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Seeking A Business Loan – Bank Loan Vs Non-Bank Loan

As the months slowly pass by, there are many things in the business world that continue to change or evolve. But, one constant over the last two years is that loans to small businesses from traditional lenders like banks and similar financing companies are still extremely hard to come by.

Banks and other financial institutions remain tremendously skeptical about what tomorrow will bring. Some banks cite over regulation by the government while others tout that they are just not seeing qualified borrowers.

Regardless of the reasons, small firms continue to struggle in finding business loans from traditional sources to help them grow and succeed.

This has created an enormous funding gap for small or Main Street businesses in this country.

Small businesses are one of the (if not the) strongest economic driver in our nation. Small and Main Street businesses provide jobs, wealth and opportunities in the communities in which they operate – communities which ebb and flow with the strengths and prospects of their local businesses.

However, from the bank side – they also create the greatest risks – risks that banks continue to NOT want to take.

The old saying – the bigger the risk, the greater the reward. And, to achieve that reward, we have to find ways to make the risk work in this new economy. And, some new non-bank lenders are indeed finding ways!

Leave it to the ingenuity of entrepreneurs in this country to come with new stop gap business loan products and services – all designed with the small business or Main Street businesses in mind.

Many new non-bank lenders are stepping up to fill the small business funding gap left wide open by banks. These business loan products are usually easier to qualify for and can be funded much faster than traditional loans as these new financing companies understand the real needs of small businesses and the opportunities they represent.

Some of these new lenders have been changing or modifying traditional business loan products to meet this new small business financing demand. Example:

There has been significant changes and growth in non-profit lenders like Micro Lenders where a new business can qualify for a loan up to $35,000 but now also where an existing business can receive a business loan upwards of $50,000 – all designed and marketed to and specifically for small businesses.

There has also been a sharp increase in peer-to-peer lending or social network lending. While these are still designated as personal loans (most business loans to new businesses are personal loans – guaranteed by the business owner) they offer (and are now being marketed too) small businesses as a quick and usually low cost means of securing a small loan to help them overcome a slow month, meet payroll obligations or to take advantage of new opportunities to grow the business.

There have also been new breeds of business lenders entering the market. Some have taken traditional loan vehicles like accounts receivable factoring or business cash advances and tweaked them to better meet the needs of smaller firms (firms with potential but not yet profitable) while others have created a completely new way to view a business’s financial strength with a focus more on cash flow than profitability or time in business.

To reduce the risk of default; most lenders – bank and non-bank – like to fund on the basis of the conversion of assets. This allows these lenders to focus less on the overall financial condition of the borrower and more on the strength and make up of the asset used as collateral. Thus, when the assets actually convert into cash (like a customer paying its invoice) those funds are used to pay-off or pay down the outstanding loan balance. This has, in the past, allowed businesses and their owners a means to financing that they may not have gotten otherwise due to time in business or years of profitability limitations.

However, these new breed of lenders are taking this view of business financing, adding their own individual twist, and finding success in funding pre-profit, growing small businesses.

For example, there are new non-bank lenders that focus less of profitability and credit but more on the business’s ability to generate cash flow each day. If your business is able to close deals and has a constant supply of cash inflows (regardless if the business is profitable or not) then these new lenders are willing to take a chance on your firm’s ability to grow – with their financial help. This also means that these lenders will match their payments with your business’s daily cash inflows.

The benefit to the lenders is less risk from not having to wait 30 or more days only to find out a business is not able to make a payment. The benefits to the business is being able to use intangible assets (like its ability to find and service customers) to obtain necessary funding to propel the business to that next level.

Further, there are new business financiers that are side-stepping business loans completely and innovating new business financing mechanisms.

For example, playing off the peer-to-peer loan industry, there are companies that are implementing peer-to-peer angel or private investment. Thus, should your business not meet the very stringent and specific criteria of an angel capital or private equity deals, your firm might still be able to obtain the same type and amount of investment dollars from others like you or from those in your community or in your network.

The bottom line here is that the longer the banks hold their vaults shuts against small businesses and continue to ignore the rising demands for small business financing, the opportunities created for new, innovative lenders to step up and fill these gaps are astounding.

Will these new lending vehicles and methodologies work for your business? It really depends on your business and your ability to look outside the box. Will all of these new lenders survive? Probably not. But, whenever there is unfilled demand, pioneering entrepreneurs will emerge hoping to change the world while fulfilling their personal dreams.

What this means to the small businesses struggling today and those that will surface tomorrow is that while banks continue to dig in and avoid internal innovation to meet current small business loan demand; other non-bank lenders are stepping up and trying to succeed with new products and new markets.

Thus, while finding and obtaining a bank loan is probably still the goal of the majority of small businesses (as most don’t know about or understand these new options), new funding vehicles are opening each and every day from non-bank lenders who actually understand the needs of growing businesses and are designing ways to meet their business loan / capital needs.

