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Working-capital loans for today’s retail businesses are increasingly challenging to come by. While there is significantly talk regarding helping “main street” within the media and politics, the reality is that the most cost effective working capital for business is an SBA or Bank loan. Unfortunately, the restricted credit environment by which we find ourselves means the great majority of these loans are not being approved for the retail businesses that need them most.
This leaves many retailers in the unfortunate position of going with a merchant cash advance from their credit-card processing company. These cash advances for working capital tend to be billed as “convenient” and “unsecured” ways for business people to get “quick cash”. The fact of the matter is, most cash advance companies do secure their loans via a UCC filing against the business. While it may not be in the owners personal credit, for many small retailers, having a UCC filing against their business funding just isn’t much different. It’s a lien which is placed on the business until the advance is repaid.
What is often left out is the fact that cash advance businesses are not regulated through the government as loans. Consequently they’re free to charge interest rates, or factor rates, of 50% or higher. Even on a short-term working capital loan, this really is an incredible amount of interest. Quite often, because it is not a true loan, the MCA company has the choice of changing the rate anytime during the repayment process. These advances will often be seen as high upfront fees, and the requirement to switch payment processors and/or buy new equipment from the provider. They additionally may have high “holdback” or daily payment rates that represent a real burden for many businesses.
In the majority of cases the active commercial lenders for this specialized form of commercial funding are limiting working-capital loans to businesses that are current in their debt payments and are showing a net profit (according to recent bank statements). If these two conditions are met, new commercial loans can frequently be obtained to refinance lines of credit and term loans which have been cancelled or recalled by many loan companies. For businesses not qualified for commercial financing using these two requirements, there are alternative funding sources such as business cash advance programs.
Many small business owners also rely on personal lines of credit to finance some of their business operations. There have been many reports of widespread cancellations and reductions of these lending programs as well, especially those involving loan companies which have received a multi-billion dollar cash infusion from United States of America taxpayer money that was intended to facilitate the lending of cash to businesses and consumers.
Personal and business lines of credit are already eliminated in several cases by lenders because of a reduced ability to pay by borrowers and deteriorating business conditions. As reported in the Working capital Journal, a high percentage of borrowers, in contrast, had a great payment history for many recent line of credit reductions or cancellations.
At the same time, there are banks prepared to make working-capital loans. The most noteworthy examples are (for the most part, anyway) not banks that have received bailout funds. In general, these commercial loan companies are already willing to provide working capital financing, either in the type of new business financing or refinancing lines of credit and term loans which have been recalled or cancelled by other loan companies.
Because it basically indicates that bailout funds are already given (so far) to loan companies who primarily have a history of making bad loans (virtually all lenders receiving bailout funds to date), the lending activities described above are a serious concern to many observers. Currently, little attention has been given to lenders with a healthy balance sheet in federal attempts to get additional funds in to the hands of consumers and businesses.
