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It can be frustrating to own a small business and be unable to secure the cash that you need to grow your inventory or to give your bottom line a boost. When the bank won't hand over any cash, you may have to look elsewhere. If that's the case, you need to make sure you weigh your options.
Even years after the global financial crises hit the world and closed banks, bankrupted businesses, and caused consumers to hang on to their case, some small businesses are having difficulty acquiring bank loans.
But while loans still elude the small business, there are some online services that are taking the opportunity to fill in this gap in the credit marketplace. Some of these options are loans or cash advances on money your business is likely to make every month. This makes financing a big purchase much easier. Some of those programs include PayPal Working Capital, Kabbage, and American Express Merchant Financing.
Old Fashioned Factoring
This trend is not new. It is actually a twist on a financial practice that is centuries old and it is called "factoring." When you are "factoring," you sell your invoices or accounts receivable to a factoring company. The company then advances you a percentage of the invoice's value. The percentage that they loan is typically 70 percent to 90 percent. After the client pays the invoice, the factoring company takes out a transaction fee and then sends the business the balance. Because of the dollar amount of the transaction fees, factoring isn't always a worthwhile practice for businesses within invoices that are usually pretty small.
Nonetheless, the newer services differ from factoring in a number of ways, such as they are not based around a single invoice. Instead, they look at how much money is historically brought in through a specific payment source and then they issue the advance based on the expected ability to repay.
Although such options can help your business when it is in a pinch, it is important to know how much you are paying for that advance.
When considering loans that require you to pay back a small percentage of your invoices every day, every week, or every month, it can be difficult to make an effective comparison to other forms of financing. An example of another form is the use of a credit card where the average APR of a business credit card is close to 13 percent. Small businesses can also compare these options to the usual bank loan where 8 percent is the usual interest rate.
When a factoring company charges a set fee, they base it on a number of factors. Those factors include the repayment rate. It is a must to understand the fee before signing on. You don't want to use the service and be surprised at how much money they take out as a fee.
You also need to be watchful of a very common hazard that small businesses have encountered when using invoice loans and advances. Sometimes the lender will begin extracting payments from a company's receivables before the company even has the time to address the receivables themselves. If the cash flow of the business is already tight, automatic withdrawals can result in a short cash flow and this can make day-to-day operation difficult. You don't want to get to the point where you feel like you are a hamster on a hamster wheel, trying to catch a break.
Despite these downsides, there are some merchants that are finding some types of receivables financing to be very convenient when they have no other option. For instance, one gentleman turned to Kabbage to finance his business inventory. Because a majority of his monthly receivables came through PayPal due to his percentage of online purchases, and he mainly purchased liquidations, his bank turned him down. Banks don’t even look at a PayPal account as a source of income.
The business owner received a $10,000 advance through Kabbage to help him buy merchandise. Since then, he has used the Kabbage account as a line of credit when he needs it. He is now allowed to have up to $25,000 on loan at any time and Kabbage extracts the monthly payments.
Kabbage isn't the only option, as PayPal users can use PayPal Working Capital. It allows qualified merchants to receive an advance that is a specific percentage of their PayPal receivables the business has processed in the past year. They have a limit on how much they will loan. Merchants then pay back the loan by giving back a cut of their daily PayPal sales. Payments are collected from the PayPal account until the loan is repaid. There is a fixed fee involved as well. Businesses even have the option to pay off the loan early without penalty.
For the business that primarily accepts credit cards, American Express Merchant Financing is an option. It is aimed for those merchants that make between $50,000 and $10 million in sales annually. The terms of the deal is tailored to the merchant's cash generation record on American Express cards. If the merchant pays off the loan early by writing a check or because of a high charge volume, an early repayment rebate is offered.
Finding The Right Option
Before trying alternative financing, it is important to rule out the bank loan first. The bank loan can be more affordable compared to the fees. One thing that businesses tend to neglect is the fact they can go to a smaller bank and apply for a traditional loan. Small banks approve, on average, 30% more small business loans than big banks. Look for a small bank that you may have never heard of but has a good reputation.
Once you compare your options and find the right one, it is important to make sure you treat the account with care. You want to ensure that you have access to that line of credit any time you need it. That way when things get a little tight, you have a reliable resource for the cash you need.