Key Points to Consider When Shopping for Business and Commercial Auto Insurance

Coverages Available in Commercial Auto Insurance

Business owners realize the importance of making sure that their business is well protected from all risks that can affect their businesses. A vehicle that is owned by the business may put the business in jeopardy of a lawsuit in the event of an accident if the accident is caused by that vehicle or its operators. The following are key points that business owners need to remember when shopping for commercial auto insurance.

Personal or Business Insurance: Take commercial auto coverage anytime the vehicle is titled in the name of the business, regardless of the size of car and regardless if the car is for doing business or pleasure. The titleholder of the vehicle (in this case it is the business) may be sued as a result of at fault accidents, bringing the entire business in a legal preceding. If the insurance coverage is not under the name of the business, then the business may have some issues related to the validity of the insurance coverage.

Liability Limits: Insurance companies offer different liability limits, from the basic limits mandated by law (in Illinois it is 20,000/40,000/15,000) to as high as one million dollar for every accident. A business that insures its commercial vehicles at the basic liability limits of ($20,000 bodily injury per person, $40,000 bodily injury per accident, and $15,000 property damage per accident) is certainly running in a big risk of losing its business assets in case of at fault accident involving their business autos with death or serious injury to others. High insurance limits are required to avoid losing business assets in case of auto accidents.

Vehicle Classification: Improper classification of the commercial auto may result in voiding insurance coverage, therefore, rendering policy useless and putting business in significant risk of losing business assets in the event of at fault automobile accident. A truck that is used by an electrician has different classification than a similar truck used as a dump truck. The two trucks have different classes and their premiums are not similar in amount.

Autos that are titled in the name of a business, or ones that is used to run a business must have commercial auto insurance coverage. The following are examples of automobiles that need commercial insurance coverages:

All trucks (local or long hauls), Artisans and all contractors, Messenger and delivery services, Ice cream vendors, Landscaping, Limousine services insurance, Para-Transit transportation insurance, Religious and non-profit, Food services and restaurant insurance, Pickup truck insurance, Truck insurance, Tow truck insurance, Dump truck insurance, Landscaping insurance, Snow plowing, Commercial Vans. etc.

Business Auto Mandatory Coverage Includes:

(1) Liability. In the State of Illinois a minimum of $20,000 bodily injury per person, $40,000 bodily injury per accident, and $15,000 property damage per accident is required from all registered vehicles, personal or commercial. Some commercial autos that need federal filing or state filing may need higher limits. For example, a limo operating in Chicago need to have a minimum of $350,000 in auto liability. A truck that transports hazardous materials is required to have at least one million dollars in auto liability coverage.

(2) Uninsured Motorist/ UM Coverage. In Illinois a minimum of $20,000 bodily injury per person, $40,000 bodily injury per accident is required for Uninsured Motorist/ UM coverage. These are the limits that your insurance company will pay people in your business vehicle in the event of them being injured by some uninsured motorist. This coverage may not apply if the accident is work related, and if the business workers compensation policy comes in the picture.

(3) Other coverages may be required, based on the nature of the business. For example, certain long haul trucking businesses are required to meet FHA Insurance Requirements, and their filing may be require to have Cargo Coverage in place.

Some Optional Coverages for Business Vehicle Includes:

(1) Physical Damage Coverage- Comprehensive coverage will pay for physical damage to the insured vehicles caused by a variety of risks, including fire, lightning, theft, vandalism, hail and flood. Collision will pay when the auto is physically damaged in an accident involving another vehicle or a stationary object, such as a wall, telephone pole, or guardrail.

(2) Underinsured Motorist/ UIM Coverage. In Illinois a minimum of $20,000 bodily injury per person, $40,000 bodily injury per accident is required for UIM (Underinsured Motorist, bodily injury.) These are the maximum limits that your company will pay people in the insured commercial vehicle in the event of them being injured by an insured motorist. Remember that this coverage will not apply if the accident was work related.

(3) Medical Payments: The coverage will pay medical care expenses for the insured(if you are not covered by workers’ compensation) as well as passengers in your auto.

(4) Hired and Non-owned Auto: Pay for damages the business is legally obligated to pay due to bodily injury or property damages that happens during the use, loading or unloading of hired or non-owned autos used for your business.

Small Business Loans Versus Business Cash Advances

Many business owners are struggling to find working capital. Once readily accessible to most businesses, small business loans are harder and harder to come by. Thankfully, business cash advance providers have stepped up to fill the gap. Some business owners are skeptical, and hesitant to be open to the idea, but there are many benefits to the business cash advance program. While they both certainly have strengths and weaknesses, in this article, we hope to clearly explain how they work and what their benefits can be over traditional small business loans.

Who Qualifies?

