In the current hostile economic environment, access to capital will be the primary differentiating factor between all those businesses which have been able to expand plus gain market share versus those that have experienced enormous drops in revenue. The reason many small businesses have seen their product sales and cash flow drop dramatically, several to the point of closing their doors, while many large U. S. corporations have managed to increase sales, open up new retail operations, and grow earnings per share is that a small company almost always relies exclusively on conventional commercial bank financing, such as SBA loans and unsecured lines of credit, while large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.
Prior to the onset of the financial crises of 2008 and the ensuing Great Recession, many of the largest U. S. commercial banks were engaging in an easy money policy and openly lending to small businesses, whose owners had good credit scores and some industry experience. Several business loans consisted of unsecured commercial credit lines and installment loans that required no collateral. These loans had been almost always exclusively backed by a private guaranty from the business owner. This is why great personal credit was all that was required to virtually guarantee a business mortgage approval.
During this period, thousands of small business owners used these business loans and lines of credit to reach the capital they needed to fund operating capital needs that included payroll expenses, equipment purchases, maintenance, maintenance, marketing, tax obligations, and growth opportunities. Easy access to these capital resources allowed many small businesses to grow and to manage cash flow needs because they arose. Yet, many business owners increased overly optimistic and many made intense growth forecasts and took on increasingly risky bets.
As a result, a lot of ambitious business owners began to expand their business operations and borrowed seriously from small business loans and lines of credit, with the anticipation of being able to pay back these heavy debt loads through future growth and increased profits. As long as banks maintained this ‘easy money’ policy, asset values carried on to rise, consumers continued to spend, plus business owners continued to expand with the use of increased leverage. But , eventually, this particular party, would come to an abrupt closing.
When the financial crisis of 2008 started with the sudden collapse of Lehman Brothers, one of the oldest and most well-known banking institutions on Wall Street, a financial panic and contagion spread throughout the credit markets. The ensuing freeze out of the credit markets caused the particular gears of the U. S. financial system to come to a grinding halt. Banking institutions stopped lending overnight and the sudden lack of easy money which acquired caused asset values, especially home prices, to increase in recent years, now cause those very same asset values to plummet. As asset values imploded, commercial bank balance sheets damaged and stock prices collapsed. The times of easy money had ended. The party was officially over.
In the aftermath of the financial crisis, the Great Recession that followed created a vacuum cleaner in the capital markets. The very same commercial banks that had freely and easily lent money to small businesses and small business owners, now suffered from a lack of capital on their balance sheets – one that threatened their very own existence. Almost overnight, many commercial banks closed off further access to business credit lines and called due the excellent balances on business loans.
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Small businesses, which usually relied on the working capital out there business lines of credit, could no longer fulfill their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses failed.
Because so many of these same small businesses were responsible for having created millions of jobs, each time one of these enterprises failed the joblessness rate increased. As the financial crisis deepened, commercial banks went into a tailspin that eventually threatened the collapse of the entire financial system. Although Our elected representatives and Federal Reserve Bank led a tax payer funded bailout of the entire banking system, the damage had been done. Hundreds of billions of dollars were injected into the banking program to prop up the balance sheets of what were effectively defunct institutions. Yet, during this process, no supply was ever made that required these banks to loan money in order to consumers or private businesses.
Instead of using a portion of these taxpayer money to support small businesses and avert unnecessary business failures and increased joblessness, commercial banks chose to continue to refuse access to capital to thousands of smaller businesses and small business owners. Even after receiving a historic taxpayer funded bailout, the industrial banks embraced an ‘every guy for himself’ attitude and always cut off access to business lines of credit and commercial loans, regardless of the credit history or timely payments on such ranges and loans. Small business bankruptcies increased and high unemployment persisted.
In this same period, when small businesses were being choked into non-existence, as a result of the lack of capital which was created by commercial banks, large publicly-traded corporations was able to survive and even grow their companies. They were mainly able to do so by issuing debt, through the bond markets, or raising equity, by issuing shares through the equity markets. While large public companies were increasing hundreds of millions of dollars in fresh new capital, thousands of small businesses were being put under by banks that will closed off existing commercial lines of credit and refused to issue brand new small business loans.
Even now, in mid 2012, more than four years because the onset of the financial crisis, the vast majority of small businesses have no means of access to capital. Commercial banks continue to refuse to lend with an unsecured basis to almost all smaller businesses. To even have a minute chance of being approved for a small business loan or company line of credit, a small business must possess tangible collateral that a bank could quickly sell for an amount equal to the value of the business loan or line of credit. Any small business without collateral has virtually no chance at attaining a loan approval, also through the SBA, without significant security such as equipment or inventory.
