Working Capital Challenges and Solutions for Small Businesses
Posted by NANCY BAKANOWICZ
6 December, 2016
Sixty four percent of small businesses expect to achieve major growth within the next 12 months, according to a recentSmall Business Health Index study, and many of them expect to need some kind of working capital to help achieve that growth. However, of the small business owners who plan to seek out funding, 42 percent say it’s extremely challenging to obtain that working capital, and many experts believe it may be because of the smaller amounts of money that is needed, for which the typical loan process usually doesn’t allow.
When they need working capital, many small businesses seek out amounts generally less than $50,000, usually to purchase new equipment, to hire another employee or to expand and/or relocate the business. However, when they go the traditional bank route to obtain the funding, they are often turned down because banks generally don’t like to deal with smaller small business loans. As a result, smaller businesses are turning to alternative finance companies, like Rapid Capital Funding, who are stepping in to fill the gap, ensuring business owners get the working capital they need to help their businesses grow.
Most people think of banks when they think of applying for a loan, but for small business owners, a bank may not always be the best choice, particularly if you’ve been in business for less than two years, you have a credit score below 640 and you need less than $250,000. The fact is, many small business owners fall into at least one of those categories (some fall into all three) and any one of them would be enough to disqualify you from obtaining a loan. Even if you were somehow able to get past the “gatekeepers,” you may still face a rather thorough and meticulous process that takes a considerable amount of time, at the end of which you may still not have the money you need. On the other hand, alternative lenders specialize in small amounts, because they know sometimes it’s just a little bit of money a merchant needs to get him or her over that hump, or to buy that new piece of equipment that will make the difference.
Below are a few highlights to keep in mind when working with alternative lenders and merchant cash advances:
Remember, this is a loan. You will have to pay a merchant cash advance back. Usually the terms are pretty acceptable – you will generally pay a certain percentage of each day’s receipts, which allows you to pay back more on days when sales are high and less on slower days. Some alternative lenders will also offer fixed debit repayment amount, if that’s what you prefer.
Unlike a loan, there is no collateral. This means if you should happen to go out of business before the merchant cash advance is paid back, the funding company is not going to come after your house, your car or your personal bank accounts. And because you don’t need a high personal credit score to get a merchant cash advance, there is often no credit check, meaning your personal credit rating won’t be affected.
Approval rates are high. While the approval rate for a traditional bank-based small business loan is often less than 20 percent, over 50 percent of those who apply for a merchant cash advanced are approved, and the rate is even higher for restaurants. This is usually because a merchant cash advance is essentially buying a share of your future business and not necessarily looking at your past credit history.
Approvals are usually quick. It is not unheard of to apply for a merchant cash advance and receive funding within one or two business days. You will need to provide the funding company with some financial documentation, such as bank statements, credit card statements, but as long as you have these documents at the ready, funding should be pretty quick.
Repayment periods can vary. Merchant cash advance companies know that merchants’ debit and credit receipts can fluctuate wildly, especially if the business is more seasonal. Generally, the payback period is anywhere from 4 to 18 months, however, so keep that in mind when deciding how much working capital you need. Talk to your representative to find out exactly what your terms will be.
Alternative lenders are able to fill the gap for the vast majority of small business owners who don’t qualify for traditional loans because they are separate from the banking regulatory bodies. They use a process that is based on merit and need, which enables them to keep a more open mind when deciding who can borrow money and now much. Alternative lenders are your small business problem solvers.