Fiscal Fuel for Small Businesses
The Fight
Right now, in the US Small Businesses are in a fight for
their lives. No, I am not overdramatizing for affect it is a fiscal fight for
most Small Businesses to keep their doors open. These are the businesses all
around you that carry the goods and services you have grown to depend on. The
small family restaurant down the street, the CPA you trust and rely on, and
many more. We all know of at least one business we loved that has recently shut
the doors in our community. It is mostly because the Fiscal Fuel ran out and
there was nowhere for that Business Owner to turn for help, at least that they
knew of.
80% of our friends and neighbors who own Small Businesses
can’t just run down to the bank and get a loan to keep up with the
ever-changing Fiscal Landscape in the United States. It has nothing to do with
Credit Score in most cases, generally speaking it is about collateral. The
local bank typically needs to retain assets to ensure repayment of the loan.
These assets must be of equal or higher value to the loan in order to justify
the risk. This is more so true in our post Pandemic Business world. Every
business is a risk to the banks as we are still not completely sure what will
last and what will not.
That leaves only 20% of Small Businesses who can get help
when they need it most from their local bank. So, what happens to our friends,
neighbors and family members with great businesses who fall into the 80%? Let’s
explore those options.
MCA’s
Merchant Credit Advance/ Merchant Cash Advance
If you have been in business for a while, you are most
likely acquainted with a Merchant Credit Advance or a Merchant Cash Advance.
However, most times the two different types are confused with each other.
Merchant CREDIT Advance:
This is a Cash Advance to the Merchant (Business Owner)
based on their Credit Card receipts. This is the very typical type of
“Alternative Funding” most Business Owners have been approached about. A
Merchant Credit Advance advances money to the Business Owner on a percentage of
their Credit Card Processing Revenue. In return the Business Owner will agree
to allow the provider access to their Credit Card Revenue for a period of time
to repay this advance.
The interest on a Merchant Credit Advance is typically
between 20 and 50% of the amount advanced. This can get expensive. You can
typically expect to have daily or weekly payments for between 4 and 18 months.
Interest is generally figured at the time the advance is offered. This means in
most cases it is not compounding interest but rather a fixed one-time
calculation for the life of the advance.
The Business Owner must meet a particular set of criteria to
apply for one of these. The criteria vary from provider to provider. The
generic overall criteria look similar to the following:
·
$5 – 15K per month in Credit Card Transactions
·
600+ Owner’s FICO score
·
Between 3 months and 3 years in business
·
Ability to provide Credit Card Settlements to
the Provider for a predetermined period of time.
These are not the only criteria, there are more. Business
Owners who are considering this type of Funding should ALWAYS talk with a
Funding Specialist before completing an application.
Merchant CASH Advance:
Providers who do this type of “Modified” MCAs take a broader
look at the business revenue. Providers in this case are looking at the TOTAL
GROSS REVENUE of the business. This means ALL revenue is counted to determine
the amount of advance a business can qualify for.
Typically, this type of advance has what is known as Cash
Payback. There is not an interest rate but rather a multiplier applied to the
advanced amount. These Multipliers can range from roughly 1x – 2x the amount
advanced. How this changed the repayment is as follows:
·
Business Owner Applies for a Merchant Cash
Advance and is approved for $10K
·
The underwriters apply a 1.2x multiplier to the
advance amount
·
Business Owner is responsible for repayment of
$12K total.
·
$10,000.00 x 1.2 = $12,000.00
·
Therefore, there is a $2,000.00 Cost of Funds
These advances are typically set for repayment terms of 4 –
18 months as well, with daily, weekly and with some providers monthly payments.
There is typically a Cost of Funding between 0 and 3%. Some providers will take
this fee off the top of the advance before they deposit it to the Business Bank
Account. Other Providers may ask for this fee up front. Make sure you know
which is the case before you accept any offer.
There are qualifications to apply for this mind of MCA as
well. They are typically as follows but will vary from provider to provider:
·
Gross Revenue of between $3 and $50K per month
·
Owner’s FICO between 450 at the lowest and 650
(Not all providers will work with FICOs under 500 Make sure you ask)
·
Business Bank Account in Good Standing
·
At least 3 months in business but some require 2
– 3 years in business
·
Ability to provide at least a PDF of the
Business Bank Statement for a predetermined period of time
All Business Owners should consult with a Funding Specialist
before they enter ANY application for MCAs. Neither of these options are
“cheap” money. However, both options can provide the funds needed to grow the
business to the next level and create more revenue.
Revolving Business Line of Credit
This is another option for Small Businesses who just need to
have access to extra money. Know that not all Business Lines of Credit are
created equal. Some have compounding interest, some have fixed. Some charge in
the money “Walking Around” others charge maintenance fees monthly whether there
is a draw or not.
No matter whether you receive your Small Business Line of
Credit through a bank, Credit Company (Capital One, Bank of American, ETC) or
through a Revenue Based Funding Firm (David Allen Capital, PGN, ETC), the
Owner’s FICO will be considered. A Business Owner will need to have between 600
and 750 to have a good shot at getting a Line of Credit.
Summary
It is hard out there for Business Owners. The Global
Pandemic left a lot of people in financial trouble. Whereas it is going to get
better there is still the here and now to tend with. 80% of Small Business
Owners who are trying to stay afloat are not going to get Funding from their
local bank. For those people there are options to consider.
Merchant Credit Advance is a great option if the business
has a great credit card revenue. Merchant Cash Advance is fantastic for
businesses with great overall revenue. However, both of those options are
expensive money, and a business SHOULD ALWAYS consult with a Funding Specialist
before applying and committing to this kind of Funding.
Business Lines of Credit are great for having that “Rainy
Day” Fund to fall back on. They generally only charge for the money that is out
and not for letting it sit. Business Owners can find these Lines of Credit in
several different places, but the terms and repayment will vary with each Line.
For any Business Owner reading this who has questions about
these forms of funding and if any of them are right for them, I am a Funding
Specialist and would love to chat. We will find what is best for your Business
NOT what is best for my bank account. Education first my friends.
For more information on Business Funding Small Business
Owners can contact me in the following ways:
Phone: 234-249-1993
Email: KSprinkle@wcobusinesssolutions.com
Schedule a Success
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