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7 Ways to Finance a Small Business


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Most people thing that having bad credit disqualifies you to obtain business financing. This white paper provides information to alternative financing options many people do not know are available.

Published in: Economy & Finance
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7 Ways to Finance a Small Business

  1. 1. 7 [Type text] to Finance a Small Business Ways You can’t drive around the corner to the 7-Eleven and back for a Slurpee without a tank of gas. American small business owners need fuel. They’re standing in line at the gas station of banks and credit unions begging, near dying to get their business moving. Washington knows it. They know without capital, our economy will continue to slump, as it has for the last four years. Washington has tried boosting the lending market, of course, with a flop, a belly-dive into that empty pool that’s left Main Street still asking, “Where are the funds?” They’re out there. Believe it or not, they’re out there. Not around a dark corner, or in a dark alleyway from some shady dealer, they’re in the swamp of misinformation. The funds are out there. In many ways, there is more funding available than ever. Business owners merely need to know where to find it. While there is no question that securing financing has changed over the last few years, other forms of financing have emerged to help business owners. Business owners just need to know their options, the types of capital they can pursue, and how to position themselves to grab those funds.According to the U.S. Small Equipment Financing is usedBusiness Administration, exclusively to acquire business-use85% of all companies lease equipment, but can also be used toequipment. 89% of those obtain cash on paid-off equipment.companies will lease Approvals are typically based on creditequipment again in the score, collateral, financial history, andfuture. value of the equipment. Equipment loans and leases can be obtained as an SBA or Sale- Leaseback. Typically they require collateral. Approvals are based on credit score, collateral, financial history and strength, and the market value of the equipment. Some equipment financing programs may help replenish cash flow, and more closely match the monthly revenue and expense associated with the purchase. Many equipment leaseback programs are good options for those who have purchased equipment and wish to use the proceeds Page 1Blue Ray Financial
  2. 2. 7 [Type text] to Finance a Small Business Ways from new financing as a source of additional working capital, or to pay off existing high interest debt Cash-starved businesses may want to consider leasing equipment to get access to things like computers, copy machines, fax machines, trucks, and more. Securing financing for your equipment, instead of buying, can reduce the amount of cash you’ll need to operate, start or raise funds for your business. When you lease equipment, a manufacturer, dealer, or lender either buys or already owns the equipment you want. In exchange, you make monthly payments to the owner (lessor). The monthly payment structure allows you to treat the payments as tax-deductible business expenses. Short-term leases might cost you less than buying new equipment every year, and some even have yearly computer upgrades built into them. A merchant cash advance is a funding option that can provide a small- business owner with fast access to working capital by selling a portion of their business’s future credit card sales to a cash advance provider at a discount. A merchant cash advance is also sometimes called credit card factoring or credit card receivables funding and is typically provided by specialty finance companies rather than banks or credit unions. There are many advantages of a merchant cash advance over a traditional business loan. For example:  There are no fixed monthly payments and no fixed maturity dates since it is not a loan.  Payments to the cash provider can fluctuate based on the merchant’s sales volume. This is ideal to help manage cash flow during slower seasonal trends.  Approvals and funding are quick – the entire process can be completed in as little as 3 business days, which is much less time than a typical small-business loan takes. Page 2Blue Ray Financial
  3. 3. 7 [Type text] to Finance a Small Business Ways  Large advance amounts are available – merchant cash advance amounts typically range from as little as $5,000 up to $200,000 per business location. Typically, business loans are much smaller due to their structure.  