In today’s hostile economic environment, access to capital is the primary differentiating factor between all those businesses which have been able to expand plus gain market share versus those that have encountered enormous drops in revenue. The main reason many small businesses have seen their sales and cash flow drop dramatically, several to the point of closing their doorways, while many large U. S. corporations have managed to increase sales, open new retail operations, and grow earnings per share is that your own business 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 connection market, for access to capital.
Before the onset of the financial crises associated with 2008 and the ensuing Great Recession, many of the largest U. S. commercial banks were engaging in an easy cash policy and openly lending to small businesses, whose owners had good credit scores and some industry experience. Many of these business loans consisted of unsecured commercial lines of credit and installment loans that required no collateral. These loans had been almost always exclusively backed by a personal guaranty from the business owner. This is why good personal credit was all that had been required to virtually guarantee a business mortgage approval.
During this period, thousands of small business owners used these business loans and lines of credit to access the capital they needed to fund functioning capital needs that included payroll expenses, equipment purchases, maintenance, maintenance, marketing, tax obligations, and growth opportunities. Easy access to these capital resources allowed many small businesses to prosper 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, numerous ambitious business owners began to expand their business operations and borrowed intensely from small business loans and lines of credit, with the anticipation of being able to pay off these heavy debt loads via future growth and increased earnings. As long as banks maintained this ‘easy money’ policy, asset values continuing to rise, consumers continued to spend, and 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 began with the sudden collapse of Lehman Brothers, one of the oldest and most well-known banking institutions on Wall Street, economic panic and contagion spread throughout the credit markets. The ensuing freeze out of the credit markets caused the gears of the U. S. economic climate to come to a grinding halt. Banks stopped lending overnight and the unexpected lack of easy money which experienced caused asset values, especially house prices, to increase in recent years, now trigger those very same asset values in order to plummet. As asset values imploded, commercial bank balance sheets damaged and stock prices collapsed. The days of easy money had finished. The party was officially over.
In the aftermath of the financial crisis, the truly great Recession that followed created a vacuum in the capital markets. The very same commercial banks that had freely plus easily lent money to small enterprises and small business owners, now suffered from a lack of capital on their balance sheets : one that threatened their very own existence. Nearly overnight, many commercial banks closed off further access to business credit lines and called due the exceptional balances on business loans. Small businesses, which relied on the working capital from these business lines of credit, could no longer meet up with their cash flow needs and financial 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 responsible for having created millions of jobs, every time one of these enterprises failed the joblessness 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 led a tax payer funded bailout of the entire banking system, destruction 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 organizations. Yet, during this process, no provision was ever made that required these banks to loan money in order to consumers or private businesses.
Instead of using a portion of these taxpayer money to support small businesses and avert needless business failures and increased joblessness, commercial banks chose to continue to reject access to capital to thousands of small businesses and small business owners. Even after receiving a historic taxpayer funded bailout, the commercial banks embraced an ‘every guy for himself’ attitude and carry on and cut off access to business lines of credit plus commercial loans, regardless of the credit history or timely payments on such outlines and loans. Small business bankruptcies increased and high unemployment persisted.
In this same period, when small businesses were being choked into non-existence, due to the lack of capital which was created by commercial banks, large publicly-traded corporations managed to survive and even grow their companies. They were mainly able to do so simply by issuing debt, through the bond marketplaces, or raising equity, by giving shares through the equity markets. Whilst large public companies were increasing hundreds of millions of dollars in fresh new capital, thousands of small businesses were being put under by banks that will closed off existing commercial credit lines and refused to issue brand-new small business loans.
Even now, in middle of the 2012, more than four years since the onset of the financial crisis, the vast majority of smaller businesses have no means of access to capital. Commercial banks continue to refuse to lend with an unsecured basis to almost all small businesses. 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 very easily sell for an amount equal to the value of the company loan or line of credit. Any small business without collateral has virtually no opportunity at attaining a loan approval, also through the SBA, without significant collateral such as equipment or inventory.
When a small business cannot demonstrate collateral to offer security for the small business loan, the commercial bank will ask for the little business owner to secure the loan together 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 situation places the personal assets of the proprietor at risk in the event of a small business failure. In addition , virtually all small business loans will require the company owner to have excellent personal credit score and FICO scores, as well as require a personal guaranty. Finally, multiple many years of financial statements, including tax returns for your business, demonstrated sustained profitability is going to be required in just about every small company 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 almost all small business loans or industrial lines of credit. In many instances, denials for loans are being issued to applicants that have provided each of these requirements. Therefore , having the ability to qualify with good personal credit score, collateral, and strong financial statements and tax returns still does not ensure approval of a business loan demand in the post financial crisis economic climate. Entry to capital for small businesses and small business owners is more difficult than ever.
As a result of this particular persistent capital vacuum, small businesses and small business owners have begun to seek out alternative sources of business capital and loans. Many small business owners seeking cash flow with regard to existing business operations or money to finance expansion have discovered alternate business financing through the use of merchant charge card cash advance loans and small business installment loans offered by private investors. These service provider 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 quantity of average credit card volume a vendor or retail outlet, processes over a 3 to six month period.
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Any service provider or retail operator that allows credit cards as payment from clients, including Visa, MasterCard, American Show, or Discover, is virtually assured an approval for a merchant bank 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 checking account of the small business within a seven to ten day period from the time of approval.
A set repayment amount is fixed as well as the repayment of the cash advance plus attention is predetermined at the time the progress is approved by the lender. For instance, in case a merchant or retailer processes approximately $1, 000 per day in credit cards from its customers, the monthly regular of total credit cards processed equals $30, 000. If the merchant authorize for $30, 000 for a cash loan 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 a total repayment amount of $36, 000. Therefore , the merchant would receive a lump sum of $30, 000 cash, deposited in the business checking account, and an overall of $36, 000 would need to end up being repaid.
The repayment is made by automatically deducting a pre-determined quantity of each of the merchant’s daily future bank card sales – usually at a rate associated with 20% of total daily credit cards processed. Thus, the merchant does not write checks or send obligations. The fixed percent is simply deducted 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 report of the business owner. This effectively separates the personal financial affairs of the small company owner from the financial affairs of the small company entity.
A second advantage to a product owner credit card cash advance is that an approval does not require a personal guaranty from the business owner. If the business is unable to repay the merchant cash advance loan in full, the business owner is not held personally responsible and cannot be forced to post private collateral as security for the merchant advance. The owner removes the economic consequences that often accompany an industrial bank business loan that requires a personal guaranty and often forces business owners in to personal bankruptcy in the even that their particular business venture fails and cannot pay back the outstanding loan balance.
A third, 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 pay back, thus no additional collateral needs exist. Since the majority of small businesses are deprived of physical equipment or inventory that may be posted as collateral for a traditional bank loan, this type of financing is an incredible alternative for thousands of retail businesses, merchants, sole proprietorships, and online stores seeking access to capital. Such businesses would be denied automatically for a traditional business loan simply because of the lack of collateral to serve as added security for your bank or lender.
Finally, a merchant credit card advance loan acceptance does not depend upon the strong or perfect personal credit of the business proprietor. In fact , the business owner’s personal credit score can be quite poor and have a low FICO score, and this will not disqualify the company from being approved for the cash advance. The business owner’s personal credit is usually checked only for the purpose of helping to determine that will factoring rate at which the total loan repayment will be made. However , a business owner with a recently discharged personal bankruptcy can qualify for a merchant bank card cash advance loan.