In today’s hostile economic environment, access to capital is the primary differentiating factor between these businesses which have been able to expand plus gain market share versus those that have experienced enormous drops in revenue. The main reason many small businesses have seen their sales and cash flow drop dramatically, many to the point of closing their doorways, while many large U. S. companies have managed to increase sales, open up new retail operations, and develop earnings per share is that a small company almost always relies exclusively on conventional commercial bank financing, such as SBA loans and unsecured lines of credit, whilst large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.
Before the onset of the financial crises of 2008 and the ensuing Great Recession, many of the largest U. S. industrial banks were engaging in an easy money policy and openly lending to small businesses, whose owners had great credit scores and some industry experience. Many of these business loans consisted of unsecured commercial credit lines and installment loans that required no collateral. These loans had been almost always exclusively backed by an individual guaranty from the business owner. This is why great personal credit was all that has been required to virtually guarantee a business mortgage approval.
During this period, thousands of small business owners utilized these business loans and lines of credit to get into the capital they needed to fund functioning capital needs that included payroll expenses, equipment purchases, maintenance, maintenance, marketing, tax obligations, and development opportunities. Easy access to these capital sources allowed many small businesses to flourish and to manage cash flow needs because they arose. Yet, many business owners grew overly optimistic and many made intense growth forecasts and took upon increasingly risky bets.
As a result, a lot of ambitious business owners began to expand their business operations and borrowed seriously from small business loans and lines of credit, with the anticipation of being able to repay these heavy debt loads through future growth and increased revenue. As long as banks maintained this ‘easy money’ policy, asset values ongoing to rise, consumers continued to spend, plus business owners continued to expand with the use of increased leverage. But , eventually, this particular party, would come to an abrupt finishing.
When the financial crisis of 2008 started with the sudden collapse of Lehman Brothers, one of the oldest and most renowned banking institutions on Wall Street, a financial panic and contagion spread through the entire credit markets. The ensuing freeze of the credit markets caused the particular gears of the U. S. financial system to come to a grinding halt. Banking institutions stopped lending overnight and the sudden lack of easy money which got caused asset values, especially house prices, to increase in recent years, now cause those very same asset values to plummet. As asset values imploded, commercial bank balance sheets damaged and stock prices collapsed. The times of easy money had finished. The party was officially more than.
In the aftermath of the financial crisis, the fantastic Recession that followed created a vacuum cleaner in the capital markets. The very same industrial banks that had freely plus easily lent money to small enterprises and small business owners, now suffered from an absence of capital on their balance sheets : one that threatened their very own existence. Almost overnight, many commercial banks shut off further access to business credit lines and called due the excellent balances on business loans. Small businesses, which usually relied on the working capital out there business lines of credit, could no longer meet their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses failed.
Because so many of these same small businesses were accountable for having created millions of jobs, every time one of these enterprises failed the unemployment rate increased. As the financial crisis deepened, commercial banks went into a tailspin that eventually threatened the collapse of the entire financial system. Although Our elected representatives and Federal Reserve Bank brought a tax payer funded bailout of the entire banking system, the damage had been done. Hundreds of billions of bucks were injected into the banking system to prop up the balance sheets of what were effectively defunct institutions. Yet, during this process, no provision was ever made that required these banks to loan money to be able to consumers or private businesses.
Instead of using a portion of these taxpayer funds to support small businesses and avert needless business failures and increased unemployment, commercial banks chose to continue to refuse access to capital to thousands of small businesses and small business owners. Even after receiving a historical taxpayer funded bailout, the commercial banks embraced an ‘every guy for himself’ attitude and still cut off access to business lines of credit and commercial loans, regardless of the credit history or even timely payments on such lines and loans. Small business bankruptcies increased and high unemployment persisted.
During this same period, when small businesses had been being choked into non-existence, as a result of the lack of capital which was created by industrial banks, large publicly-traded corporations managed to survive and even grow their businesses. They were mainly able to do so simply by issuing debt, through the bond marketplaces, or raising equity, by providing shares through the equity markets. Whilst large public companies were increasing hundreds of millions of dollars in new capital, thousands of small businesses were being put under by banks that closed off existing commercial credit lines and refused to issue brand new small business loans.
