A Merchant Cash Advance, sometimes also known as credit card receivable funding, is an alternative method of funding a small business. Based on credit card sales, a Merchant Cash Advance is usually a quick, efficient, and easy-to-manage form of small business funding. The main criterion for receiving a Merchant Cash Advance is to have a predictable credit card sales volume. Most providers will offer you slightly different terms, but it mostly depends on your proof of steady credit card sales volume. The provider, in most cases, will purchase a fixed dollar amount of your future credit card receipts at a discount. They pay your business up to $150,000, and then receive a fixed percentage of your future credit card sales, if and to the extent such sales occur, until they have received the dollar amount of future credit card sales they purchased.
There can be many benefits in finding the right Merchant Cash Advance provider. This is typically a very fast way to get money for your business, with completion of the application process in anywhere from 3-14 days. With most providers, you can spend the proceeds from a Merchant Cash Advance on whatever is best for your business. While it may carry a slightly higher cost than other options, it can create opportunity for a business that struggles with traditional providers.
Off balance sheet financing generally refers to financing from activities not on a corporate balance sheet. This could include operating leases, joint ventures, and research and development partnerships. Businesses will keep these larger capital expenditures off the balance sheet by classifying them in a way that keeps debt-to-equity and leverage ratios low. This is especially true if negative debt covenants would be broken by including the large expenditures on the balance sheet.
Off balance sheet financing items (most commonly operating leases) must follow Generally Accepted Accounting Principles (GAAP), in determining whether a lease should be expensed or capitalized. If expensed, the leased asset remains on the lessor’s balance sheet, and the lessee only expenses the actual rental charge of the asset.
Many US corporations have structured subsidiaries and partnerships to prevent billions of dollars in debt from appearing on their balance sheets. Various banks arrange many of these structures and use them as well.
Off balance sheet financing became popularly known during Enron Corporation’s bankruptcy travails in 2002. Many of the company’s financial problems were a result of questionable accounting practices in relation to off balance sheet entities. Since Enron’s failure, this type of financing is becoming more scrutinized by government entities.
A payroll loan is a cash advance that is given to a borrower based on their employment status and income. A payroll loan is also known as a payday loan because the amount of the loan is typically scheduled for repayment upon getting paid by an employer.
A payroll loan may be obtained easily with proof of income and identification. There are many payroll loan facilities that can process a request and provide cash within just few minutes or hours. However, certain criteria must be met in order to qualify for a payroll loan. Most payday loan lenders require the borrower to provide a checking or savings account as collateral and will extract the amount due from the account directly. Fees may apply in situations where a borrower does not have employee direct deposit because there is greater risk to the lender in that they can’t recoup the loan. This also generates a greater responsibility to the borrower, as they must ensure payments are made in full and on time. If a default occurs, the financial penalties from a payroll loan may be severe and can be very damaging to a person’s credit score.
A payroll loan is often used to subsidize an immediate financial need. Some examples of this may include emergency travel, repair to an essential automobile or purchase of inventory or commodities for resale. A payroll loan is poorly used as a supplemental means of income as it is a short-term solution with relatively high rates and fees. Most experts do not advise the use of payroll loans, simply because they are expensive, risky, and many providers have been found to be rather unscrupulous.
Restaurant financing refers to money arranged that can be used to open a restaurant, expand a current establishment, or buy a franchise. Restaurant financing can help cover equipment purchases, inventory, payroll, rent, utilities, and other operating expenses.
Banks and other lending institutions are the traditional sources for restaurant financing, though there are many different ways to get business capital.
Additional restaurant financing options might include:
- Loans from the US Small Business Administration (SBA) may be an option. The most popular is the 7(a) Loan Guaranty Program.
- Investors can be challenging, but can offer access to the necessary financial resources. Family, friends, accountants, and attorneys can often help bring in potential investors.
- If you’re purchasing a business from someone else, look into seller financing. In this scenario, the seller finances the sale. This can be particularly helpful if you’re unable to meet a bank’s requirements.
- Partnerships help owners to pool resources together, which can provide a solid source of funding. In restaurant financing, partnerships can help ease the burden of the individual by sharing it among the group.
- Personal loans are sometimes viable options. For example, a home-equity loan can provide sole funding or supplemental funding. Do beware of putting your personal assets at risk for the good of your business—you may lose more than you bargained for.
- Venture capital firms invest significant funds in companies and can be particularly interested in businesses promising expansion opportunities.
- There can be alternative funding options, other than loans, available to some restaurants, such as factoring or credit card receivable funding .
Most experts agree, when considering your restaurant finance options, a combination of sources can help you get the best possible fit to your needs.
A small business loan can be secured through a variety of means. It may be obtained through a traditional financial institution such as a bank. A small business loan may also be found through an organization that specifically caters to the financial needs of small and growing companies. Perhaps the most sought-after source for a small business loan is the U.S. Small Business Administration (SBA).
The SBA provides information about how to qualify and receive a small business loan. It also endorses many institutions that may meet the specific needs of your company. The organizations found through the SBA are required to meet stringent guidelines to gain endorsement. Therefore, using them for your small business funding needs is more secure than many other, less-regulated options. A small business loan is extremely helpful to entrepreneurs and fledgling companies. Many different small business loan programs can be found that offer flexible interest rates and payment schedule options. Some restrictions will require that the borrower be disciplined and diligent with the application of the loan. However, the hard work that goes into managing a small business loan is well worth the benefit of a strengthened credit profile and the opportunity to sustain and expand your company. With a small business loan, your company can challenge and enter the marketplace with the confidence of being supported by a secure financial portfolio.
As the name suggests, a small business start up loan is money used to begin a new business. While the traditional place to go for one of these loans is to a bank or other financial institution, there are other options you can consider for a small business start up loan.
