Small Business Financing and Franchise Financing Blog

Do Small Business Loans Work for "Real" Small Business Owners?

Wednesday, August 26
By Todd Taskey

Why Small Business Loans Don't Work for "Real" Small Business Owners

There are multiple reasons, and if you have every looked for working capital or a small business loan for your business, you know how frustrating the process is. Today is even more difficult.
However, once you become a business owner, the challenge becomes even greater. Your credit score typically drops, debt load increases and your attractiveness to traditional lending and credit companies drops like a rock. that, combined with a very tight credit market is putting the squeeze on millions of business owners.

My last post discussed why you can not rely on the ARC program, however, you need capital to take advantage of an opportunity or get through a rough patch.
So, let’s ask a better question: What really works?

Access to small business working capital is constantly changing and two of the most popular form initial equity capital that fueled small business growth are now effectively closed. Business Credit Cards and Home Equity loans have all but dissapeeared durning this credit crunch. Access to small business capital was a problem in September 2008 and working capital is still a problem in July 2009.

As business owners are forced to become more creative, there are effective options that are getting working capital into the hands of small business owners.

Funding Program Required Credit Time in Business Potential Funding
Business Cash Advance: 550+ 1 year + up to $150,000
Streamlined Business Loan: 690+ 2 year+ up to $125,000
Equipment Collateral Loan: 660+ 1 year+ up to $1,000,000
SBA Guaranteed Loan: 675+ new + up to $1,000,000+
Business Credit Cards: 650+ Effectively Closed
Home Equity Line of Credit: 600+ Effectively Closed

Business Cash Advance is a great solution because it really works and will over look tax liens, debt load, “credit issues” and other problems traditional banks can not get past. Business cash advance offers funding without any personal guarantee or collateral, and, given they are taking 100% of the risk in the financing transaction, the cost of capital is significant. If you get a $50,000 you can expect to repay about $65,000 – $70,000 and payments will come directly from your credit card processing or bank statement. Expensive capital, but effective, quick and often successful.

Streamlined Business Loan is an evolution of business cash advance (also known as merchant cash advance). This program allows you to use a personal guarantee and cut the cost of your working capital loan significantly, perhaps as much as 40%-50%. They funding is quick (two weeks) and easy to apply for though you’ll need to have a credit score of 690+ and 2 years worth of tax returns to qualify. In many cases this option is cheaper and easier on cash flow than the business cash advance, but you need better credit and must feel comfortable with a personal guarantee.

Equipment Collateral Loan is an effective way to get a well priced loan if you own equipment (completely paid) or will be buying some soon. Either will require a personal guarantee and the equipment will act as collateral for your loan. If you are buying new equipment you can finance almost all your purchase. If you are using equipment you already own, expect to borrow about 50% of the current value of the equipment. Rates and terms are typically better than the two options above due to your good credit, collateral and personal guarantee.

SBA Secured loans (both 504 and 7A) are great loan products if you have strong credit, lots of collateral and plenty of patients. These loans are made by your local bank and the SBA will guarantee the loan in the event you default. The process is long (60- 90 days) and frustrating at times. In today’s environment they are even more difficult to qualify for but represent the best pricing you will likely qualify for.

Business Credit Cards are very difficult to acquire today and many that have been issued over the past year are being withdrawn. They are not a very good option for small business working capital in the summer of 2009.

Working capital today requires thinking outside the box, a trait traditional lenders are not know for. If you have had success with a working capital loan, please share your comments.

Todd Taskey has over 20 years experience helping small business owners be more effective financially. After 17 years as a Certified Financial Planner, Todd is now a Principal at Potomac Business Capital, an independent firm that helps arrange working capital and business financing through SBA loans, private equity, business cash advance, equipment leasing, traditional loans and other creative financing. Located in Bethesda, MD, he serves clients natiaonally and also blogs for Business Management Daily and Wrong Question.