Business Loans: 2008 Spiral Leads to 2009 Promise

There’s little doubt that 2008 had small business owners and investor scratching their heads and wondering what’s on the horizon. With a discouraging 30 percent decline over the course of a rock year, the federal government and the Small Business Administration SBA locked horns over a new direction. Fortunately for us, the SBA won a small, albeit crucial win to salvage business loans for up-and-comers.

A Year that will Live in Infamy
After five years of record loan volume, uncertainty among banks and entrepreneurs has dramatically reduced demand for small business loans. The destructive mix of tightening credit by lenders, declining creditworthiness and a reduction in borrowing has had a damaging effect on the industry as a whole. Here are some of the lowlights according to NuWire:

• Dropping Vital Signs. The loan dollar amount fell from $14.3 billion in 2007 to $12.7 billion 2008; that’s close to 11 percent
• 7(a) Guaranteed, Not So. Loans that are typically given to new franchise and small business owners fell from 99,606 in 2007 to 69,434 for 2008

Business Loans See Reprieve on Horizon
It’s almost unbelievable that the federal government would vote to decrease funding and assistance for small businesses. Despite the fact that small businesses create more than two-thirds of all new jobs, the Bush administration decided to eliminate several key business loans and other programs (most notably microloans and the Microloan Technical Assistance.

According to Evan Carmichael, the SBA and Senator John Kerry's Small Business & Entrepreneurship Committee saved a number of programs aimed at Small Business Development Centers, Women's Business Centers, veterans outreach programs, and technical assistance programs.

Also, keep in mind that there are alternatives out there for small business owners. For example, funding sources such as merchant cash advances can be a godsend for struggling entrepreneurs.

Merchant Cash Advance: Trends that Validate a Viable Source of Funds

Business media coverage of the merchant cash advance (MCA) funding option has reached a fevered pitch. Owners of small to medium-sized businesses are finding this form of financing particularly amicable in the face of economic uncertainty. Here’s why.

In the Numbers
Perhaps the best way to judge whether or not the merchant cash advance is right for your business is to look at it from the other side. A quick glance at performance highlights from the MCA industry is rather illuminating. Here are a few gold stars:

• Explosive Growth. $545 billion in terms of loans outstanding at year-end 2007--factoring volume grew to $135 billion, a 6.5% increase over 2006.
• Top Industries. Retailing, steel, textile and apparel, and food leads all industries use of merchant cash advance funding
• Strong for Business. For all factors, the majority of factoring volume in 2007 involved client-to-retail sales.

How It Works
A merchant cash advance is not a traditional loan. In fact, money is not being lent at all. An MCA, or factoring, financer will purchase a portion of your future sales receipts. Money is sent directly to your business checking account, usually within 96 hours; you can use it for such expenses as expansion, advertising, payroll, remodeling, inventory, new equipment or unforeseen emergencies.

The arrangement particularly suits seasonal businesses that experience an ebb and flow of annual business. And it’s ideal for companies with poor credit, as the transaction doesn’t show up as a debt on credit reports.

Unsecured Business Loans: A Variety of Types for Specialized Circumstances

If you’re considering taking on an unsecured business loan to launch a start-up or expand your market reach, you should know that there are several different kinds available. Each has its own purpose and features to meet various needs. Here’s a rundown of some unsecured loans and how they’ll affect your purchasing power and repayment schedule.

Unsecured business loans are a form of debt financing. And while they’ve gotten a bad rap with small business owners--with comparatively high APRs and acquisition difficulty--there’s still no reason to write them off as unusable. With some management savvy, they can be an effective way to draw venture capital funding.

• Unsecured Business Installment Loan. A loan designed for expansion. There’s very few limitations on how the funds can be used, in most cases. Small business owners love the flexibility these loans carry. The APR can be a bit higher, but the ability to use them as you see fit more than makes up for the expense.
• Unsecured Bank Overdraft Loan. This one is primarily used as a “safety net” for daily operating expenses. Banks will review your business credit worthiness periodically and extend an offer of coverage. You have the opportunity to minimize your interest expense with funds used for a short period of time.

It’s important to note that banks and lenders assign varying degrees of terms and stipulations with each loan type, so read before you sign. Or you can ask your financial advisor which loan will best work in your favor and go from there.

