Getting working capital is one of the greatest challenges facing small businesses in the present time. Working capital, however, means different things to different people in the business sector. Technically the term means the amount by which current assets exceed current liabilities. This method of examining the working capital of a business might not prove to be of much use to the average business person. The more practical way of determining the working capital of a business at any point in time is to evaluate the working cycle. The working cycle evaluates the accounts receivables, inventory, and account payable cycle. The account receivables are evaluated by the number of days it would require collecting an account, while the inventory is judged based on the number of days it will take to turn over the sale of a particular product. Since most small businesses cannot finance their working cycle with just the accounts payable which are evaluated by the number of days it takes to get a supplier invoice, small business often resorts to getting easy business loans.
Why are small businesses turning to alternative sources of funding?
Almost all the time, small and medium-sized business owners, when confronted with the need to obtain working capital financing, often turn to traditional sources of lending such as commercial banks which are often the first point of call. Because most small businesses might often just require short-term financing alone, it is quite difficult for them to make do with loans from commercial banks which are especially suited to businesses that need long-term financing. The difficulty of getting loans from commercial banks is also increased by other stringent requirements that small businesses are unable to meet most of the time. For now, let us examine some of the choices a small business might want to explore in getting easy business loans before narrowing down the discussion to merchant cash advance which is, in any case, the option that best suits the need of small businesses for immediate cash.
Equity financing and trade creditors
One of the choices open to small businesses is that of equity financing. Equity financing is very much ideal if the business has been in operation for just a few years. It is even more preferable if the business has not been turning profit in its first few years of operation. And because equity funds are suited to short-term financing, they can be obtained from personal assets, friends or family. As simple as this might sound it should be quite apparent that equity funding cannot be expected to meet the short-term financing needs of a business because getting funds from friends or family cannot be guaranteed. Moreover, small businesses often require finding when emergency situations such as equipment failure come up. In such a situation getting an investor, for instance, to provide financing will most likely prove to be futile. One other option to businesses is that of trade creditors. Obtaining easy business loans from trade creditors might be considered a good option if the business has a good relationship with them. This means that the business must have a good track record of paying on time in times past. In most cases, trade creditors help small businesses to fulfill large orders. What is often required is evidence of that order and file a lien on it as security. Obviously, this kind of funding is not suited for some kinds of small businesses.
Invoice factoring and business line of credit
Invoice factoring is one other source from which small businesses can obtain short-term working capital. The way it works is pretty simple. If a business has an order, a firm called a factoring firm purchases the account receivables of the business and after which proceeds to manage the order. This is the sort of financing that is often adopted by startup companies since they are often not eligible to receive funding from other conventional sources. For instance, most financial institutions will often request that a business must have been in operation for at least two years before it can be eligible to receive loans. However, there are some merchant cash advance firms that promise to offer easy business loans to firms which have been in operation for up to 3 months. A business line of credit is another quite popular option. A business line of credit is open to small businesses that are well capitalized as well as those that are able to provide the required collateral. In most cases, a business line of credit is only given for one year at a time and is expected to be paid off in 30 to 60 consecutive days.
Situations that can make a business to be in urgent need of working capital
Initially, we stated that small business often finds that they are in need of working capital urgently when emergency situations arise. So getting a quick an easy business loan under some of the conditions we intend to discuss will prove to be very crucial for the continued existence of the business. First, most small businesses often rely on specialized equipment which can fail at any time and without warning. Because of how tied to the business a machine can be, once it goes down the business remains stagnated until something is done—replacement or repair. In this kind of situation when funds are needed are critical, a commercial bank loan or loans from other traditional sources will certainly not save the day. If on the other hand the business requires funding to carry out routine maintenance and the funds are not readily available, it would still have to rely on alternative financial institutions that are known to provide instant business funds
Even though the dream of every business is to grow and expand, growth, however, comes with sometimes unexpected expenses which might attempt to make the business lose its footing. If for instance a business had just experienced growth and obtained more specialized equipment, this carries with it the additional and probably unforeseen cost of hiring new personnel, or training and retraining old ones. Because it is not always possible to anticipate the expenses that might follow from growth, a business will often find itself needing an easy business loan. There might also be times when an expected opportunity to boost profit might arise. If for example, a business needs to purchase a quick turnaround inventory at a steep discount, or there is a special offer from the manufacturer of particular equipment that is sure to boost production levels, and the business has no funds at hand, it will still find itself needing urgent, external funding.
Merchant cash advance as the best option for small businesses in need of quick cash
It is in circumstances such as those that we have enumerated that obtaining easy business loans merchant cash advance providers become really important. A merchant cash advance is a commercial transaction that involves a business which will be referred to as the merchant, and the merchant cash advance provider. Under this arrangement, the business offers to sell its future receivables at a discounted price to the merchant provider in exchange for a lump sum of cash which can often be obtained very quickly. Because of the way a merchant cash agreement is structured it is not considered to be a loan. First, as a defining property, a merchant cash advance does not attract interest payments, at least in the traditional sense of the word. And it is unsecured. This means that a merchant which obtains a cash advance provides no personal guarantee that the loan, so to speak, will be repaid at some specific time. In short, the implication of this is that the merchant cash advance provider loses his investment if the business happens to fail.
Read More: All You Need to Know About Merchant Loans
Who gets a merchant cash advance and what does it entail?
For a business to be eligible for an easy business loan from merchant cash advance providers, it must meet certain requirements which are, however, not as stringent as those of commercial banks. The first thing that merchant cash advance providers consider is whether the business generates enough credit sales that would enable it to easily repay the cash advance. In this regard, they typically require that a business must be generating at least $5000 per month. The business must also accept credit card payments such as Visa and MasterCard. Merchant cash advance providers also require that the business has a physical location and generally exclude online businesses. As for the amount a merchant can borrow, merchant cash providers allow businesses to borrow from 50% to 250% of their monthly receivables. The amount borrowed is factored in order to create some profit for the merchant cash provider. Then the percentage of the credit sales that will be remitted to the merchant cash provider on a daily basis is determined. This amount is continually paid to the merchant until the entire advance is cleared off and then merchant loses its right to the future receivables of the business.
In conclusion, small businesses have begun to embrace the opportunity of getting easy business loans through merchant cash advance. The future of the industry seems quite promising and in time merchant cash advance might as well become the number one choice for small businesses.