One of the top things most small and medium-sized business owners tend to worry about is how to obtain working capital for the purpose of expanding their businesses or even to keep it afloat. It is one thing to request business funding from traditional financial institutions such as commercial banks; it is another thing for such funds—if approved—to be delivered to the business in a timely manner. Of course, business owners are quite conversant with the hectic bureaucratic procedures associated with commercial bank loans which result in loan application taking months to process. Getting small business loans unsecured from commercial banks is even out of the question since banks would often request both collateral and a personal guarantee from the business before considering the loan application in the first place. It has, therefore been the practice of business owners to look to other sources in order to obtain easy business funding.
Account Receivables Financing Option
There are a number of options when a business is looking for an unsecured loan and each of them has its own unique features that differentiate it from the others. The first one to be considered is account receivable financing also known as factoring. Account receivable financing involves a business using its receivables that is money it is owed by customers to serve as collateral for a loan agreement. The company which issues the loan, in this case, is known as a factoring company and it gives the business an amount which is equal to a diminished value of the unpaid voices or account receivables. The most significant thing about this method of opting for a small business loan unsecured option is that it enables the business to utilize its capital that has hitherto been trapped in unpaid debts. A further implication of this method of financing is that the risks inherently associated with those debts that have been used as collateral are automatically transferred to the financing company.
In most cases, the factoring company takes offers about 70 to 90 percent of the worth of the unpaid debts and invoices to the business. The factoring company then takes responsibility for collecting the debt and if it succeeds, returns the agreed percentage to the business and thereafter keeps the remainder as profit. Factoring companies often take into consideration a number of factors before deciding on how much it is to price the debts and unpaid invoices. Although there are no strict guidelines which all factoring firms adhere to, there some general rules which they tend to follow. For instance, factoring firms prefer debts owed to the borrowing business by big firms more than those owned by smaller firms. In addition, newer debts are preferred to older ones. But, in general, if the factoring firm judges that it would be easier to collect a particular debt, the more value it assigns to such debt and conversely. Even though account receivables financing seems like a good choice when getting small business loan unsecured options, it is much more difficult to obtain as compared to something like merchant cash advance.
Short term loans
Obtaining short-term business loans is one other way businesses—especially those that are seasonal in nature—get around small financial obstacles to the smooth running of their businesses. In most cases short-term loans are used to buy inventories, to raise working capital to some extent, and to cover temporary deficiencies in finance in order for a business to meet such things as payroll expenses. It also possible for cyclical businesses to obtain short-term business loans just to even out their cash flow. One good thing about short terms loans is that it can be obtained from a number of different sources including commercial banks, mutual banks, credit unions and other nontraditional financial institutions. The requirement for a short-term loan will normally include all such things as a record of payment history for previous loans the business might have had, cash flow history for an about 3 to 5 years, as well as the income statement for the same amount if it is requested. Short-term business loans are not small business loans unsecured by their nature; rather, it is solely at the discretion of the provider to evaluate the documents which the business has provided and determined if a collateral will be needed or not.
Business line of credit
One other way small businesses obtain working capital is a business line of credit. A business line of credit can be viewed as an arrangement between a business and a financial institution often a bank, in which the bank provides the partnering business with a maximum amount of loan which it can draw upon at any time. The business is enabled to withdraw funds as and when needed provided the set limit is not exceeded. A business line of credit usually helps a business to handle basic everyday operations such as making a purchase, getting additional inventory, or even meeting up with payroll. Because a business can suddenly be plunged into cash flow problems, a small business loan unsecured option, such as a business line of credit can serve as a buffer—once the need for funding arises that cannot be met by the business quickly on its own, it draws on the line of credit. Once a business uses a line of credit, it can repay what it has used so that it would still be eligible for a future line of credit within the set limits.
Merchant Cash Advance
Of all the alternative sources of obtaining business funding available to small businesses, merchant cash advance has proven to be the most efficient and easiest method of securing a business loan. A merchant cash advance is not technically a loan. There are marked differences between a loan and a merchant cash advance. Unlike a loan, a merchant cash advance does not attract interest, neither does it require collateral or some other forms of guarantee in order to obtain. And unlike account receivables financing option in which a lump sum of cash is given to a business in exchange of its debts and unpaid invoices, a merchant cash advance is a sale of the future receivables of the business in exchange for cash. This means that in a merchant cash advance transaction, a business agrees to sell its future credit card sales to a merchant cash advance provider which provides the small business loan unsecured. Merchant cash advance is especially suited to businesses which fulfill the vast majority of their sales transactions through credit cards. A further criterion for being eligible for a cash advance is that the business must have a physical address as online businesses are generally excluded from receiving cash advances.
Understanding how a merchant cash advance works
In order for a business to receive funding from merchant cash advance providers, a merchant cash agreement which contains all the terms of the transaction is first signed by the business in question. Such terms typically include the withholding percentage, factor, and total payback amount. There are no fixed terms in a merchant cash transaction as is obtained in typical loan agreement where it is stated that the loan has to be repaid at a specific time—failure to do so can attract serious consequences for the business. First, let us assume that a particular business needs about $10000 in order to purchase some new piece of equipment which would help it to boost production levels. If the business approaches a merchant cash provider for the loan so to speak, the merchant cash provider offers this amount to the business in exchange for its future credit sales which it buys at a discount. Because of this discount, the cash advance is factored by say 1.5 to give a total payback amount of $15000 which the business is expected to repay. In order to complete the payment of this small business loan unsecured, a certain percentage of the daily credit card sales of the business—the withholding percentage—is remitted to the merchant cash provider. If in this case, the withholding percentage is 10% then ten percent of daily credit sales is sent to the provider until $15000 is repaid.
Some benefits of merchant cash advance
There are some unique features of merchant cash advance which has endeared it to small business owners. The most enticing thing about it is the speed with which funds can be obtained. It can take as short as one week to obtain a merchant cash advance and this includes the time taken to process the application. Furthermore, the documentation that is required by most merchant cash advance providers is quite minimal. In most cases, only the cash flow statement of the business for the preceding few months are required in order to establish the creditworthiness of the business. Moreover, there is no risk of a personal loss for the business owner as this is what essentially makes it a small business loan unsecured. In all, the merchant cash advance industry is one that is growing, however, an increasing number of small business owners are beginning to realize it is the most reliable means through which a business can obtain instant working capital.