No personal guarantee is required – all small business loans usually do require one.Many Companies have the From time to time, companies may need a revenue source to getmajority of capital tied up in through a rough spot, or to finance a project that is expected to yieldinventory. Accounts large dividends. When these types of situations arise, there is the optionreceivable funding allows a of accounts receivable financing as a way to continue operations whilecompany to free up capital resolving the issues that created the temporary crunch.tied up in inventory. There are two distinct alternatives when it comes to accounts receivable financing. Lenders may use the average monthly accounts receivable revenue as the basis for extending a loan. The amount of the loan will take into amount the average aging of the account debtors, consistency of the monthly billed revenue generated by customer accounts, and the usual amount of payments received per month. Along with the total amount of the loan, these factors will also be used to determine the amount of the monthly payments on the loan. With this alternative, the company retains all control of its receivables and is responsible for handling collections, posting payments, and all the usual accounting functions. Generally, this is a workable alternative for a corporation that is in a short-term money crunch for some reason, and needs funds to get through six months to a year. For companies that are attempting to regroup after some sort of major crisis, such as using up resources to fight off a takeover attempt, the concept of factoring as a means of accounts receivable financing is a common practice. Lenders who specialize in this form of accounts receivable financing usually charge a flat fee per billing period, plus a fixed percentage of the total billed revenue for the period. In exchange, they factor the total Page 3Blue Ray Financial
  4. 4. 7 [Type text] to Finance a Small Business Ways billed revenue, less their percentage, and advance that amount to the company. With this sort of arrangement, the lender assumes control of receiving all payments on the invoices issued by the company, takes over the collection process, and supplies the company with periodic reports on payments received. This allows the company to still post payments in their billing system, so there is an accurate record of what is paid and what is outstanding. Typically, the account debtor cannot be released from an accounts receivable financing arrangement until the terms are completely settled. While the loan form of accounts receivable financing has an obvious end point when the loan is paid off, the factoring type of accounts receivable financing may be more difficult to arrange. Working with the factoring lender to determine when the last batch of invoices will be factored and making arrangements to pay off any outstanding invoices that were factored will keep the process ordered, so customers are not confused about where to remit payments. Unsecured small business loans are the ultimate solution to the perpetual problem of lack of funds for small business and entrepreneurs. While secured loans have played their rounds, unsecured loan is becoming the preferred choice for more and more small business. An unsecured small business loan comes with a host of advantages, the main one being they do not require any type of collateral. Though unsecured loans would attract a higher rate of interest the flexibility with the terms and conditions and ease of availability makes them the first option for all small business. As the small business owners have often seen people falling in trap with secured loans they are more inclined to go for unsecured small business loans offered by lending companies at flexible terms and easy interest rates to satisfy their need for finance. Unsecured business loans are gaining from the general aversion towards secured loans that has been growing in businessmen and common people over the years. Though unsecured small business loans would come with a higher rate of interest, it is pretty reasonable and logical. The lenders put their Page 4Blue Ray Financial
  5. 5. 7 [Type text] to Finance a Small Business Ways money at stake by offering loans without security, so they need to charge this higher interest rate to set off the higher degree of risk involved in the whole process. However, in most cases the lender would like to confirm about the credit history of the borrower before offering an unsecured small business loan.Borrowers appear to prefer A major source of financing for smallthe ability to refinance businesses in the United States is theexisting debt, and the U.S. Small Business Administrationrelatively low rates & fees (SBA). Thousands of small enterprisesassociated with SBA 504 who were unable to secure loans fromLoans. lending institutions on their own were supported by the SBAs various loan programs. Businesses cannot solicit loans from the SBA unless they are unable to get funding independently. The main component of the SBA loan system is its 7(a) programs that annually accounts for the vast majority of the loan guarantees distributed to small businesses. Loan guarantees made through the 7(a) programs totaled $10.5 billion in FY 2000, accounting for approximately 91 percent of the total of all SBA loans made during that time. Under the 7(a) Loan Program is the most popular of the agencys programs. Under this program, the SBA does not actually make direct loans to small businesses. Instead, it assures the institution that is making the business loan—usually a bank—that it will make payment on the loan if the business defaults on it. Since the SBA is taking responsibility for the loan, it is usually the final arbiter of whether a loan application will be approved or not. The 7(a) Loan Program was formed to meet the long-term financing needs of small businesses. The primary advantage of 7(a) loans is that business enterprises are able to repay the loan over a very long period of time. Ten-year maturities are available for loans for equipment and working capital (though seven-year terms are more commonplace), and loans for real estate and major equipment purchases can be paid back over as long as 25 years. The SBA can guarantee 75 percent of loans up to $750,000, and 80 percent of loans of less than $100,000. The interest Page 5Blue Ray Financial
