A "small business" can be defined as a number of things. The U.S. Small Business Administration defines a small business in different classes depending on the type of industry it is involved in. Basically, the business size boils down to, "the largest a business can get (both in terms of employees hired and overall turnover) while still being considered a small business concern." While confusing in and of itself, we know that small businesses make up the backbone of America's economy and have done so from the earliest days of American economic freedom. Today, restaurants, craft breweries, barber shops, beauty salons, automotive shops, florists and all other types of retail businesses make up some of the most respected businesses in every city across the country.
Small businesses hearken back to a time when the American Dream was alive and well, fueled not by plastic products from China, but by honest, dedicated work. There are still people that conform to these ideals, and these people make up the basis of America's small businesses. Innovative ideas from a number of different catchment areas means that you can open up a business dealing with almost any type of good or service. Throughout America are new manufacturers, breweries, retail stores, coffee houses, retail boutiques and entertainment centers…just to name a few. These businesses are what fuel America's growth and help it to withstand times of economic uncertainty. By keeping true to the values that business owners before them have espoused, these local business owners serve as the platform that supports the American economy.
Nobody faces more challenges on a daily basis than business owners. In fact, for owners of small and medium sized businesses, handling many different challenges is the source of great satisfaction and some headaches, too.
But when business owners are asked to name their greatest challenge, one thing tends to top the list most often; access to capital. In other words, making sure there is enough capital flowing in to cover everything that needs to flow out.
Financing a small business usually requires a lot of creative means in order to come up with a viable financing strategy. There are a number of ways that small business owners can finance his or her business. Depending on the type of business, the expected return on investment and the complications that may arise financially, finding funding can vary. The scope of the project must be presented to any potential financiers in order to give them the gist of the business plan and use of funds.
So what options are available to a small business owner in their search for capital? In a perfect world, you’d walk into your local bank and walk out with a business loan. Well, those days are long gone! If your business isn’t profitable or over 2 years old, lack perfect credit, and aren’t willing to sign over you home as collateral, just for starters; there’s an 80% chance a bank loan is never going to happen. Thankfully, you do not have to rely on bank loans or stress about being automatically denied from your local lending institution. Alternative lenders and resources such as LVRG have many advantages over traditional bank financing, including:
- Less Likely to be Denied
- Niche Markets Better Understood
- Credit Scores Not the Only Factor
Keep reading for 3 of the fastest, efficient and “obtainable” ways to access capital for your small business without the nonsense of a bank:
#1. Revenue Based Loan -
A revenue based loan could be your businesses lifeblood and provide it with several financial benefits. When your business is growing, chances are you'll need an injection of cash to continue its growth. Bank loans are often times too restrictive and near impossible to obtain these days. In this situation, a revenue based loan may be the best solution. If you use it wisely, a revenue based loan could do wonders for your business. Without being capitalized, chances are you will wind up in a growth stalemate. Here are three ways that revenue based loan can save your business:
Helps Grow Your Business
If your business is under 2 years old and starting to scale, you obviously want to ride the wave. You cannot do this without a dependable source of capital. Bank criteria is typically a minimum of 2 years in business, strong cash flow, positive ratios and perfect credit. However, a revenue based lender will fund newer businesses, with less stringent credit requirements and use of capital restrictions. This type of loan will give you a shortcut to cash since it only requires a few months of business bank statements; whereas banks require 2 to 3 year business and personal tax returns, income statement, balance sheet, personal financial statement, debt schedule and countless other documents to complete loan package. Many times, your bank statements are enough to demonstrate to a revenue based lender that you can repay your loan.
Get Cash Quickly
You're busy running a business, you don't have to time to compile overly detailed loan packages and chasing after loan sources. All you know is that you need cash quickly and even if you could get approved for a bank loan, is it really worth all the trouble? A revenue based loan will provide cash quickly with a very short turnaround time. If you are prepared to apply for a revenue based loan and have the appropriate supporting documents ready to go, you may be able to get funding in as little as 24 hours. Compare that to a bank loan where the loan process is on average 2 to 4 months. This is one of the main advantages of a revenue based loan. Some businesses actually consider this a lifesaver, and will go this route over a bank loan any day.
No Lingering Debt
A revenue based loan will not weigh you down with long-term debt. When you obtain a revenue based loan, you will not be looking at 5 to 10 years to repay a loan for money that you're using today. Think about it, why would you want the headache of paying off a 2015 marketing campaign all the way into 2025? Not to mention, having this type of long-term loan could hurt your chances for getting funding in the near future, which all businesses will need if they plan to scale. With a revenue based loan, you will pay it off in roughly 6-12 months, which makes more sense for short-term expenses. Additionally, lenders are usually willing to replenish the loan after roughly 50% is paid down, so you can continue getting more capital along the way. One more point to mention, going the bank route you'll also have to be aware of up-front fees, equity injections, referral fees, packaging fees, guarantee fees, and closing costs.
As you see, the preceding three steps show you how a revenue based loan could be advantageous for your business. It helps you grow your business quickly and it does not saddle you down with long-term, highly encumbering debt. It gives you the cash that you need quickly, to grow your business your way. What more could a growing business need?
