In today’s hostile economic environment, access to capital may be the primary differentiating factor between those people businesses which have been able to expand and gain market share versus those that have skilled enormous drops in revenue. The main reason many small businesses have seen their sales and cash flow drop dramatically, a lot of to the point of closing their doorways, 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 traditional commercial bank financing, such as SBA loans and unsecured lines of credit, whilst large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.
Before the onset of the financial crises of 2008 and the ensuing Great Economic downturn, many of the largest U. S. commercial banks were engaging in an easy money policy and openly lending in order to small businesses, whose owners had great credit scores and some industry experience. Many of these business loans consisted of unsecured commercial lines of credit and installment loans that needed no collateral. These loans were almost always exclusively backed by a personal guaranty from the business owner. This is why great personal credit was all that was required to virtually guarantee a business loan approval.
During this period, thousands of small business owners utilized 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, fixes, marketing, tax obligations, and enlargement opportunities. Easy access to these capital resources allowed many small businesses to grow and to manage cash flow needs as they arose. Yet, many business owners increased overly optimistic and many made aggressive growth forecasts and took on increasingly risky bets.
As a result, many ambitious business owners began to expand their particular business operations and borrowed greatly from small business loans and credit lines, with the anticipation of being able to repay these heavy debt loads through future growth and increased income. As long as banks maintained this ‘easy money’ policy, asset values continued to rise, consumers continued to spend, plus business owners continued to expand through 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 through the entire 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. Banks stopped lending overnight and the unexpected lack of easy money which acquired caused asset values, especially home prices, to increase in recent years, now trigger those very same asset values in order to plummet. As asset values imploded, commercial bank balance sheets damaged and stock prices collapsed. The days of easy money had ended. The party was officially more than.
In the aftermath of the financial crisis, the truly amazing Recession that followed created a vacuum in the capital markets.
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The very same industrial banks that had freely plus easily lent money to small enterprises and small business owners, now suffered from an absence of capital on their balance sheets – one that threatened their very own existence. Almost overnight, many commercial banks shut off further access to business lines of credit and called due the exceptional balances on business loans. Small businesses, which usually relied on the working capital from these 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 plus 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 directed a tax payer funded bailout of the entire banking system, the damage had been done. Hundreds of billions of bucks were injected into the banking system to prop up the balance sheets associated with what were effectively defunct establishments. Yet, during this process, no provision was ever made that required these types of banks to loan money in order to consumers or private businesses.
Rather than using a portion of these taxpayer money to support small businesses and avert unneeded business failures and increased joblessness, commercial banks chose to continue to refuse access to capital to thousands of small businesses and small business owners. Even after receiving a historical taxpayer funded bailout, the industrial banks embraced an ‘every guy for himself’ attitude and always cut off access to business lines of credit plus commercial loans, regardless of the credit history or even timely payments on such lines and loans. Small business bankruptcies skyrocketed and high unemployment persisted.
In this same period, when small businesses had been being choked into non-existence, as a result of the lack of capital which was created by commercial banks, large publicly-traded corporations managed to survive and even grow their companies. They were mainly able to do so simply by issuing debt, through the bond marketplaces, or raising equity, by giving shares through the equity markets. While large public companies were increasing hundreds of millions of dollars in clean 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 middle 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. Industrial banks continue to refuse to lend on 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 simply sell for an amount equal to the value of the company loan or line of credit. Any small business without collateral has virtually no chance at attaining a loan approval, even through the SBA, without significant collateral such as equipment or inventory.
Every time a small business cannot demonstrate collateral to give security for the small business loan, the commercial bank will ask for the little business owner to secure the loan with his or her own personal assets or equity, such as equity in a house or cash in a checking, savings, or retirement account, such as a 401k or IRA. This latter situation places the personal assets of the proprietor at risk in the event of a small business failure. In addition , virtually all small business loans will require the business owner to have excellent personal credit score and FICO scores, as well as need a personal guaranty. Finally, multiple years of financial statements, including tax returns for that business, demonstrated sustained profitability will be required in just about every small business loan application.
A failure or lack of ability to provide any of these stringent requirements will often result in an immediate denial in the application for almost all small business loans or industrial 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 statements and tax returns still does not guarantee approval of a business loan ask for in the post financial crisis economic climate. Entry to capital for small businesses and small business owners is more difficult than ever.
As a result of this persistent capital vacuum, small businesses and small business owners have begun to seek out option sources of business capital and business loans. Many small business owners seeking cash flow intended for existing business operations or funds to finance expansion have discovered choice business financing through the use of merchant charge card cash advance loans and small business installment financial loans offered by private investors. These service provider 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 quantity of average credit card volume a seller or retail outlet, processes over a 3 to six month period. Any merchant or retail operator that accepts credit cards as payment from clients, including Visa, MasterCard, American Convey, or Discover, is virtually assured an approval for a merchant credit card advance. The total amount of cash advance that the merchant qualifies for is determined by this three to six month average and the funds are generally deposited in the business bank account of the small business within a seven to ten day period from the time of approval.
A set repayment amount is fixed and the repayment of the cash advance plus interest is predetermined at the time the progress is approved by the lender. For instance, if a merchant or retailer processes approximately $1, 000 per day in credit cards from its customers, the monthly average of total credit cards processed equates to $30, 000. If the merchant authorize for $30, 000 for a money advance and the factoring rate is 1 ) 20, the total that would need to be repaid is $30, 000 – in addition 20% of $30, 000 which usually equals $6, 000 – to get a total repayment amount of $36, 500. Therefore , the merchant would receive a lump sum of $30, 000 money, deposited in the business checking account, and an overall of $36, 000 would need to be repaid.
The repayment is made by automatically deducting a pre-determined amount of each of the merchant’s daily future charge card sales – usually at a rate associated with 20% of total daily bank cards processed. Thus, the merchant does not write checks or send obligations. The fixed percent is simply subtracted from future credit sales until the total sum due of $36, 000 is paid off. The advantage to this type of financing versus an industrial bank loan is that a merchant cash loan is not reported on the personal credit history 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 seller credit card cash advance is that an authorization does not require a personal guaranty through the business owner. If the business is unable to pay back the merchant cash advance loan in full, the company owner is not held personally responsible and cannot be forced to post individual collateral as security for the seller advance. The owner removes the economic consequences that often accompany an industrial bank business loan that requires a private guaranty and often forces business owners in to 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 need any collateral as additional protection 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 have no physical equipment or inventory that can be posted as collateral for a conventional bank loan, this type of financing is an extraordinary alternative for thousands of retail companies, merchants, sole proprietorships, and online stores seeking access to capital. Such companies would be denied automatically for a traditional business loan simply because of the lack of guarantee to serve as added security for the bank or lender.