There is no gainsaying the fact that small businesses are vital to the economic viability and competitiveness of the United States. Small businesses have been at the forefront of job creation in America with two out of every three new jobs being created by small business, some of which are even home-based, and accounting for some 65 percent of total job creation the country. In spite of how vital small businesses are to the United States economy and indeed world economy, there are concerns that they face a major survival threat at the present time. The issue at stake has everything to do with finance, being that small businesses have faced increasing difficulty in getting fast small business loans since the time of the great economic recession of 2008. Small businesses, in particular, have been slow to recover from the effect of the recession and credit crisis that hit them so hard. (During the recession it was well known that small businesses were much affected than big businesses). This rather slow recovery has led some to ask whether there is a credit card in small business lending has had hitherto made fast small business loans to elude businesses that are in dire need of funding.
Impact of the recent economic recession on small businesses
To further explore the impact of the recession on small businesses one has to look at the fact that between 2007 and 2012 small businesses had 60 percent of the total job loss recorded for that period because they were seriously constrained and could not have access to working capital. While the big businesses saw a 7 percent decline in the payroll, small businesses on the other hand. So it can be concluded that financial crisis of whatever nature tends to hit hardest on small firms as exemplified in the United States scenario. Going back to the issue of fast small business loans, there has been a 20 or so percent decline in bank lending to small businesses in general; while there has been a 4 percent increase in commercial bank lending to big firms since the 2008 financial crisis. It has been alleged that the banking industry, in general, is not focused on lending to small business since doing so poses a greater risk to their investments.
What options banks have since loans from commercial banks are no longer forthcoming
Being that bank credit especially in the form of term loans has been the leading source of external business financing for small businesses—particularly main street firms—and has been instrumental in helping these businesses maintain a healthy cash flow, purchase new inventory and grow, one is often left wondering how small business are going to cope with the absence of fast small business loans from commercial banks. More to the point, more than 40 percent of small business owners had reported that major banks were their number one source of financial stability, while some 34 percent made it clear that regional or community banks were instrumental to their survival. However, recent surveys have shown that small business no longer sees commercial as reliable sources of fast small business loans. One survey even showed that more than 40 percent of small business owners who responded that they did not bother consulting banks for their financial needs. And this is not surprising considering that these days more than 50 percent of lo applications end up being rejected. We shall now examine how small business have turned to alternative lending sources such as merchant cash advance and what this means for the financing industry.
Invoice discounting is a form of alternative finance that is best suited for businesses with poor cash flow which would have made them ineligible for bank loans. To be eligible for discounting a business must have an efficient billing system, well-established business clients as well as predictable future income statements. Invoice discounting or factoring involves a bank or finance company buying a firm’s outstanding debts at an agreed funding rate. For instance, the factoring firm might advance as much as 90 percent of the value of debt to the business as a loan. Once the agreement has been signed the discounting firm becomes responsible for collecting the debts, however, payments received are administered by the lender. One good thing about factoring is that it provides fast and flexible financing which has no limit and in which advances are secured against debts which don’t pose a problem to the business from obtaining fast small business loans. However, factoring can be expensive and might place a considerable strain on the financing department of a small business.
Angel investors are usually private individuals who provide financial assistance to small businesses which show great promise. Angel investors generally look out for ambitious entrepreneurs with outstanding business ideas that are capable of projecting their businesses and position them for market domination. Fast small business loans from angel investors can be as much as $50000 or more into a business that meets the requirements. And apart from providing financial assistance these investors bring along contacts, ideas, and experience in order to ensure the success of the business. Being an unsecured form of investment, angel investors typically demand a significant stake in the business for a period of 3 to 8 years. Some advice though for those seeking to partner with investors: it is best to go for high net worth individuals as doing so could lead to less strain in the relationship. Meanwhile fast small business loans from angel are ideal for startups, and early-stage businesses with few earnings but with high growth potential in critical sectors such as media, technology, and even the life sciences.
Crowdfunding is a form of a fast small business loan that is based online. Crowdfunding provides a growing number of businesses with the opportunity to pitch their requests to a wide array of potential lenders and equity investors—thousands of those. A single individual in a crowdfunding platform could offer as much as $100000 to a single business. The fees associated with crowdfunding are often in the range of 7 percent of the total amount raised. Where one individual or investor is unable to provide the complete funds single-handedly, the fund is split and different investors contribute to making up the money. Unlike other sources of alternative finance, crowdfunding could take up to several weeks to process depending on the investor interest. Crowdfunding is suggested for colorful startups which are able to generate mass appeal, and which has at least 3 years of financial forecast in addition to flexible funding deadlines. One discouraging aspect of crow funding is that businesses are often unable to meet their fast small business loan expectations.
Loan Guarantee Schemes
Loan guarantee schemes are often funded by the government with a view to making fast small business loans available to a greater number of small businesses. The motivation for guarantee schemes is mainly due to that there can be businesses which are otherwise eligible for bank loans save for the fact that they are unable to provide the much-needed collateral. What the government does, for instance, the small business administration SBA is to provide a guarantee that if the business is unable to repay the debt, it would do so. The small business administration typically underwrites around 75 percent of the loan which could go into working capital or refinancing.
Fast Small Business Loans Through Merchant Cash Advance
Merchant cash advance is arguably the leading source of fast small business loans insofar as speed is the criteria for assessment. Merchant cash advance takes the shortest time to process, say, 3 to 5 business days. Looking critically at merchant cash advance leaves us with the realization that it is not technically a loan even though it has certain characteristics in common with loans: an amount is given to a business; the business pays a little more than what it receives in order to generate profit for the lender. However, a merchant cash advance is simply an arrangement between a cash advance provider and a business where the latter agrees to sell a portion of its future credit receivables to the former in exchange for a lump sum of cash. In a merchant cash advance transaction, a certain percentage of the daily credit sales of the business is remitted to the merchant cash advance provider until the payment has been completed. There is no collateral requirement for merchant cash advance and as such the business stands to lose nothing if it is unable to pay. Meanwhile, a good credit score is not a condition for getting a cash advance. What is often required is for the business to be generating a minimum of monthly revenue of $5000. In spite of the obvious advantages of obtaining fast small business loans through merchant cash advance, some still regard it as being expensive. Although there is some truth in this, it has to be said that the highs of MCA more than equals its cost.
Looking through all of the options for fast small business loans which we have discussed, it is quite clear that merchant cash advance is the superior option. Indeed, an increasing number of business owners have found it a veritable source of quick business funding, while a lot more are now willing to give it a try.