Business cash advances are very easy to qualify for. Since they’re based on revenue from credit card processing, the biggest qualifying factor is whether or not you accept credit cards as a form of payment, and how often you have sales to run. This makes most retail businesses and certain service-based businesses excellent candidates because they usually accept credit cards and the cardholders are physically present at the point of sale. Unfortunately, most home-based and internet-based businesses don’t qualify. You have to process at least $5,000 per month in credit card sales, and underwriting also likes to see that you settle transactions at least 10 – 12 times every month. Personal credit is not a big factor; the only stipulation ist that the owner’s FICO score is above 500 and there are no open bankruptcies.

Application Process

The application process is very simple. A one page application is filled out and signed by the business owner. The application contains basic administrative data about the business and the owner(s) and usually also lists a few trade references. The signature authorizes the cash advance provider to obtain a copies of the applicant’s business and personal credit reports. Pre-approvals can be given within 24 hours of the application being submitted along with the business’s 4 most recent credit card processing statements. At lease one, if not all, of the statements must be complete (i.e. all pages submitted) so underwriting can review them completely, looking at credit card processing activity, transaction count, average ticket size, batch frequency and rate analysis. The pre-approval will consist of a few different funding options based on the statements you submitted, along with a list of additional paperwork you’ll need to submit prior to approval. This can vary slightly on a case by case basis, but here’s a complete list of paperwork that’s generally required:

  • Signed, completed application.
  • 4 most recent credit card processing statements. Seasonal businesses may have to submit more so underwriting can fully understand your seasonality.
  • 3 most recent business bank statements. This should be the account where your credit card deposits go. If that account sweeps to another operating account, those statements may also be required.
  • Business lease. Underwriting will need the pages listing the parties to the lease, the term and expiration date, the property address and the signatures.
  • Proof of ownership. This can be a business licence or articles of organization.
  • Driver’s license or other state issued identification card.
  • Voided check.
  • Deals over a certain size may require year-to-date financial statements or the most recent tax returns.

Three Different Programs

Besides the main business cash advance program, there are two additional programs available:

  • The Starter Program – The starter program is designed for those individuals and businesses who don’t qualify for the traditional program. The two most common reasons someone would be declined for the traditional program is because of poor personal credit or because they process less than $5,000 per month. For the starter program, underwriting still requires that there are no open bankruptcies and that you settle transactions at least 10 – 12 times per month.
  • The Gold or Platinum Programs – For a long time, individuals and businesses with stellar credit and healthy financials have turned down cash advance offers. The cost of the traditional program was too great for many of them, and there was little that could be done. Providers have developed Gold and Platinum programs for these kinds of businesses. The cost can be less than half compared to the traditional program, and they are often underwritten at 12 – 18 month deals, which is typically a longer term than the traditional program.

Between these two relatively recent developments in the industry, business cash advance providers have been able to boast approval ratings upwards of 90%, and at the same time gain market share among established, credit worthy businesses who normally would only consider traditional small business loans.

Cost

Business cash advances, admittedly, are most costly than traditional business loans. The main difference is that business loans accrue interest over time. The longer you take to pay them off, the more expensive they become. Business cash advances have a fixed cost. The transaction that takes place is actually the purchase and sale of your business’s future credit card receivables. The business cash advance provider decides how much of your future receivables they are interested in purchasing (the “purchased amount” or total payback amount), and offer to purchase them at a discount rate, usually somewhere between 15% and 30%. How much they offer to purchase them for is called the “purchase price”. It’s also known as the “advance amount”. At a 15% discount rate, a cash advance could purchase $10,000 by advancing you $8,500. No matter how long you take to pay it back, it will never cost you more than $10,000. The discount rate offered depends on a number of things, including time in business, credit score, process history, etc.

Payback

Since the transaction involved in a business cash advance is the purchase of future credit card receivables, they are paid back as you process credit cards. A small percentage of each credit card transaction gets paid to the cash advance provider to pay down the advance. This percentage is fixed, so it remains the same through the course of the advance, and it’s agreed upon prior to funding. The result is an extremely flexible payback schedule. If you have a bad month, you might struggle to make the payment on your traditional business loan, but with a business cash advance, you’ll just end up paying back less that month. You never have to worry about missing a payment, and the cash advance provider only gets paid when you get paid. Most business owners find comfort in this method of payback.

Events of Default

Defaulting on a business loan is serious, since most of them are secured or personally guaranteed. If you miss that monthly payment, the bank can put you in a tricky situation. If you put up any collateral, the bank has the right to take that asset and liquidate it, below market value if they have to, in order to reimburse themselves for the principal outstanding. If you signed personally for the loan, don’t count on “limited liability” to protect yourself. The bank will have the right to take any of your personal assets including your home or your car.

For most business owners, this is the true beauty of the business cash advance. The fact that they are unsecured and never personally guaranteed justifies the higher cost. If you find yourself in the position where you can’t pay it back because you have to close the doors, the business cash advance provider is out of luck. As long as you didn’t provide any false or misleading information during the application process, there can be no recourse. Simply put, the asset in the purchase and sale agreement (your future credit card processing revenue) doesn’t exist anymore.

Conclusion

These are only a few of the benefits of the business cash advance program.