Capital availability is the most critical factor distinguishing successful enterprises from those that have shrunk or failed in today’s harsh economic climate. While many large U.S. corporations have increased sales, opened new retail locations, and grown earnings per share, many small businesses have seen their sales and cash flow drastically decline, with some even closing their doors. This is because small businesses almost always rely solely on traditional commercial banks financing, such as SBA loans and unsecured lines of credit. At the same time, large publicly traded corporations have access to the public market.
Many of the largest U.S. commercial banks had an easy money policy. They were freely lending to small firms with owners with solid credit and some experience in the industry before the financial crises of 2008 and the subsequent Great Recession hit. Many of these company financing options were no-collateral commercial lines of credit or installment loans. These loans were often nearly guaranteed only by the business owner personally. This is why getting a corporate loan was as easy as having good personal credit.
During this period, hundreds of small business owners took out loans and lines of credit to meet their working capital requirements, such as payroll, equipment purchases, maintenance and repairs, marketing, tax obligations, and prospects for growth. Many small enterprises were able to thrive and adapt to changing cash flow needs because of the ease with which they could access these capital resources. Nonetheless, many company leaders were unduly confident, making bold growth predictions and taking on progressively riskier projects.
Many enterprising business owners borrowed substantially from small business loans and lines of credit to expand their operations, counting on future revenue growth to cover the interest and principal payments. Asset values, consumer spending, and corporate expansion through leverage continued to rise as long as banks adhered to a ‘loose money’ strategy. However, the festivities could not continue indefinitely.
Financial panic and contagion erupted throughout the credit markets when Lehman Brothers, one of Wall Street’s oldest and most recognized banking organizations, suddenly collapsed in 2008. The subsequent standstill in credit markets brought the wheels of the American financial system to a screeching halt. Since banks abruptly halted lending, asset values, notably real estate prices, have plummeted. This is because the lack of free money has contributed to their rise in recent years. Commercial banks’ balance sheets weakened, and stock prices plummeted as asset values crashed. The days of financial ease were over. The festivities had come to a close.
The Great Recession that followed the financial crisis left the capital markets without sufficient participants. Commercial banks who had previously been so willing to lend money to entrepreneurs and small business owners found themselves in a precarious position when their balance sheets became depleted of capital. Commercial banks cut off new business borrowing overnight and demanded immediate repayment of past-due loans. When access to these commercial lines of credit dried up, it became difficult for small companies to satisfy their daily cash flow demands and debt obligations. Many small firms closed because they couldn’t weather the unexpectedly significant reduction in sales and revenue.
Every time one of these establishments went bankrupt, the unemployment rate rose since similar businesses were responsible for having produced millions of jobs. Commercial banks slipped into a tailspin as the financial crisis worsened, posing a threat to the stability of the entire financial system. Congress and the Federal Reserve Bank bailed out the banking system with taxpayer money, but the damage was already done. Hundreds of dollars were pumped into the banking system to stabilize the financials of bankrupt financial institutions. However, no provision was ever adopted during this process that mandated these banks provide money to individuals or non-governmental organizations.
Commercial banks have consistently denied access to finance for thousands of small businesses and small business owners rather than using some of these public dollars to support small businesses and prevent needless business failures and increased unemployment. Commercial banks have adopted an ‘every man for himself’ attitude and continue to cut off access to business lines of credit and commercial loans, notwithstanding borrowers’ good credit histories and on-time loan payments, even after receiving a historic bailout paid by taxpayers. High unemployment persisted, and the number of small businesses declaring bankruptcy increased.
Large publicly traded organizations managed to survive and even thrive during this time when tiny enterprises were being strangled to death by the lack of funding that commercial banks created. They did this primarily through the bond and stock markets, issuing debt and raising capital, respectively. Banks cut off existing commercial lines of credit and refused to provide new small company loans, causing the demise of thousands of small enterprises. In contrast, major public companies raised hundreds of millions of dollars.
More than four years after the start of the financial crisis, the vast majority of small firms still have no access to funding, even in the middle of 2012. Most small firms still can’t get unsecured loans from commercial banks. Any small business hoping to secure a loan or line of credit from a financial institution will need readily available, liquid assets that can be sold for at least the loan or line of credit amount. If a small firm doesn’t have substantial collateral, such as equipment or inventory, it has almost no chance of getting a loan approved, even from the Small Firm Administration.