  6. 6. 7 [Type text] to Finance a Small Business Ways rate of 7(a) loans cannot exceed 2.75% over the prime-lending rate. The SBA maintains several individual loan programs under the 7(a) umbrella. These include CAPLines, LowDoc, SBAExpress, EWCP, DELTA, and an assortment of other lending initiatives targeted at specific sectors of the small business world. If you need funds to buy another business, this is your option. Acquisition Loans can be used to acquire, refinance, or purchase a business or franchise. There are several eligibility factors which can include the value of the business, experience of the owner, and the past performance of the business. A business acquisition loan is used for financing a new acquisition, refinancing, or franchise purchase. Oftentimes an SBA guarantee is used to secure the funding for the lender. The lender will examine the business’s performance, the experience of the borrower, and the value of the business. Lenders generally want to see a new business plan and financial projections. 4 things to know about an acquisition loan:  Lenders are looking so see if you have industry experience  Need down payment (more the better, but minimum of 10%)  Lenders will look at cash flow of business you’re trying to buy  A lot of moving parts since you’re buying a new businessBridge loans can be very Commercial bridge loans enable you touseful in commercial real have access to short-term funds thatestate, for people who have bridge cash flow timing gaps allowingto acquire quick funding in you or your Company to execute someorder to save a piece of sort of interim task. For example, if youproperty from foreclosure. have to pay a balloon payment thats soon to be due on an existing commercial loan, you could deal with that balloon payment until you receive permanent financing. Or if there is only a limited time-frame during which a particular piece of Page 6Blue Ray Financial
  7. 7. 7 [Type text] to Finance a Small Business Ways commercial property is available, you can utilize bridge financing to get that asset, then repay your bridge loan with funds from your permanent commercial mortgage. So, fundamentally, commercial bridge loans are short-term commercial real estate financing vehicles that you have the option to use for temporary financing until you improve, refinance, lease up, sell, or complete the property. As a way to compensate for their short-term nature and their greater risk level, bridge loans are inclined to have greater rates of interest than permanent commercial mortgage loans. Generally, commercial property bridge loans have terms that range from six months to one year. Quite a few commercial bridge lenders actually allow you as the borrower to extend your bridge loan for an additional 6 months to 1 year for a fee that usually ranges from a half-point to 2 points on a case by case basis. Commercial property bridge loans are generally repaid when the borrower places permanent financing on the real estate, after improvements are finished and new tenants move in. As a consequence of their short-term attribute, bridge loans usually dont have any prepayment penalties. Heres a typical commercial real estate bridge financing scenario: Lets pretend that youve got a 275-unit less-than-perfect apartment complex running at 40% vacancy in a seriously nice area under contract at $10 million. You’re in depth due diligence has demonstrated that the property will likely be worth $22 million after just $3 million in renovations that can take seven months to finish, after which you should be able to raise the rents to warrant the higher post-renovation valuation. Consequently, you collateralize the subject property to get a $13 million commercial bridge loan to cover the purchase plus renovations, complete the work, lease-up the apartment complex to over a 90% occupancy rate, then 7 months in the future, you refinance the property with $22 million permanent financing generally in the form of a conventional commercial mortgage loan based on the greater post renovation valuation from which you pay back your original bridge loan in full. Page 7Blue Ray Financial
  8. 8. 7 [Type text] to Finance a Small Business Ways A variety of sources for financing is available for businesses. Depending on how the business is organized and its overall financial condition the best available sources can be sought. In the different phases of the business cycle where a business exist a classification of financing with the different maturity periods is shown in the chart below.Blue Ray Financial Blue Ray Financial is composed of a group of highly experienced andP.O. Box 750534 seasoned, certified, financial professionals. With our knowledge andForest Hills, NY 11375 expertise, we can find the right solution for all your financing needs.Phone: 718.554.3841 Unlike local lending institutions, which only lend to the most credit-Fax: 718.732.2405 worthy businesses, we have programs available for all credit types andemail: company sizes. Perfect credit is not the only factor we use in qualifyingConnect with us: you for a loan, and If you business has good cash flow… You are approved. If you business needs financing, we will guide you in choosing the best option available. For more information, visit You can also connect with Blue Ray Financial on Facebook, Twitter and Google+. Page 8Blue Ray Financial