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Working capital loans for today’s retail businesses are increasingly tough to come by. While there is a lot talk regarding helping “main street” within the media and politics, the reality is that the most cost effective working capital for business is an SBA or Bank loan. Unfortunately, the restricted credit environment by which we find ourselves means a large proportion of these loans are not being approved for the retail businesses that need them most.
This leaves many retailers within the unfortunate position of going with a merchant cash advance from their credit card processing company. These cash advances for working-capital tend to be billed as “convenient” and “unsecured” ways for business owners to get “quick cash”. The very fact of the matter is, most cash advance companies do secure their loans via a UCC filing against the business. While it may not be in the owners personal credit, for many small retailers, having a UCC filing against their business is not much different. It’s a lien which is placed on the business until the advance is repaid.
What is usually left out is that cash advance companies are not regulated through the government as loans. Therefore they are free to charge rates of interest, or factor rates, of 50% or higher. Even on a short term working capital loan, this really is a staggering quantity of interest. Often times, since it is not a true loan, the MCA company has the option of changing the rate anytime throughout the repayment process. These advances will often be characterized by high upfront fees, and also the requirement to switch payment processors and/or buy new equipment from the provider. They also may have high “holdback” or daily payment rates that represent a real burden for many businesses.
In the majority of cases the active commercial loan companies for this specialized form of commercial funding are limiting working-capital loans to businesses which are current in their debt payments and also are showing a net profit (based on recent fiscal reports). If these two conditions are met, new commercial loans can frequently be obtained to refinance lines of credit and term loans which have been cancelled or recalled by many loan companies. For businesses not qualified for commercial financing using these two requirements, there are alternative funding sources for example business cash advance programs.
Many small business owners also depend on personal lines of credit to finance several of their business operations. There happen to be many reports of widespread cancellations and reductions of these lending programs as well, especially those involving loan companies that have received a multi-billion dollar cash infusion from USA taxpayer money that was intended to facilitate the lending of cash to businesses and consumers.
Personal and business lines of credit are already eliminated in many cases by lenders as a result of a reduced capability to pay by borrowers and deteriorating business conditions. As reported within the Working capital Journal, a high portion of borrowers, however, had a great payment history for many recent bank line reductions or cancellations.
Meanwhile, you will discover banks willing to make working-capital loans. The most significant examples are (for the most part, anyway) not banks that have received bailout funds. In general, these commercial lenders are already willing to provide working-capital financing, either within the form of new business financing or refinancing lines of credit and term loans which have been recalled or cancelled by other lenders.
Because it basically indicates that bailout funds happen to be given (so far) to lenders who primarily have a history of making bad loans (virtually all lenders receiving bailout funds to date), My Home Page the lending activities described above are a serious concern to many observers. At this time, little attention has been given to loan companies with a healthy balance sheet in federal attempts to acquire more funds in to the hands of consumers and businesses.
