For decades, small business owners have struggled with getting the capital they need. In fact, startup businesses have no choice but to bootstrap their companies' financial needs - no choice anymore at all.
But, what about existing businesses - businesses that have revenue and time under their belt (meaning that not only does their business model work in generating that revenue but that they have done it year after year)?
These are the things that banks really want to see - right - revenue generation and the ability to replicate it over and over again?
And, add to it that existing business usually do not have as hard a time in raising outside capital - like business loans - as once their companies do start earning revenue, many capital options - mostly alternative financing options - do open up to them (especially regarding working capital).
But, take away from that that banks - still the primary go to source for business capital - do not like to underwrite small business loans. They claim that they just cannot make money on business debt facilities under $100,000. And, based on a report put out by the Federal Reverse of Cleveland, banks of all sizes have been pulling back from the small business market - not since the financial crisis - but since as early as 1996.
So, where does that leave existing businesses in getting needed working capital to grow and expand?
Working Capital
All businesses need working capital and existing, growing businesses need it the most. And, for the most part, these growing companies have to turn to those old, tried and true alternative loan sources - more called cash advances then business loans.
But, not all small businesses have the financial assets to tap these sources of capital and some just do not want to encumber their accounts receivables (especially if it involves letting their customers know about it) or change their merchant processors just to get a short-term loan.
For years - probably more then I can count - small businesses have been asking for a loan product that does not focus on the business's financial assets, the credit score of the owner or their other business or personal assets (collateral). In fact, they just simply want a short-term working capital loan based on their business and their business only.
And, it makes sense given that the vast majority of working capital loan products are used to directly produce revenue - revenue that will be used to repay that advance or loan.
The good news - they now have it. In fact, there are several, newly prominent companies that do nothing but provide short-term loans based solely on the business - or more on the business's ability to produce revenue. In addition, because of their successes, more and more players (financing companies) are entering the market each and every day.
And, while these types of loans still get categorized as alternative business loans - given that banks are puling back and ignoring the needs of small businesses - not only are these loans replacing the funding gaps left by the traditional sources of capital but they are becoming more of the main stream.
Thus, in our opinion, these loans and some of the other alternatives like business cash advances or invoice factoring should themselves now be called traditional loans with bank products now becoming the alternative (or the just hard to get).
Revenue Based Loans
These new business loan products - termed revenue based loans (RBL) - are just that; based on the business's ability to generate revenue.
They do not focus on personal credit scores - most of these lenders only require a credit score of 500 + FICO. And, if your credit score is below 500 FICO - you have more problems then growing your business.
Very few of these lenders require collateral - physical assets - but may ask for a personal guarantee or may take a uniform blanket lien on the business - much like a mechanic will take a uniform blanket lien on your car while they do repairs.
And lastly, they tell you everything up front - no hidden fees, not onerous covenants and no additional surprises.
All the things that small business owners have been asking for in business loan products for generations.
How These Loans Work
For the most part these loans are very simple - simple to qualify for and simple to get.
Most of these RBL providers have some general requirements:
Once approved for the loan, the funds will be wired directly into your bank account but repayment will also commence almost immediately.
As their underwriting is based on your company's ability to generate revenue - day after day - then their repayment comes from your revenue generation - day after day (given some grace period).
Example: Your business earns some $150,000 per year in sales. And, you get approved for a $50,000 working capital loan for 12 months. Thus, your business earns some $410 per day on average in revenue and your repayment comes to about $157 per day on average.
Not too extremely bad given what your business might be able to do with that extra revenue - like earn an additional $200 per day - more then enough to cover the loan payments with some left over for your business and, after the complete repayment, the full $200 more per day in your pocket.
The One Down Side
The one down side of these alternative business loans is cost. While banks are pulling back in lending to small businesses and they make the entire process from application to repayment in full as onerous as they can and then some - banks tend to still offer the lowest overall costs of financing.
Many of these RBL lenders charge - not so much a percentage of interest - but a percentage of money lent. Thus, for your $50,000 loan, the lender might charge 15% of that loan amount for their fee. So, if you keep that loan outstanding for 1 year or 12 months - that would translate into a 15% interest rate. But, if your loan is only outstanding for say 6 months, your total interest will be much lower - maybe not as low as the banks but EUR¦
The bottom line here is this. If you can't get a so-called traditional business loan from your bank or financial institution but you have opportunities to grow your business and ultimately grow your revenue - then the decision to take that revenue based loan really only comes down to your anticipated return on that loan.
If the loan costs your business $7,500, as in our example above - 15% of the $50,000 for 12 months, then the decision to take that loan would come down to how much over and above the principal your business stands to make. If it only earns $5,000 over the principal - then you should not take the loan. But, if it can earn $10,000 or more over and above the $50,000 in principal - then there is no reason that the rate of the advance should make you say no - especially if you have no other option in raising those needed funds.