Even now, in mid 2012, more than four years because the onset of the financial crisis, the vast majority of small enterprises have no means of access to capital. Commercial banks continue to refuse to lend with an unsecured basis to almost all small enterprises. To even have a minute chance of being approved for a small business loan or company line of credit, a small business must possess tangible collateral that a bank could quickly sell for an amount equal to the value of the business enterprise loan or line of credit. Any small business without collateral has virtually no opportunity at attaining a loan approval, even through the SBA, without significant collateral such as equipment or inventory.
When a small business cannot demonstrate collateral to deliver security for the small business loan, the commercial bank will ask for the little business owner to secure the loan with his or her own personal assets or even equity, such as equity in a house or cash in a checking, cost savings, or retirement account, such as a 401k or IRA. This latter circumstance places the personal assets of the owner at risk in the event of a small business failure. Additionally , virtually all small business loans will require the business enterprise owner to have excellent personal credit and FICO scores, as well as need a personal guaranty. Finally, multiple years of financial statements, including tax returns for your business, demonstrated sustained profitability will be required in just about every small business loan application.
A failure or lack of ability to supply any of these stringent requirements will often result in an immediate denial in the application for nearly all small business loans or industrial lines of credit. In many instances, denials for business loans are being issued to applicants which have provided each of these requirements. Therefore , having the ability to qualify with good personal credit, collateral, and strong financial statements and tax returns still does not guarantee approval of a business loan request in the post financial crisis economic climate. Access to capital for small businesses and small business owners is more difficult than ever.
As a result of this persistent capital vacuum, small businesses plus small business owners have begun to seek out substitute sources of business capital and business loans. Many small business owners seeking cash flow to get existing business operations or funds to finance expansion have discovered alternative business financing through the use of merchant credit card cash advance loans and small business installment financial loans offered by private investors. These vendor cash advance loans offer significant advantages in order to small businesses and small business owners when compared to conventional commercial bank loans.
Merchant cash advance loans, occasionally referred to as factoring loans, are based on the amount of average credit card volume a vendor or retail outlet, processes over a 3 to six month period. Any merchant or retail operator that allows credit cards as payment from customers, including Visa, MasterCard, American Communicate, or Discover, is virtually assured an approval for a merchant credit card advance. The total amount of cash advance that a merchant qualifies for is determined by this particular three to six month average as well as the funds are generally deposited in the business bank account of the small business within a seven to ten day period from the time of approval.
A set repayment amount is fixed and the repayment of the cash advance plus attention is predetermined at the time the move forward is approved by the lender. For instance, if a merchant or retailer processes around $1, 000 per day in bank cards from its customers, the monthly average of total credit cards processed equals $30, 000. If the merchant authorize for $30, 000 for a cash advance and the factoring rate is one 20, the total that would need to be repaid is $30, 000 – plus 20% of $30, 000 which usually equals $6, 000 – for the total repayment amount of $36, 500. Therefore , the merchant would receive a lump sum of $30, 000 money, deposited in the business checking account, and a complete of $36, 000 would need to become repaid.
The repayment is made by automatically deducting a pre-determined amount of each of the merchant’s daily future bank card sales – usually at a rate of 20% of total daily credit cards processed. Thus, the merchant does not have to write checks or send obligations. The fixed percent is simply subtracted from future credit sales until the total sum due of $36, 000 is paid off. The advantage to this type of financing versus a commercial bank loan is that a merchant cash loan is not reported on the personal credit history of the business owner. This effectively sets apart the personal financial affairs of the small business owner from the financial affairs of the small company entity.
A second advantage to a seller credit card cash advance is that an approval does not require a personal guaranty in the business owner.
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If the business is unable to pay back the merchant cash advance loan in full, the business owner is not held personally accountable and cannot be forced to post personal collateral as security for the vendor advance. The owner removes the financial consequences that often accompany a commercial bank business loan that requires a personal guaranty and often forces business owners in to personal bankruptcy in the even that their own business venture fails and cannot pay back the outstanding loan balance.
A 3rd, and distinct advantage, is that a merchant credit card cash advance loan does not need any collateral as additional protection for the loan. The future credit card receivables are the security for the cash advance repayment, thus no additional collateral specifications exist. Since the majority of small businesses do not have physical equipment or inventory that may be posted as collateral for a traditional bank loan, this type of financing is an extraordinary alternative for thousands of retail companies, merchants, sole proprietorships, and online retailers seeking access to capital. Such businesses would be denied automatically for a traditional business loan simply because of the lack of security to serve as added security for that bank or lender.