Each time a small business cannot demonstrate collateral to supply security for the small business loan, the particular commercial bank will ask for the little business owner to secure the loan with his or her own personal assets or even equity, such as equity in a home or cash in a checking, cost savings, or retirement account, such as a 401k or IRA. This latter scenario places the personal assets of the owner at risk in the event of a small business failure. Additionally , virtually all small business loans will require the business enterprise owner to have excellent personal credit score and FICO scores, as well as require a personal guaranty. Finally, multiple years of financial statements, including tax returns for the business, demonstrated sustained profitability is going to be required in just about every small business loan application.
A failure or lack of ability to deliver any of these stringent requirements will often lead to an immediate denial in the application for nearly all small business loans or commercial lines of credit. In many instances, denials for business loans are being issued to applicants which have provided each of these requirements. Therefore , being able to qualify with good personal credit score, collateral, and strong financial claims and tax returns still does not guarantee approval of a business loan request in the post financial crisis economic climate. Access to capital for small businesses and small businesses proprietors is more difficult than ever.
As a result of this persistent capital vacuum, small businesses plus small business owners have begun to seek out alternative sources of business capital and loans. Many small business owners seeking cash flow to get existing business operations or money to finance expansion have discovered option business financing through the use of merchant bank card cash advance loans and small business installment loans offered by private investors. These product owner cash advance loans offer significant advantages to small businesses and small business owners when compared to conventional commercial bank loans.
Merchant cash advance loans, sometimes referred to as factoring loans, are based on the amount of average credit card volume a vendor or retail outlet, processes over a 3 to six month period. Any seller or retail operator that accepts credit cards as payment from customers, including Visa, MasterCard, American Exhibit, or Discover, is virtually assured an approval for a merchant charge card advance. The total amount of cash advance that a merchant qualifies for is determined by this three to six month average and the funds are generally deposited in the business checking account of the small business within a seven to ten time period from the time of approval.
A set repayment amount is fixed and the repayment of the cash advance plus curiosity is predetermined at the time the enhance is approved by the lender. For instance, if a merchant or retailer processes around $1, 000 per day in bank cards from its customers, the monthly average of total credit cards processed equals $30, 000. If the merchant qualifies for $30, 000 for a money advance and the factoring rate is 1 ) 20, the total that would need to be paid back is $30, 000 – in addition 20% of $30, 000 which equals $6, 000 – for a total repayment amount of $36, 1000. Therefore , the merchant would receive a lump sum of $30, 000 money, deposited in the business checking account, and a complete of $36, 000 would need to be repaid.
The repayment is made by automatically deducting a pre-determined quantity of each of the merchant’s daily future charge card sales – usually at a rate of 20% of total daily credit cards processed. Thus, the merchant does not have to write checks or send payments. The fixed percent is simply subtracted from future credit sales till the total sum due of $36, 000 is paid off. The advantage for this type of financing versus an industrial bank loan is that a merchant cash loan is not reported on the personal credit report of the business owner. This effectively separates the personal financial affairs of the small business owner from the financial affairs of the small company entity.
A second advantage to a vendor credit card cash advance is that an acceptance does not require a personal guaranty from the business owner. If the business is unable to pay back the merchant cash advance loan in full, the business owner is not held personally responsible and cannot be forced to post individual collateral as security for the merchant advance. The owner removes the financial consequences that often accompany a commercial bank business loan that requires an individual guaranty and often forces business owners into personal bankruptcy in the even that their business venture fails and cannot repay the outstanding loan balance.
A 3rd, and distinct advantage, is that the merchant credit card cash advance loan does not require any collateral as additional safety for the loan. The future credit card receivables are the security for the cash advance repayment, thus no additional collateral needs exist. Since the majority of small businesses do not possess physical equipment or inventory that may be posted as collateral for a traditional bank loan, this type of financing is a remarkable alternative for thousands of retail businesses, merchants, sole proprietorships, and online stores seeking access to capital. Such businesses would be denied automatically for a traditional business loan simply because of the lack of guarantee to serve as added security for that bank or lender.
Finally, the merchant credit card advance loan authorization does not depend upon the strong or perfect personal credit of the business proprietor. In fact , the business owner’s personal credit score can be quite poor and have a low CREDIT score, and this will not disqualify the business from being approved for the cash advance. The business owner’s personal credit is usually checked only for the purpose of helping to determine that will factoring rate at which the total loan repayment will be made. However , a business owner with a recently discharged personal bankruptcy can qualify for a merchant credit card cash advance loan.
Since the cash funds being lent on merchant credit card advancements is provided by a network associated with private investors, these lenders are not regulated or affected by the new capital requirements that have placed a restriction on the commercial banking industry. The particular merchant cash advance approvals are dependant on internal underwriting guidelines developed by the particular private lenders in the network. Every loan application is reviewed and prepared on a case-by-case basis and home loan approvals are issued within 24 in order to 48 hours from receipt of a complete application, including the previous three to six months of merchant credit score statements.