When a commercial bank grants a small business loan, it often requires the loan to be secured by the owner’s assets or equity, such as a home’s equity, or cash in a checking, savings, or retirement account, such as a 401(k) or an Individual Retirement Account (IRA). In the latter case, the proprietor’s assets are on the line in the event of the company’s insolvency. Small company loan requirements typically include high personal credit, FICO ratings, and a personal guarantee from the firm owner. Last but not least, every application for a small business loan will require financial documents and tax returns going back several years, showing consistent profitability.
Any application for a commercial line of credit or small company loan that does not meet these severe conditions will likely be rejected outright. Loan applications for businesses that meet all of these criteria are frequently denied. Therefore, in the post-financial-crisis economy, it is still not sure that a business loan request will be approved, even with good personal credit, collateral, and strong financial statements and tax filings. Small businesses and their owners now face a more challenging lending environment than ever before.
Small firms and their owners have been forced to go elsewhere for financing due to the persistent shortage of traditional finance. Merchant cash advances and small company installment loans provided by private investors have become popular sources of alternative business financing for many owners of small businesses in need of working capital for ongoing operations or money for expansion. Small businesses and their owners can benefit significantly from these merchant cash advance loans instead of more conventional commercial bank loans.
The amount of a merchant cash advance loan, also known as a factoring loan, is determined by the average monthly credit card volume business processes during a three- to six-month period. Likely, a merchant credit card advance application from any retailer or wholesaler that takes credit cards like Visa, MasterCard, American Express, and Discover will be approved. A merchant’s eligibility for a cash advance is based on their average monthly sales over the past three to six months, and once approved, the funds are typically put into the merchant’s business checking account within seven to ten working days.
When a cash advance is accepted, the interest rate and the amount that must be repaid are set in stone. If a store takes an average of $1,000 in credit card payments daily, that equates to $30,000 in monthly credit card transactions. A cash advance of $30,000 at a factoring rate of 1.20 would need repayment of the principal ($30,000) plus interest (20% x $30,000 = $6,000) for a total of $36,000. This means the business owner will get $30,000 in a single cash payment placed into the company’s bank account, with a total repayment obligation of $36,000.
Repayment is implemented through periodic deductions from the merchant’s future daily credit card sales, often at 20% of total daily credit card transactions. This eliminates the need for the retailer to issue checks or post payments. To settle the balance of $36,000, the predetermined percentage will be subtracted from all future credit sales. Compared to a commercial bank loan, a merchant cash advance cannot affect the owner’s personal credit. This helps keep the small business entity’s finances distinct from the owner’s.
A second perk of merchant cash advances is that the business owner is not required to purchase any personal collateral to get approved. The business owner will not be held personally accountable for repaying the merchant cash advance loan in total, and he or she will not be required to use any of their assets as collateral for the transaction. By not having to guarantee a commercial bank business loan personally, the owner avoids the negative financial implications that might otherwise arise in the event of the business’s failure and the owner’s inability to repay the loan in full.
Thirdly, and perhaps most significantly, a merchant credit card cash advance loan does not necessitate any additional assets as security for the loan. The expected credit card sales secure the cash advance. Thus, no further collateral is needed to obtain the loan. Thousands of retail stores, merchants, sole proprietors, and online stores can benefit greatly from this type of financing because, unlike traditional bank loans, they do not require collateral in the form of equipment or inventory. The lack of collateral would automatically cause a bank or other lender to reject such a business for a conventional business loan.
In conclusion, a business owner’s credit score is not a factor in whether or not they are approved for a merchant cash advance loan. Even if the owner’s credit isn’t great and their FICO score is low, that won’t stop the firm from getting a cash advance. In most cases, a business owner’s credit history is just evaluated to assist in setting the factoring rate at which the loan would be repaid in full. A business owner who has just filed for and been granted a bankruptcy discharge may still be eligible for a merchant cash advance loan.
Since private investors pool their money to supply the cash for merchant credit card loans, these lenders are not subject to the new capital requirements that limit the commercial banking sector. Private lenders in the network make decisions on whether or not to grant merchant cash advances based on their own internal underwriting rules. Within 24 to 48 hours of receiving a complete application, including the preceding three to six months of merchant credit statements, your loan application will be examined and approved based on its merits.
The absence of commercial banks has resulted in exponential growth for the merchant credit card advance business. Private investors and business owners are flooding the still-untapped market for merchant advance loans because they see it as the future of small business financing. Visit for details on business installment loans and merchant cash advances.
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