But, what about existing businesses - businesses that have revenue and time under their belt (meaning that not only does their business model work in generating that revenue but that they have done it year after year)?
These are the things that banks really want to see - right - revenue generation and the ability to replicate it over and over again?
And, add to it that existing business usually do not have as hard a time in raising outside capital - like business loans - as once their companies do start earning revenue, many capital options - mostly alternative financing options - do open up to them (especially regarding working capital).
But, take away from that that banks - still the primary go to source for business capital - do not like to underwrite small business loans. They claim that they just cannot make money on business debt facilities under $100,000. And, based on a report put out by the Federal Reverse of Cleveland, banks of all sizes have been pulling back from the small business market - not since the financial crisis - but since as early as 1996.
So, where does that leave existing businesses in getting needed working capital to grow and expand?
Working Capital
All businesses need working capital and existing, growing businesses need it the most. And, for the most part, these growing companies have to turn to those old, tried and true alternative loan sources - more called cash advances then business loans.
But, not all small businesses have the financial assets to tap these sources of capital and some just do not want to encumber their accounts receivables (especially if it involves letting their customers know about it) or change their merchant processors just to get a short-term loan.
For years - probably more then I can count - small businesses have been asking for a loan product that does not focus on the business's financial assets, the credit score of the owner or their other business or personal assets (collateral). In fact, they just simply want a short-term working capital loan based on their business and their business only.
And, it makes sense given that the vast majority of working capital loan products are used to directly produce revenue - revenue that will be used to repay that advance or loan.
The good news - they now have it. In fact, there are several, newly prominent companies that do nothing but provide short-term loans based solely on the business - or more on the business's ability to produce revenue. In addition, because of their successes, more and more players (financing companies) are entering the market each and every day.
And, while these types of loans still get categorized as alternative business loans - given that banks are puling back and ignoring the needs of small businesses - not only are these loans replacing the funding gaps left by the traditional sources of capital but they are becoming more of the main stream.
Thus, in our opinion, these loans and some of the other alternatives like business cash advances or invoice factoring should themselves now be called traditional loans with bank products now becoming the alternative (or the just hard to get).
Revenue Based Loans
These new business loan products - termed revenue based loans (RBL) - are just that; based on the business's ability to generate revenue.
They do not focus on personal credit scores - most of these lenders only require a credit score of 500 + FICO. And, if your credit score is below 500 FICO - you have more problems then growing your business.
Very few of these lenders require collateral - physical assets - but may ask for a personal guarantee or may take a uniform blanket lien on the business - much like a mechanic will take a uniform blanket lien on your car while they do repairs.
And lastly, they tell you everything up front - no hidden fees, not onerous covenants and no additional surprises.
All the things that small business owners have been asking for in business loan products for generations.
How These Loans Work
For the most part these loans are very simple - simple to qualify for and simple to get.
Most of these RBL providers have some general requirements:
- First, your business must have annual revenues of $100,000 or more.
- Must fit one of their approved industries - however, these lenders do cover industries like restaurants, retailers or services businesses - those industries that tend to be the hardest to fund from traditional lenders. And,
- Be in business for at least 1 year.
Once approved for the loan, the funds will be wired directly into your bank account but repayment will also commence almost immediately.
As their underwriting is based on your company's ability to generate revenue - day after day - then their repayment comes from your revenue generation - day after day (given some grace period).
Example: Your business earns some $150,000 per year in sales. And, you get approved for a $50,000 working capital loan for 12 months. Thus, your business earns some $410 per day on average in revenue and your repayment comes to about $157 per day on average.
Not too extremely bad given what your business might be able to do with that extra revenue - like earn an additional $200 per day - more then enough to cover the loan payments with some left over for your business and, after the complete repayment, the full $200 more per day in your pocket.
The One Down Side
The one down side of these alternative business loans is cost. While banks are pulling back in lending to small businesses and they make the entire process from application to repayment in full as onerous as they can and then some - banks tend to still offer the lowest overall costs of financing.
Many of these RBL lenders charge - not so much a percentage of interest - but a percentage of money lent. Thus, for your $50,000 loan, the lender might charge 15% of that loan amount for their fee. So, if you keep that loan outstanding for 1 year or 12 months - that would translate into a 15% interest rate. But, if your loan is only outstanding for say 6 months, your total interest will be much lower - maybe not as low as the banks but EUR¦
The bottom line here is this. If you can't get a so-called traditional business loan from your bank or financial institution but you have opportunities to grow your business and ultimately grow your revenue - then the decision to take that revenue based loan really only comes down to your anticipated return on that loan.
If the loan costs your business $7,500, as in our example above - 15% of the $50,000 for 12 months, then the decision to take that loan would come down to how much over and above the principal your business stands to make. If it only earns $5,000 over the principal - then you should not take the loan. But, if it can earn $10,000 or more over and above the $50,000 in principal - then there is no reason that the rate of the advance should make you say no - especially if you have no other option in raising those needed funds.