FLORIDA SMALL BUSINESS DEVELOPMENT CENTER AT IRSC
THERE ARE LOAN OPTIONS FOR SMALL
BUSINESSES BUT THEY CAN BE EXPENSIVE
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TCBusiness.com
I think it’s safe to say the Paycheck Protection
Program wasn’t a good fit for every
small business looking for capital. What’s
more, the Small Business Administration
loan is not the only source of financing
options available. A savvy business owner
can leverage the loan options that are
available to maintain business operations,
grow revenue and exit the current financial
crises a little bruised and battered, but
none the worse for wear.
The technicolor world of financing in
2019 is a little more monochromatic today.
With many lenders pulling back or tightening
their credit thresholds there are fewer
options available for small businesses to
access borrower capital. Business credit
cards, which I have long felt were a good
way for new businesses to establish business
credit, are available but primarily for
the most creditworthy borrowers. Business
owners should expect their business lines
of credit to shrink and the possibility of
obtaining a new line of credit to dry up,
at least for the rest of 2020. Business term
loans are still available for some but there
are lenders who are pulling back entirely
— at least for the short term.
The upcoming famine of financing puts
us in a position to consider those options
that traditionally re-enter a market like this
first, some of which will come at a premium.
But frankly, that’s why they can reenter
the market now, rather than waiting
for eight or 10 months from now. Some
of these lenders are often willing to work
with borrowers who find themselves with
less-than-perfect credit, a shorter track
record and smaller annual revenues — the
very businesses that will need a little extra
capital to keep their businesses afloat. Particularly
in times like these, there is a direct
correlation to access and cost that every
small business needs to be aware of.
If you didn’t get a PPP loan or you need
a little extra capital to fund business needs
not covered by the forgiveness requirements
of a PPP loan, here is a list of a few
of the financing options still available
today outside of the SBA.
MERCHANT CASH ADVANCE
A merchant cash advance isn’t really a
loan, but rather an advance based upon
the credit card sales that flow through
a business’ merchant account. If you’ve
heard that MCAs are expensive, you’ve
heard right. Interest rates are very high.
Depending on the provider, they can be
triple-digit high, which is why under normal
circumstances, I wouldn’t recommend
them. Nevertheless, a business owner can
apply for an MCA and have funds deposited
into a business checking account
fairly quickly — sometimes as quickly as
24 hours after an application is approved.
MCA providers don’t evaluate credit risk
the same way a more traditional lender
would. They are primarily concerned with
the daily volume of credit card transactions
flowing through the business to
determine if there is enough cash flow
for a borrower to support the periodic
payment. In addition to a higher interest
rate, in terms of periodic payment, you
should expect a daily direct debit from
your merchant account. So if you do a lot
of credit card transactions every day, a
merchant cash advance could be an option
to consider.
What is an MCA holdback?
The language of an MCA is also a little
different from that of a traditional loan. In
addition to terms like interest rate, term
and periodic payment, there is something
called a holdback. In terms of an MCA, the
term holdback refers to the percentage of
daily credit card sales debited from your
account and applied to your advance. The
holdback percentage (usually between 10
percent and 20 percent) is typically fixed
until the advance is paid in full.
It’s easy to confuse the interest rate
you’re being charged for the advance and
the holdback amount. The holdback is the
daily draw from your account until the
advance (including the agreed-upon interest)
is paid in full. So holdback applies to
your daily payment while the interest rate,
which is typically a factor rate, is the cost
of the financing.
For example, if you borrow $10,000 at a
factor rate of 1.5 ($10,000 x 1.5 = $15,000),
the cost of borrowing the $10,000 would
be $5,000, plus any fees the provider may
charge in addition to the factor rate.
If the holdback percentage was 15 percent
and $5,000 was deposited into your
merchant account today, your payment
for today would be $750. If you received
$8,000 in your merchant account tomorrow,
your daily payment would be $1,200.
Does an MCA make sense?
Although there are many small business
owners who successfully leverage MCAs
on a regular basis, I can only recommend
one-use case. Because of the high cost,
using an MCA to fund an initiative with a
defined return of investment big enough
to support the extra expense, provided the
borrower factors in the cost of the MCA
into the cost of goods sold, an MCA can
successfully be used to help the business
grow profits. I cannot recommend an MCA
to meet day-to-day cash flow or working
capital needs.
Additionally, a practice known as stacking
multiple MCAs on top of each other is
not a good practice and puts your business
in tremendous financial jeopardy. The
use of two or three of these very high-interest
products has forced bankruptcy and
closed the doors of more than one small
business since MCAs were introduced 20
or so years ago.
EQUIPMENT FINANCING, LEASING
In terms of equipment financing, any
tangible asset, other than property or a
BY TY KIISEL
Katherine Culhane’s background includes
a long career in banking including roles
in management, business development,
commercial lending and private banking.
She has a Master’s Degree in Organizational
Learning and Leadership, is a Certified
Professional Behavioral Analyst and is a
SHRM Senior Certified Professional with the
Society of Human Resources.
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