Retail Finance Companies and the Best Options to Choose From
Small businesses have been at the heart of the competitiveness sustaining the economic vibrancy of the United States. It is they which account for more than 90 percent of the total number of companies in the country. Unlike it was in the past, small businesses are finding it increasingly difficult to survive.
Statistics show that more 1 in every new 3 small business startups is likely to fail in the first 5 years of operation. It also has been found that of the remaining two, one would fail to exceed 10 years of operations. The problem of these small business setups is not far fetched from the seeming scarcity of retail finance companies that are supposed to provide funds for small businesses in the country.
It is not that these companies are actually scarce; however for some time now, since the event of the recent US economic recession, there has been a decline in overall lending to small business from the traditional quarters.
What is the state of bank lending to small businesses?
Ironically, while the small businesses were experiencing a decline in loan offerings, the huge businesses were experiencing something that could well be referred to as a lending boom. For instance, while the big businesses have experienced an increase of around 7 percent in commercial bank loans, there has been a 20 percent decrease in the total bank lending to small business.
Even when the country slipped out from the recession, retail finance companies still remained skeptical about lending to small businesses. In reality, though, lending to small businesses is quite risky. However, finding a solution to the problem of unavailability of funds to small businesses is a must considering the strategic role they play in ensuring there is employment for the majority of persons. After all, more than 50 percent of the entire workforce of the United States all work for small businesses; that is, businesses having less than 500 employees.
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Steps government has taken to somewhat save the situation
In a bid to tackle the problem of lack of funding from retail finance companies, the government has taken steps it believed would help reduce the potential risks lenders faced in lending money to small businesses. One of such steps was the introduction of the small business administration which had a mandate of underwriting certain loan applications, determining whether or not the prospective borrower was worthy of receiving credit from the retail finance companies in the first place.
In the event that the small business administration finds that the business is creditworthy, it proceeds to back the loan. In backing the loan, the SBA does not provide funds directly to the business owners; rather, it guarantees the lending institution that would be held liable to a certain degree if the business is unable to redeem the debt. In a typical situation, the small business administration pledges to repay around 80 to 90 percent of the loan if the borrower defaults.
How the small business administration works with banks to provide loans for small business owners
The small business administration in order to fulfill its mandate entered into a partnership with some banks to provide the federal government-backed loans. The retail finance companies which in this case were banks were chosen based on certain criteria.
In order for a bank to partner with the SBA on the loan scheme, it had to have a solid reputation, possibly needing to have been in the business for more than 10 years, An additional requirement is that the bank, being part of the long train of retail finance companies, must have been ordinarily committed to providing loans to small businesses. Other banks, however, that do not meet this criterion could also work with the small business administration on a secondary level.
Banks that fall into this category simply underwrite the loans and offer it to the SBA for approval. If the request is approved, only then will the small business administration back the loan. Meanwhile, we have to take a look at bank lending and why is it that small businesses are finding it very difficult to obtain funds from them, creating the need for the businesses to sometimes turn to alternative retail finance companies, many of which are essentially more expensive.
Reasons why small businesses are no longer hooked on bank loans
Right from the earliest times of business, it is the banks that have been the greatest sources of retail finance to businesses in general and small businesses in particular. From the look of things, one might not be so wrong of one concludes that banks are now generally unwilling to cater for the needs of small businesses.
In recent times also, there has been an increase of government regulation of the banks, much more than what some other retail finance companies have witnessed. Increased government oversight and prevailing market conditions have informed the banks` to toughen the requirements for obtaining a public loan. Prior to this time banks could offer collaterals and that would just be it.
But now, even when the business has presented its collateral the banks still demand personal guarantees from the owners of the business that they are personally responsible for repaying the loan. When a business has offered a personal guarantee to the bank, the bank makes sure that the net worth of the guarantor is at least equal to the value of the loan being sought.
Offering a personal guarantee means that the business owner could lose his personal assets if the business is unable to pay. Although this made the whole process of obtaining loans from banks much more complex as other compared to other retail finance companies, the practice will not be abandoned—at least not anytime soon. Banks also require businesses of whatever nature to have excellent credit scores in order to be considered for loans.
No doubt, a good number of small businesses usually do not meet these criteria with the implication being that they are generally excluded from obtaining bank credit—whether in the form of a term loan, cash credit, bill discounting, or even overdraft. Even in cases where a business has qualified for a loan and the loan has been approved, it could take several months for the cash to be made available to the business, meaning that unlike credits from other retail finance companies, commercial bank loans are not ideal for a business which is in dire need of cash.
There are however ready alternatives to commercial bank loans. One is, of course, speaking of alternative lenders that are all seeking to fill the gap created by the seeming unavailability of commercial bank loans. Some of the most popular alternative retail finance companies include those which offer which merchant cash advance. It is those companies and the merchant cash advance which they offer that shall now be our focus.
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Introduction to merchant cash advance
Merchant cash advance vendors are aiming at making business funding available in the shortest possible time and to as many as possible. Merchant cash vendors do not, however, target all forms of business. The business categories that are suited for merchant cash advance are those that accept debit and credit card payments such as Visa and MasterCard. For a business to be eligible for a merchant cash advance it must also meet other requirements that could vary from one provider to another.
One of the basic requirements that are common to all merchant retail finance companies is that the business must be generating enough revenue that could enable it to meet up with the daily payments to the merchant cash advance provider without seriously jeopardizing cash flow. The business must also be one that has a physical location and not one which is based online. With all of these in mind, it is clear that such high revenue businesses such as hotels, restaurants, gas stations, large supermarkets are clearly the target of merchant cash advance providers.
Potential benefits of merchant cash advance
There are good reasons why a business might want to go for a merchant cash advance especially as an alternative to commercial bank loans. One of such reasons is that there is no requirement for collateral or personal guarantees when seeking a cash advance. This means that business owners are the ones who bear the risk involved in a merchant cash advance transaction and loses all of his investment if the business fails and cannot pay back the advance. But as should be expected, business owners are not allowed to carry out acts which are aimed at depriving the lender of his due. In addition to the unsecured nature of the merchant cash advance, attention is also not paid to the credit score in determining if a business is eligible for the advance or not. Above all, the entire process of obtaining the advance is stress-free and very timely.
In conclusion, the best retail finance companies are likely those that offer merchant cash advance, considering the many ways in which an MCA is more beneficial to a small business than a bank loan. Small business owners are beginning to realize this, and hopefully, as a result, the merchant cash advance industry will continue to grow and expand.
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