In today’s unfavorable economic climate, access to capital is the primary differentiating factor between businesses that are able to grow and gain market share that has experienced significant declines in revenue. Many small businesses have seen their sales and cash flow drop dramatically, many to the point of closing their doors, while many large US corporations have managed to increase sales, open new retail operations, and increase earnings per share. Small business is almost always dependent on traditional commercial bank financings, such as SBA loans and unsecured lines of credit, while large publicly traded corporations have access to public markets, such as the stock market or bond market, for access to capital. it occurs.

Before the onset of the 2008 financial crisis and the ensuing Great Recession, many of the largest U.S. Commercial banks engaged in an easy money policy and were openly lending to small businesses whose owners had good credit scores and some industry experience. Many of these business loans included unsecured commercial lines of credit and installment loans that did not require any collateral. These loans were almost always backed exclusively by a personal guarantee from the business owner. This is why only good personal loans were needed to guarantee a business loan approval.

During this period, thousands of small business owners used these business loans and lines of credit to access the capital they needed to meet working capital needs, including payroll expenses, equipment purchases, maintenance, repairs, marketing, tax liability, and expansion opportunities were included. Easy access to these capital resources allowed many small businesses to thrive and manage their cash flow needs. Still, many business owners became overly optimistic and many made aggressive growth forecasts and made increasingly risky bets.

As a result, many aspiring business owners began to expand their business operations and borrow heavily from small business loans and lines of credit, paying back these heavy debt loads through future growth and increased profits. With the anticipation of being able to pay. As long as banks maintained this ‘easy money policy, asset values ​​continued to rise, consumers continued to spend, and business owners continued to expand through the use of increased leverage. But, eventually, this party will come to an abrupt end.

When the 2008 financial crisis began with the sudden collapse of Lehman Brothers, one of Wall Street’s oldest and best-known banking institutions, a financial panic, and infection spread throughout credit markets. The ensuing freeze of credit markets has left the U.S. The gears of the financial system stopped grinding. Banks stopped lending overnight and the sudden shortage of easy funds in recent years has resulted in a rise in property values, especially house prices, now the same property values ​​have declined. As asset values ​​exploded, commercial bank balance sheets eroded and stock prices fell. The days of easy money were over. The party was officially over.

After the financial crisis, the Great Recession that followed created a vacuum in the capital markets. The same commercial banks that lent money freely and easily to small businesses and small business owners now faced a lack of capital on their balance sheets – one that threatened their own existence. Almost overnight, many commercial banks cut off access to business lines of credit and solicit outstanding balances on business loans. Small businesses, which relied on working capital from these business lines of credit, could no longer meet their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses fail.

Because many of these small businesses were responsible for creating millions of jobs, the unemployment rate rose every time one of these enterprises failed. As the financial crisis deepened, commercial banks went into a tailspin, which eventually threatened the collapse of the entire financial system. Although Congress and the Federal Reserve Bank led a taxpayer-funded bailout for the entire banking system, the damage was done. Hundreds of billions of dollars were injected into the banking system to push the balance sheets of effectively dormant institutions. However, during this process, no provision was made that would allow these banks to lend money to consumers or private businesses.

Instead of using a portion of these taxpayer funds to support small businesses and prevent unnecessary business failures and rising unemployment, commercial banks continue to deny access to capital to thousands of small businesses and small business owners. Even after receiving a historic taxpayer-funded bailout, commercial banks continued to adopt an ‘every man for himself attitude and continued business lines of credit and commercial credit, regardless of credit history or timely payments on such lines and loans. continued to cut access. Small businesses went bankrupt and unemployment remained high.

During the same period, when small businesses were being pressed into non-existence, as a result of the lack of capital created by commercial banks, large publicly traded corporations were unable to survive and even expand their businesses. managed to develop. They were able to do this primarily by issuing shares through the equity markets, by issuing debt, through the bond markets, or by raising equity. While large public companies were raising hundreds of millions of dollars in new capital, thousands of smaller businesses were being kept by banks, which closed existing commercial lines of credit and refused to issue new small business loans.

Even now, at the end of 2021, more than thirteen years after the start of the financial crisis, the vast majority of small businesses have no means of access to capital. Commercial banks are refusing to lend on an unsecured basis to almost all small businesses. To have an even minute chance of being approved for a small business loan or business line of credit, a small business must have tangible collateral that the bank can easily sell for an amount equal to the value of the business loan or line of credit. Is. Any small business without collateral has no chance of obtaining loan approval, even through an SBA, without significant collateral, such as equipment or inventory.

