FLORIDA SMALL BUSINESS DEVELOPMENT CENTER AT IRSC
TCBusiness.com 33
building, used in the operation of a business
may be considered equipment. For
example, desks, computers, a pizza oven,
a dental X-ray machine and construction
equipment are all considered business
equipment and can be either purchased
with an equipment loan or leased.
Because the equipment you are purchasing
is considered collateral, there are
equipment lenders approving small business
owners right now.
Leasing is similar to borrowing, however
it’s the leasing company that owns the asset
and rents it back to you for a monthly
fee — sometimes with a lower payment
than a loan would be. Most leases come
with a fixed interest rate and terms that
can vary depending on the leasing company.
At the end of the lease, you may also
be able to purchase the equipment at fair
market value or a predetermined amount
depending on the lease.
Equipment financing can come from a
variety of sources depending on your credit
worthiness and the nature of the equipment
being purchased. Commercial banks,
credit unions, online lenders and even the
SBA can all offer equipment loans.
Terms will vary depending on the
lender, but commercial equipment loan
terms typically max out at seven years with
interest rates that will vary depending on
the lender and your credit profile.
Does equipment financing make
sense?
I like this type of financing because it
allows a business owner to spread the cost
of expensive equipment over the useful
life of the asset, making it possible to free
up capital for other cash flow or working
capital needs. If you are looking for
financing to fund the purchase of anything
that could be considered equipment, this
is one of the better financing options still
available today.
FACTORING
This is another source of capital that
is technically not a loan, but rather an
advance on the value of your accounts
receivable. It also has a long history. Medieval
businessmen and English colonists all
used factoring. Online factoring has made
it more accessible to small businesses
looking for quick and simple access to
capital to meet business needs.
A factor is a third party that is willing to
purchase part or all of your company’s accounts
receivable at a discount. The factor
then owns the outstanding invoices and
collects from your customers. The factor
profits from the difference between the
discounted rate negotiated to buy the
receivables and the full amount collected
from the customer.
The factor is primarily interested in the
credit history of your customers. Do they
pay their invoices on time? With that in
mind, it will likely want to review your
customer’s payment history before it
makes an offer. There is no standard factoring
arrangement, so you should expect
to negotiate the rate with your factoring
company. You can expect it will offer to
pay 85 percent or 90 percent of the value
of your receivables and advance a percentage
of that amount with the balance being
paid once it receives payment from your
customers. There may also be fees associated
with the arrangement, so make sure
you understand what they are.
Most factors work in specific industries,
so when looking for a factor make sure
they work in the industry you do. Any fees
will be based upon variables like the credit
quality of your customers, the size of the
invoices and the industry you’re in.
Most factoring arrangements are
recourse factoring. If your customers don’t
pay their invoices to the factor, you will
be expected to pay any invoice they were
unable to collect.
Nonrecourse factoring is when the
factoring company assumes all the risk
for uncollected invoices. These arrangements
are the exception and often come
with additional fees to mitigate the risk of
uncollected invoices.
Does factoring make sense?
Factoring makes sense for a lot of businesses
that offer payment terms to their
customers. It’s been a favored method of
acquiring capital in the textile industry for
many, many years, for example.
If you are a baker, for another example,
and you provide croissants and éclairs to
all the big hotel chains in your city and
they pay you from an invoice, factoring
could work for you. On the other hand, if
you own the corner bakery and you cater
primarily to a walk-in trade, a factor will
likely not be a viable option for you.
NONPROFIT MICRO LENDERS
Nonprofit micro lenders fill a niche for
many small businesses that might not
otherwise qualify for a loan with a more
traditional lender. Nonprofit lenders tend
to focus on smaller loan amounts of under
$50,000 (what is defined as a micro loan
by the SBA) or even smaller amounts like
$5,000 or $10,000.
These lenders typically have very low and
sometimes even no-interest loans for the
borrowers that meet their criteria. Many of
these lenders also offer services like mentoring,
workshops and other services.
Some communities also offer micro loans
to support community development initiatives
and are looking for small businesses
that can leverage a relatively small amount
of capital into opportunities to create jobs
and contribute to community growth.
Many restaurants, small merchants, and
other businesses you might associate with
Main Street can benefit from this type
of financing — depending on the size of
the business and where the business is
located. These lenders typically serve the
smaller small businesses that don’t get
much attention from bigger banks.
Does a nonprofit lender make sense?
If you are a small business that can leverage
a relatively small loan amount into
a big impact, this could be a good fit for
you and your business. The smallest small
businesses, particularly those in developing
communities that aren’t often served
well by traditional for-profit lenders, are a
good fit for these nonprofit lenders. If this
describes your business, they could be a
good fit for you.
To take advantage of the loan options
available today, small business borrowers
need to be savvier about where they
apply, what they use the financing for, and
the lenders they choose. Although they
don’t have to be small business financing
experts, they do need to become experts
in the financing that best suits their needs.
Through the rest of 2020, borrowers
with less-than-perfect credit histories will
have the hardest time accessing borrowed
capital but there are options available.
They will just be more expensive and will
have less favorable terms. Some of the
traditional sources of borrowed capital are
still on the table for borrowers with great
personal credit scores and business credit
histories beyond reproach, but if you have
a personal credit score of 600 and a spotty
business credit profile you aren’t going to
meet the criteria. v
PLEASE NOTE
The material contained in this article is for informational
purposes only, is general in nature, and should
not be relied upon or construed as a legal opinion or
legal advice. Please keep in mind this information is
changing rapidly and is based on our current understanding
of the programs. It can and likely will change.
Although we will be monitoring and updating this
as new information becomes available, please do not
rely solely on this for financial decisions. We encourage
you to consult with your lawyers, certified public accounts
and financial advisers.
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