In today’s tightened lending environment, many business owners are looking for new sources of working capital in an attempt to replace sources of capital that may have been reduced or eliminated by many commercial banks that normally would serve small and medium sized business. The so called “credit crunch” has hit small businesses particularly hard in their time of greatest need, and because of this, they are searching for ways to replace this lost avenue for funding.
For most businesses, the path toward obtaining capital can be difficult, especially if there are credit problems due to the downturn. Below are three options that businesses can pursue to help develop the working capital that they need:
- Small Business Administration- The SBA is the best source for affordable working capital. The key thing to remember however is that the SBA is a loan guarantor, not a lender. The actual funds that are disbursed will come from a traditional commercial bank and may contain some of the lower business lending rates available. The SBA guarantees a portion of the balance against default as long as the loan follows SBA guidelines for underwriting. The level of the guarantee that the governments is typically in the 50 -75% range. However, the recent small business bill passed by Congress ups this guarantee on some loan types as high as 90% in an effort to get banks to make more loans. Will this goad SBA bankers and non-bank lenders to make more of these loans? The government can only offer the guarantee, but they cannot force banks to lend, so time will tell.
- Commercial Mortgage- This is viable option for those business that own property in the businesses’ name and have equity in the property. While a residential mortgage is increasingly difficult to get approved for, commercial lenders have the ability to be more flexible in their underwriting if the property has equity and a decent revenue stream. Check this option first as you may be able to get a balloon note which will feature lower early year payments with a large amount due later in the contract. Typically, this will get the working capital you need, as well as the time to pay it back before you need to refinance in 3 to 7 years.
- Merchant Cash Advance- For many options that cannot get an SBA working capital loan or a Commercial mortgage, this option may be their only choice. This option is not technically a loan, but a cash advance on future credit card receivables at a discount. Essentially, the merchant cash company may advance $40000 on future monthly credit card receivables of $65000, charging a very high effective interest ratego here. These advances also are hallmarked by the requirement to switch credit card processors as well as pay upfront application fees. The upside to this proposition is that these companies can work with difficult credit situations that other lenders would not normally approve.
Luckily, there are new options available for small businesses that feature the ability to work with tougher credit situations with interest rates that are 30-50% less than a typical merchant cash advance with no upfront fees and no requirement to switch processors.
Today, the sources of working capital that are available for small businesses are different than they were even two years ago. However, despite the public perception, there are good options available for those businesses that need working capital and may have had difficulty obtaining them elsewhere. Check out the link below to find out more.
Neal Coxworth is an entrepreneur and a 17 year veteran of the consumer credit industry with experience in originating, underwriting and processing mortgage, student and consumer credit loans. He publishes an informational blog for consumers to provide insight and analysis to all major loan types as well other topics such as credit history, that most consumers will face.
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