One of the most difficult challenges for new business owners is staying afloat financially and turning a profit. We often encounter business owners who shortly after celebrating their first year of business review their taxes with their accountant, check their bank balance, and find themselves needing a quick solution to survive through the second year.
Of course, having a business plan and strategy is vital to an owner’s long term success, but sometimes lack of cash in the bank and lack of daily cash flow hinders execution of the best of plans. When profit margins are lower than anticipated, most business owners start to think about getting a business loan to use for inventory, back taxes, expansion, staff hiring, or advertising.
The next obstacle is finding a business loan. Many companies start with their local banks; however, big banks are often unwilling to lend as easily as they used to; a majority of loan applicants are turned down for financing.
Additionally, big banks put businesses thru lengthy application processes which include examining questions, proof of back taxes, financials, and profit statements, to name a few things. After all this, it still takes a few months to learn whether or not you are approved.
After denied, big banks often cite reasons such as the business are too new or the credit is not strong enough. But this is a Catch-22 because a new business can’t help these factors.
Avoiding Big Banks
The next best business option in order to borrow money is going for alternative funding sources; such as private lenders that do not fall under the federal guidelines. These lenders usually work with most business owners who are having difficulty finding traditional funding, whether being a new business or an established business. The product they offer is a merchant cash advance.
When applying for this loan, lenders require most businesses to have existed for one year, and the owner have a fico score of 500 or more. It doesn’t put much value into personal credit scores and instead, the lender looks at the monthly sales of the business.
For example, a produce market owner who does about $30,000 a month in credit card sales, consistently for 3 months or more, would be approved for a $30,000 lump sum of cash for future credit card sales.
This is all set up within a merchant’s credit card terminals. They set it to where they take out 10 to 20 percent of the day’s sales everyday weekday until the obligation is paid back. While this is a good option for a business who needs money immediately, it’s also expensive to pay back. Additionally, because payments are automatically withdrawn from merchants account every weekday, it interferes with the daily cash flow of the business.
This can have a compounding effect on the company when business owners run short on cash to buy inventory, pay employees, or other bills such as rent. For some businesses, this solution works, but for the majority it is risky. Most credit challenged business owners go this route because it is one of the only choices they have.
The process to apply for a merchant cash advance is easy, and applicants find out if they are approved in 1 day. It then takes 5-7 business days for the money to be deposited into the business checking account. To avoid this route, business owners should clean up their credit to raise their FICO score.
Applicants with 680+ FICO score have more lending options. Business owners who work with accountants often have more cash and write fewer expenses off. This shows that a business can handle a loan and puts them in a position to apply for better loan options.
One such option is a business term loan with a 10-year term. This requires a business owner have a 680+ credit score, 1 year or more of business behind them, and has positive cash flow. Approval for a business term loan is based on these terms as well as the lender looking at the business credit before making a decision.
Merchant Cash Advance vs. Business Term Loan
There are many reasons why a business owner should choose a 10-year term loan vs. merchant cash advance.
Here are a few:
· Term Loan has an interest rate, which is tax deductible
· Merchant Cash Advance uses a factor rate, which is NOT tax deductible
· Merchant Cash Advance- Payments are very expensive 6-12 months payback
· Term Business Loans- 10 Year Term has Very Low Monthly Payments
· Term Business Loans- No Prepayment Penalty
Because payments are spread out over 10-years, business owners have more daily cash flow, which decreases their chance of getting into trouble again. The Term Business Loan is also suitable for the business owner who currently has a merchant cash advance hurting them due to high daily payments. The lender pays back the cash advance, freeing much more cash flow!
Some merchant cash advances collect weekly payments as much as once a month. A business owner can pay thousands a week with a merchant cash advance, as compared to only paying a $1000 a month for the same length of time borrowed.
As you can see, not all business loan options are the same. It’s important to make the right choice with the best terms available for the future of your business.
At Treasure Coast Business Loans we’ve seen too many businesses make bad decisions out of a desperate need for money. Taking on expensive payback terms that harm future business growth isn’t always the best solution.
We believe alternative lenders have the best solutions for the business owners today. Call and talk to an advisor. We will explain the process and your options to help you make the best decision for your current needs and the future of your business.