The following are three common methods of start-up funding that won’t necessarily involve banks:
- Friends and Family: Friends and family members are one of the most common places to get a small business start up loan, but using them can have complications. Your personal relationships may be at risk if there is a problem on either side of the deal. If you use friends or family for a small business start-up loan, you need to handle it like a business transaction and put everything in writing. Handled properly, this can be a very simple way to get started.
- Venture Capital: Venture capital is money offered by individuals or groups to be invested in a business. There are venture capital firms and some government entities that specialize in providing venture capital.
- Private Investors: Private investors can be individuals or groups. Some investors prefer to be silent partners, while some will want a more direct connection to the management decisions being made in your small business. Understand what the ramifications will be before you accept an investment in your small business. An investor’s input can be very beneficial; in addition to funding they can offer guidance and some creative direction.
An SBA loan is a small business start up loan that is backed by the Small Business Administration. SBA does not provide these loans; rather, they are the guarantor of the loan. This means, in case of default, SBA subsidizes the provider. This makes the lending opportunity more attractive to a lender, but it also makes the qualifications more stringent than some other methods of funding.
Working capital is a fundamental accounting concept essential to running a business. Essentially, working capital is a company’s current assets minus its current liabilities. Current assets are typically those that are highly liquid, such as cash or inventory. Current liabilities are those debts or accounts payable that are due to creditors within one year. Working capital is the money used to purchase inventory and sustain operating activities.
Available working capital can measure the success of a company by how it manages its cash flows. Working capital can also help measure how well debt instruments are being implemented and used to leverage the business into a position of increased financial strength. If your company has positive working capital it may be in good shape to continue operations without immediate financing. A positive cash flow might indicate operations are being financed well by the sale of inventory, and your business may use the surplus working capital to pay-down liabilities to limit debt. If working capital is negative, your business may have to incur more immediate debt to sustain its operating activities. While this can be tricky, there are some funding alternatives that can increase your working capital without compromising your operations, and when used strategically, an influx of working capital can turn a negative cash flow into a positive.
To ask, “What is the definition of working capital?” and to understand how the answer applies to your organization, you need a solid grasp on the business model your company uses to generate revenues and sustain its activities. Look at your profit and loss statements and your debt-to-income ratio. Look into your accounts to see what your business has borrowed, and what debt remains outstanding. Know exactly where the money is coming in, where it is going out, and how much is tied-up in unmoving inventory. When you understand the definition of working capital and how the formula of assets minus liabilities applies to your business, you can start to look more aggressively to the future and plan for growth more accurately.
Equipment funding is capital you use to lease or buy equipment for your business. Equipment funding is available from many different sources and can be designed to fit the unique needs of your company.
You may be able to fund equipment through your company’s sales revenues. This can be an ideal way to fund an equipment lease. With a lease, property is not owned, which may be a better option for small businesses that don’t have the money to purchase and maintain equipment. Equipment can be updated through a lease program as well, helping your company maintain a workflow on par with industry standards. You might find, however, that sales revenues are not the best way to fund an equipment purchase. If cash reserves are low, and you need money to maintain your business operations, it may be better to seek a loan. The purchased equipment acts as its own collateral and is not fully owned until the loan is repaid in full. Another source for equipment funding is through alternative funding channels, such as credit card receivable funding. In this scenario, you use funding through an alternative provider to purchase or lease your equipment.
Many small business owners prefer alternative funding methods for equipment finance, because it preserves their cash reserves.
An equipment loan is capital offered to businesses that are buying new equipment or replacing current equipment. Traditional sources of equipment loans, such as banks, typically require a specific purpose and impose strict limits on usage. From alternative sources, an equipment loan may be a little more flexible regarding how it is spent. An equipment loan can offer fixed or variable rates, flexible repayment terms, variable payment frequency, and possible tax benefits. An equipment loan allows companies to retain and build equity.
Most banks and other traditional sources often write equipment loans for terms of up to seven years. There is usually a documentation fee when the loan is initiated. Equipment loans from banks will vary in terms of borrowing amounts. The amount of the loan depends on the cost of the equipment or fixed asset you’re purchasing or refinancing.
Many small business owners find alternative funding methods to be ideal for equipment loan needs. Because they are less demanding than traditional loans, alternative-funding sources can help a business owner get the equipment more quickly. In addition, with an alternative funding source, an equipment loan is not always restricted to the costs of the equipment. This means that a small business owner can include the anticipated costs for other aspects of obtaining new equipment, like training, transportation, or ongoing maintenance.
While there are certainly pros and cons to using either a traditional or an alternative source of funding for an equipment loan, there is no question that an equipment loan can certainly benefit the efforts of a small business owner.
Factoring accounts receivable is when a third party exchanges cash for a business’s uncollected invoices. The third party (called a factor) pays a percentage of the invoice’s face value up-front, allowing the business owner to spend the money rather than wait for it.
Factoring accounts receivable is a relatively simple process with relatively easy qualifications. It can often be arranged in days rather than weeks, increasing the flexibility and opportunity of the small business. Collecting on the invoice can be handled in a number of different ways depending on the needs of the business and the terms and conditions of the provider.
There is recourse factoring or non-recourse factoring. In recourse factoring, the seller buys back the account if it has not been paid in a set period of time, typically 90 days. Non-recourse factoring occurs when the factor takes the full risk on the account. This type of deal usually costs more, and the buying companies will usually only buy low-risk accounts. There is also confidential (or invoice) factoring, where the small business collects on the invoice and pays the factor.
One additional benefit of factoring accounts receivable is that it usually puts significantly less stress on the business owner’s personal assets and credit history. Since the factored accounts receivable are the collateral, even individual business owners with very low credit scores can take advantage of such a funding arrangement.