Ideal Business Financial Services for Small Business Owners
Small business owners have always wondered what the best business financial services for them might be. This does not come as a surprise since small businesses are beginning to realize that commercial bank loans are fast becoming out of reach of small businesses. Of course, apart from its effect on the small businesses themselves the unavailability of business funding to small businesses stands to affect the economy in general. After all small businesses have been at the forefront of job creation in the world and in the United States in particular. According to one study, small businesses were found to account for one out every 3 new jobs in the country, thereby creating employment for more than 50 percent of Americans. It is therefore important that small businesses get access to suitable business financial services in order to ensure their continued survival which the country’s economy is going to profit from. Meanwhile, commercial banks have been the greatest source of funding for all forms of businesses but for small businesses in particular. However, since the American economy went into recession in 2008 there has been a significant decrease in the level of bank funding to small businesses.
Why are small businesses facing difficulty in obtaining funding?
For instance, there has been an estimated 20 percent decrease in total bank lending to small businesses in the country. And the particularly disturbing thing about this worrisome state of affairs is that it is the small businesses that are being dealt a cruel blow. This is because while small businesses struggled to find the much-needed business financial services from commercial banks, there has been recorded a 7 percent increase in bank lending to big firms compared to the way it was before the recession. This naturally leaves one wondering. But here is the thing: Economic recessions are known to take a larger toll on small businesses than the big ones. Part of the reason for this is that it is that banks get especially wary of small businesses which pose a greater investment risk to them during times of economic difficulties. So even when the economy gradually slipped out of recession the banks` apathy towards small businesses continued to linger, leaving them with no choice but to turn to alternative sources of business financial services, some of which we shall later consider.
What do small business owners need to know before applying for business financial services?
But, one of the first questions a business needs to ask before even scouting for the best business financial services has to with how much it really needs. For indeed it is the needed amount that would play a great role in helping the business decide what options to pursue, that is what source of business lenders it should go for. Another angle from which way one could approach the question of how much is needed is from the angle of how much the business can afford. After all, any lender would often want to determine whether or not the business has the capacity to repay the advance. One way in which lenders determine the creditworthiness of a potential borrower is by looking at the debt service ratio of the business. In order for a business to know its debt service ratio, it should look at the cash flow which is the difference between sales and expenditure. After that, the business determines how much it projects to commit to monthly advance payments. If we assume a cash flow of $3000 and a monthly payment of $1000, then we have a debt service ratio of 3. As a rule, lenders require a business to have a minimum debt service ratio of at least 1.5 before it can have access to the business financial services they render.
Reasons why small businesses are turning away from commercial banks in the search for business financial services
Furthermore, the business has to be certain that the advance is going to help grow the businesses as should be shown in the business plan since lenders would also request the business plan in order to see how the advance fits into the objectives of the business. It is even this performance analysis test that helps the business to determine whether the advance amount is just sufficient. Another equally important requirement for obtaining an advance of any kind is credit score, especially for small business advance applications. It is the credit score of the business that tells the business advance service provider whether or not the business is a reliable borrower. For the credit score shows how the business behaved in previous credits it received. If a business has a good credit score then it is more likely to receive business advance than one that does not. Although an excellent credit score alongside a strong cash flow is a core requirement for receiving business financial services from commercial banks, there are however other lending options that do not have much to do with credit scores. But the reasons why small businesses are finding it difficult to borrow from banks extend that of credit score. Of course, it is the issue of collateral that stands as the biggest obstacle to small businesses. Commercial banks usually require collateral security for business advances which could be in the form of mortgage—and sadly, small businesses are often unable to provide the needed collateral. In addition, banks look at the financial statement of the business in order to establish that it has sufficient high revenue to repay the advance. The implication of this is that startups and small businesses that are struggling are unable to access business financial services from banks. All of these have made small business turn to alternative source of funding of which merchant cash advance happens to be a leading source.
Understanding what merchant cash advance is why it might be the perfect alternative to commercial bank loans
Merchant cash advance is one of the leading sources of alternative business funding in the United States. However, unlike other forms of alternative business funding, merchant cash advance takes the exception of not being a loan, at least from a technical perspective. One major reason for this is that a merchant cash advance does not attract interest payments nor does it have fixed payment terms. It is not, however, all forms of businesses that can make use of business financial services so to speak that is provided by merchant cash advance vendors. For one thing, it is a form of business funding that targets business which generate huge credit sales and which accept master card and visa card payments. For a firm to obtain a merchant cash advance it must be making at least $5000 in credit sakes each month, although some new merchant cash advance providers accept something less than that. The business also expected to have a physical location and must have also been in operation for more than one year. Of course, these requirements are only industry conventions since individual merchant cash advance providers could have their own requirements. Firms which could easily meet the criteria for merchant cash advance are usually such high sales volume businesses such as restaurants, gas stations, as well as large supermarkets.
In actuality, a merchant cash advance transaction is one in which the merchant sells a portion of its future receivables in exchange for a lump sum of cash. This means that at the end of each day of sales, the agreed percentage or fixed amount as the case may be is remitted to the provider. The amount that is remitted to the provider is determined by a number of factors. Such things as the nature of the business and the volume of sales play a major role in deciding this holdback percentage. Once this percentage has been agreed upon, the amount which the business obtained through the business financial services of merchant cash advance providers is factored to arrive at the total payable amount. Factoring means that the advance amount is multiplied by, say, 1.2. This creates the profit margin for the providers. Once the factor rate, payback amount, and the withholding percentage have been determined, payments are made on a daily basis until the cash advance has been repaid.
The benefits of merchant cash advance over commercial bank loans cannot be overemphasized. First, there is no collateral requirement in order to receive a merchant cash advance. This removes the major hindrance to even eligible businesses having access to business financial services. The main significance of this is that business bears no risk whatsoever and does not stand to lose assets if it is unable to pay back the advance. Furthermore, a good credit score is not required by merchant cash advance providers before issuing capital advances to small businesses. As such firms with poor credit scores are able to qualify for business funding. And most importantly, the greatest advantage of MCA funding is that the finds are issued in less than a week, unlike commercial bank loans that could months to obtain.
The high approval rate of merchant cash advance coupled with the hitch free process of application has inevitably turned it to a major source of business financial services. And although there is concern regarding its relatively high cost, it remains a great source of business funding, providing value that more than equals its cost.
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