How a Retail Business Loan or Merchant Cash Advance Loan Work?
If you look at the ways that the Canadian government (and, to be fair, most of the other major governments in the West) responded to the financial collapse of 2008, there seems to be a paradox at work. The prime lending rates remain at or near historical lows because the governments want to stimulate economic activity. When people want to start a business, or expand one, they often need money that they don’t have. Theoretically, they would then go to a bank and apply for a business loan at a low rate thanks to the activity of central national banks, and then they start that business, or make the expansion, and then the economy grows because people are spending more at the expanded businesses, bringing more money to everyone in the industries associated with that business. The government gets more money too, because more purchases mean more sales tax.
The same logic applies to keeping those rates low for the mortgage industry. The idea behind these rock-bottom rates means that, theoretically, more people will take out home loans because they can afford it and prefer ownership to renting. Once again, home sales mean tax revenues, and as property values go up over time, the wealth that people have will expand.
The Bank Qualifying Factor..
However, the other side of this – and you’ve likely run into this if you’ve ever headed into a bank asking about small retail business loans – is that the lending requirements that banks have for borrowers keep many entrepreneurs from getting the funding that they need – and that they have the means to pay back with interest.
Why does this happen? Well, the financial collapse of 2008 saw a ton of banks get caught with loans that went into default. So the underwriting requirements became stricter – credit scores became a lot more important, and banks took a closer look at income streams and the verification of income history. This might seem logical at first blush, because many banks (particularly in the mortgage sector) had not done any due diligence on their loans, simply rubber-stamping them to bring in volume and get revenue coming in the door. The problems came when people couldn’t afford to pay their loans back and the banks were left holding empty paper.
The Merchant Advance Advantage
While a credit score is important, it doesn’t tell you everything about a potential borrower’s viability. When you talk about retail capital business loans, you’re usually talking about an entrepreneur who has already had some success over the past few months (or even more than a year) in building up his business. Things haven’t been perfect by any means, but the vast majority of businesses start with a rough month – or even a rough quarter of two. Even those that turn into smashing successes go through growth pains, often more than one time. Even a giant like Starbucks went through a period when it had to cut back on its number of locations and make some adjustments to its business model before expanding its operations once again.
How to get retail business working capital
We founded Best Bridge Capital because we knew there were so many small business owners in Canada & the United States looking for retail business working capital who simply could not get the money that they needed – and deserved, on the basis of the way their business had performed so far. We have built a network of lenders who approach this sort of financing in a different way, by providing cash advances to retail merchants. The approval process is a lot faster than what you will get from a traditional installment loan with a bank. You’ll almost always get approved for more money, and the flexibility of a merchant cash advance is significantly higher than what you would get from a bank loan.
How does the application process work?
Well, if you approach BBC, we will ask for your information one time and then distribute it to all of the lenders in our network that we feel would make a good match with your profile. So you don’t have to send PDFs of your bank statements and credit card receipt statements more than once – and we only have to pull your personal and business credit scores once.
When Banks say NO, we often say YES
If your credit scores caused the banks to turn you down, don’t worry just yet. Yes, our lenders also look at your credit scores as part of the application process, but remember that while the score numbers play a role, they play much less of a role than they do with the banks. The lenders that BBC work with look at your income stream, particularly what you bring in from credit and debit cards, because that is how they will get their money back in the end.
Let’s say that you opened a flower shop about eight months ago. You’ve built your business steadily since then, and a new location a couple blocks up from you has become available. The square footage is about 10 percent bigger, which isn’t a huge difference, but the location is incredible. It’s next door to one of those fabled Starbucks locations, and on the other side there is a trendy Vietnamese restaurant. You know that if you can get in there you will be able to drive your revenues up through the roof.
However, you don’t have enough money on hand to cover some of the new furnishings and fixtures that you would want in a location like that one. You also want to add a couple of staffers because you anticipate the foot traffic here being significant and you don’t want to lose any business.
Complete an application package with Best Bridge Capital and send us the required documents. Usually within 24-48 hours, one of our lenders offers you a $200,000 advance with a factor rate of 1.2, and a repayment rate of 16%. The lender calculated that, based on the trends in your credit and debit card revenue, if you pay them 16% of those receipts each business day, then you will pay the total due back in about ten months.
But wait – how much are you paying back? That’s where the factor rate comes in. You took out a $200,000 advance, and you multiply that by the factor rate to get $240,000. The factor rate is set on the basis of your credit scores, the amount of time your store has been open, and the reliability of your credit and debit card income streams.
If 16% seems high, the lender may provide a modified 13% repayment rate. This means that, every business day, you’ll pay 13% of your credit and debit card receipts directly to the advance provider. So if you sell $1,000 in flowers on a particular day to clients using credit and debit cards, the provider will get $130. If you only bring in $100 of credit and debit card receipts, then you would only pay $13. That percentage remains set each business day until your total balance is paid off. The balance does not change, no matter how long you take to pay it back – which is another reason to take out this sort of advance. There are no penalties for late payment, and you never pay more than that set percentage each day.
Want to know more? Call us at BBC today. We’ll talk about your flower shop (or other small to mid-size businesses) and go over a plan that will get you to the next level.