When a small business cannot demonstrate the collateral to provide security for a small business loan, the commercial bank will ask the small business owner to secure the loan in cash or in his personal assets or equity, such as home equity. Checking, savings, or retirement accounts, such as a 401k or IRA. This latter situation puts the owner’s personal assets at risk in the event of a small business failure. Additionally, virtually all small business loans will require the business owner to have excellent personal credit and FICO scores, as well as a personal guarantee. Finally, several years of financial statements, including tax returns for the business, demonstrated that nearly every small business loan application will require continued profitability.

Failure to provide any of these stringent requirements or lack of capacity will result in an immediate denial in applications for almost all small business loans or commercial lines of credit. In many cases, denials for business loans are being issued to applicants who have met each of these requirements. Therefore, being able to qualify with good personal loans, collateral, and strong financial statements and tax returns does not guarantee approval of a business loan request in the post-financial economic climate. Access to capital is more difficult than ever for small businesses and small business owners.

As a result of this constant capital vacuum, small businesses and small business owners have begun to look for alternative sources of business capital and business credit. Many small business owners seeking cash flow for existing business operations or funds to finance expansion have explored alternative business financing through the use of merchant credit cards, cash advance loans, and small business installment loans offered by private investors. Is. These merchant cash advance loans offer significant advantages to small businesses and small business owners compared to traditional commercial bank loans.

Merchant cash advance loans sometimes referred to as factoring loans, are based on the average credit card volume of a merchant or retail outlet, processed over a period of three to six months. Any merchant or retail operator that accepts credit cards as a form of payment from customers including Visa, MasterCard, American Express, or Discover is virtually guaranteed acceptance of merchant credit card advances. The total amount of cash advances for which a merchant qualifies is determined by averaging this three to six months and the money is typically deposited into the small business’s business checking account within a seven to the ten-day period from the time of approval. is deposited.

A stipulated repayment amount is fixed and the repayment of cash advance and interest is predetermined at the time the advance is sanctioned by the lender. For example, if a merchant or retailer processes approximately $1,000 per day in credit cards from its customers, the monthly average of the total credit cards processed equals $30,000. If the merchant qualifies for $30,000 for a cash advance and the factoring rate is 1.20, then $30,000 – plus 20% of the $30,000 that equals $6,000 – will have to be repaid, for a total repayment amount of $36,000. Therefore, the merchant will receive a lump sum of $30,000 in cash deposited into the business checking account and will need to repay a total of $36,000.

Repayments are made automatically by subtracting a pre-determined amount of daily sales of each merchant’s future credit cards – typically at a rate of 20% of the total daily credit cards processed. Thus, the merchant does not need to write a check or send a payment. The fixed percentage is only deducted from future credit sales until a total of $36,000 is paid. The advantage of this type of financing versus a commercial bank loan is that a merchant cash advance is not reported on the business owner’s personal credit report. This effectively separates the personal financial affairs of the small business owner from the financial affairs of the small business entity.

Another advantage of merchant credit card cash advances is that it does not require a personal guarantee from the business owner for approval. If the business is unable to repay the merchant cash advance loan in full, the business owner is not held personally responsible and cannot be forced to post personal collateral as security for the merchant advance. The owner removes the financial consequences that often accompany a commercial bank business loan that requires a personal guarantee and often forces business owners into personal bankruptcy even if their business venture fails. and cannot pay the outstanding loan balance.

A third, and distinct, the advantage is that a merchant credit card cash advance loan does not require any collateral as additional security for the loan. Future credit card receivables are the security for cash advance repayment, thus no additional collateral requirements exist. Since most small businesses do not have physical equipment or inventory that can be posted as collateral for traditional bank loans, this type of financing is an unprecedented option for thousands of retail businesses, merchants, sole proprietorships, and access to online stores. Is. Capital. Such businesses will automatically be declined for traditional business loans due to the lack of collateral to serve as additional security for the bank or lender.

Finally, a merchant credit card advance loan approval does not depend on the business owner’s strong or complete personal credit. In fact, the business owner may have significantly poor personal credit and a low FICO score, and this will not disqualify the business from being approved for a cash advance. A business owner’s personal credit check is usually only done for the purpose of helping determine the factoring rate at which total loan repayments will be made. However, a business owner with recently discharged personal bankruptcy may also qualify for a merchant credit card cash advance loan.

Since the cash lent on merchant credit card advances is provided by a network of private investors, these lenders are not regulated or affected by the new capital requirements, which have placed a constraint on the commercial banking industry. Merchant cash advance approval is determined by internal underwriting guidelines developed by private lenders in the network. Each loan application is reviewed and processed on a case-by-case basis and approval is issued within 24 to 48 hours of receipt of a complete application, including merchant credit statements for the last three to six months.