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Working-capital loans for today’s retail businesses are increasingly tough to come by. While there is much talk regarding helping “main street” in the media and politics, the the fact is that the most cost effective working capital for business loans is an SBA or Bank loan. Unfortunately, the restricted credit environment by which we find ourselves means the great majority 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 bank card processing company. These cash advances for working-capital tend to be billed as “convenient” and “unsecured” ways for company 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 within the owners personal credit, for many small retailers, having a UCC filing against their business just isn’t much different. It’s a lien that is placed on the business until the advance is repaid.
What is usually left out is the fact that cash advance companies are not regulated through the government as loans. It means that they’re free to charge rates of interest, or factor rates, of 50% or higher. Even on a short term working capital loan, this is an incredible amount of interest. Regularly, because it is not a true loan, the MCA company has the option of changing the rate at any time during the repayment process. These advances tend to be described as high upfront fees, and also the requirement to switch payment processors and/or buy new equipment from the provider. They additionally may have high “holdback” or daily payment rates that represent a real burden for many businesses.
In many cases the active commercial lenders for this specialized type of commercial funding are limiting working-capital loans to businesses that are current within their debt payments and also are showing a net profit (based on recent financial statements). If both of these 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 lenders. For businesses not qualified for commercial financing using both of these requirements, there are alternative funding sources such as business cash advance programs.
Many small business owners also depend on personal lines of credit to finance several of their business operations. There are already many reports of widespread cancellations and reductions of these lending programs also, 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 lots of cases by lenders because of a reduced ability to pay by borrowers and deteriorating business conditions. As reported in the Working capital Journal, a high portion of borrowers, on the contrary, had a fantastic payment history for many recent credit line reductions or cancellations.
On the other hand, you’ll find banks ready to make working capital loans. The most noteworthy examples are (for the most part, anyway) not banks which have received bailout funds. Normally, these commercial lenders are already prepared 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.
Since it basically indicates that bailout funds happen to be given (so far) to loan companies who primarily have a history of making bad loans (virtually all loan companies receiving bailout funds to date), the lending activities described above are a serious concern to many observers. By this point, little attention has been given to lenders with a healthy balance sheet in federal attempts to acquire more funds into the hands of consumers and businesses.