#2. Merchant Cash Advance –
For starters, a Merchant Cash Advance (MCA) is not a loan, but rather a cash advance based upon the credit card sales of a business. A small business can apply for an MCA and have funds deposited into their account fairly quickly, often times in less than 24 hours.
Merchant Cash Advance providers evaluate risk and weigh credit criteria differently than a banker or lending institution. An MCA provider looks at the daily credit card receipts to determine if the business can pay back the funds in a timely manner. Basically, a small business “sells” a portion of future credit card sales to acquire capital immediately.
Rates on a Merchant Cash Advance can be much higher than other financing options, so it’s critical you understand the terms you’re being offered so you can make an informed decision about ROI.
How does a Merchant Cash Advance Work?
An agreement is made between the small business owner and the MCA provider regarding the advance amount, payback amount, hold-back and term of the advance. Once an agreement is made, the advance is transferred to the business’ bank account in exchange for a future percentage of credit card receipts.
Each day, an agreed upon percentage of the daily credit card receipts are withheld to pay back the MCA. This is called a “holdback” and will continue until the advance is paid in full. Access to a business owner’s merchant account eliminates the collateral requirement required for a traditional small business loan.
Because repayment is based upon a percentage of the daily balance in the merchant account, the more credit card transactions a business does, the faster they’re able to repay the advance. And, should transactions be lower on any given day, the draw from the merchant account will also be less. This means that during times of slow business, the business’ payback is relative to their incoming cash flow.
A business that uses a Merchant Cash Advance will typically pay back 15% – 40% or more of the amount borrowed. This percentage is called the factor rate.
Note: there’s a difference between the hold-back amount that a small business pays every day (as a percentage of their sales receipts) and the repayment amount for the entire advance. There could, for instance, be a hold-back of 15%, and a repayment of 30%, so it’s important for business owners to understand this distinction.
The hold-back percentage is based on:
- The amount of funds a business receives
- How long it will take to pay back the money
- How big the monthly credit card sales are
For Example: A business is advanced $10,000 and agrees to pay back $13,000. This means the payback, or factor rate, is 30%. Moving forward, the business agrees to have 15% of the business’ credit card transactions withheld by the advance company (the holdback) until the $13,000 is collected. If the business is averaging $14,500 a month in credit card sales, approximately $2,160 would be withheld each month and the advance would be paid back in roughly six months. Typical holdback rates may range from 10%-20%, though this can vary widely based upon the business and risk.
How to know if a Merchant Cash Advance is Right for Your Business?
An MCA is an option when a business needs access to capital quickly to take advantage of an opportunity to purchase inventory at a discount, a special marketing opportunity, or other short-term capital need. And, because credit requirements are less stringent, it could be an option for a business that does a lot of credit card transactions, but might have less-than-perfect credit.
#3. Cash Flow Loan
Even if your small business is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of small businesses throughout all industries.
For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
There are typically no restrictions on how you choose to use the funds from any of these funding options, as long as it’s used towards the business. With that being said, some of the more typical uses of a cash flow loan, revenue based loan or merchant cash advance include:
- Buying equipment – Could a new computer, desk, telephone, cash register or software come in handy? Money to pay for the purchase of necessary business equipment could help boost your profits. And if this cash isn’t readily available in your account, a cash flow loan, revenue based loan or MCA can provide you with these funds.
- Paying employees – Instead of running your business like a one-man show, a few extra hands could really help. Spending borrowed money on employee’s salaries can be the answer rather than disrupting your cash flow to cover this expense.
- Purchasing inventory – One of the most common uses for fast working capital is buying inventory. It takes products in stock to make business profitable, so it only makes sense to invest in enough inventory to make sure you always have enough to sell to clients.
- Expanding the business – If your business is experiencing some success, you might want to start thinking about taking things to the next level. A lump sum of cash might be just what you need to get business booming.
Benefits of a cash flow loan, revenue based loan or merchant cash advance
In addition to the much easier method of obtaining working capital from a resource like LVRG than from a bank, a cash flow loan, revenue based loan and MCA has a lot of incentives when it comes to small business financing:
- Much quicker approval times from LVRG than a bank. This translates to faster cash-in-hand, allowing you to take advantage of current market prices.
- Whereas business loans from a bank require you to have collateral in order to gain favorable consideration, LVRG requires you to be subject to a limited amount of conditions.
- A cash advance or revenue based loan is also much more beneficial to the cash flow of a company since it does not require any monthly payments or upfront fees that are characteristic of loans.
- There is no limitation on how the funds acquired from a cash flow loan, MCA, or revenue based loan can be used. Funds that are loaned through a financial institution must be used for the stated purpose by the business. As a result, money from a business loan has a very narrow scope of action as compared to money that comes from a cash advance or fast working capital loan.
So there you have it, 3 of the fastest, most efficient and “obtainable” ways to access capital for your small business. Cash Flow Loans, Revenue Based Loans and Merchant Cash Advances from LVRG have helped thousands of businesses just like yours not only turn the corner, but pull ahead in the race. Have a specific small business topic in mind? Search Our Database.