Loans for Business: Secured versus Unsecured

There are two basic routes for obtaining loans for business: personal unsecured and collateral secured. Both are marked by stark contrasts in what is expected from you with respect to repayment. They’re both valid ways to obtain business cash, but you need make the decision based on your financial situation. Here’s a quick rundown of both types of venture capital funding.

Personal Unsecured Business Loans
As the name implies, you will be borrowing money without the backing of personal collateral (hence, unsecured). Your lender is giving you money based on your personal credit worthiness and ability to repay. Here are the highlights:

• No Collateral, Higher Price. Unsecured loans are more expensive, bottom line. Because you’re not putting up any personal collateral, the down payment, APR, and monthly repayment will be much higher.
• Intense Scrutiny. Your lender will examine your financial situation with a microscope to determine if you’re eligible. In many cases, you’ll need a sterling track record for handling credit to obtain an unsecured loan.

Collateral Secured Business Loans
Easier to get, but easier to get burned--particularly if you’ve put up something like your house as collateral. Many lenders are quicker to extend this type of loan simply because it poses a decreased risk for them. What to know:

• Here Today, Gone Tomorrow. Lenders can repossess any collateral that you put up to obtain financing. And they’ll do it if you don’t meet the terms.
• Friendlier Terms. Down payment, APR, and monthly payments are much lower with this type of loan.

Small Business Loans That Can Take a Bite Out of Your Dream

Despite the fact that it’s been the year of the credit crunch, entrepreneurs and small business potentials haven’t let that stop them from pursuing the dream. Borrowers are running in droves to alternative lending sources for assistance. Unfortunately, deceptive lenders and outright fraudulent outfits have recognized desperation and are drawn to it like a shark to bait fish. Here’s how to avoid becoming their next meal.

What the BBB is Doing to Keep You Safe
The Better Business Bureau is working to identify fraudulent lenders, particularly on the Internet. You can check with their index of resources to find the names of these criminals and how they use the lure of small business loans to dupe unsuspecting borrowers. The list is updated fairly frequently and you can even report lenders to the BBB using their online form. They even offer timely advice on how small businesses and consumers can avoid fraud when seeking loans and grants.

What the BB Says About Due Diligence
Of course, the best way to approach offers for small business loans and other forms of business cash is to do your homework. Follow these simple BBB guidelines that protect you from illegitimate deals and keep you in the game.

• The Up-front Request. Never pay large sums of money upfront to receive loans or wire payment for services.
• Giving Sensitive Data. Be extremely cautious when providing bank account numbers. Review all details of any offer before making a buying decision and signing a contract.
• Go Government. Research free information on government grant programs at the U.S. government web site.

Business Cash: How to Measure It, How Much Weight to Assign to It

Business cash is the name of the game--plain and simple. Whether you're a budding start-up looking for venture capital funding or an established corporation dreaming of international expansion, business cash is king. In the face of uncertain economic twists and turns, here's a method of evaluating business cash as well as some fiscally-savvy techniques for increasing your take.

Evaluating Your Business Cash Value
According to Journal of a Serial Entrepreneur, there are three distinct measurements of your company's ability to experience growth, or even just to remain solvent.

1. Cash In-flow. Basically, the way cash enters the coffers. In order to get an accurate picture, can you notice trends, seasonal cycles or other noticeable characteristics? And if you ever have dreams of selling out, potential buyers are going to want to see your business cash stability.

2. Cash Out-flow. How your business reacts during times of feast or famine. If profits are up, do expenditures follow? And eliminating long periods of excessive out-flows will improve your business prospects.

3. Cash History. Of course, business doesn't happen in a vacuum. The historic trends of in-flows and out-flows will reveal the true picture of your business health.

How to Make Things Grow
Small Business Trends reveals some fruitful methods for accumulating business cash and getting your ship heading in the right direction. These include getting a merchant account to accept credit cards, partner with a complementary business, and study your sales patterns (such as your business cash history).

Commercial Loans: Disaster to Spike in 2009

Just when you thought the turn of the New Year would bring about relief in the commercial loans markets, think again. The evolving phenomenon of lack of credit, falling property values and reduced cash flow will only drive the situation closer to the brink. And while small businesses will fight to get off the mat, it’s these organizations with the capabilities to bring us back. Here’s more.

JPMorgan Disseminates Harrowing Statistics
If tests are any indications, the bleak financial situation is only going to get worse before it gets better. According to published research by the commercial mortgage bond research at JPMorgan, companies that specialize in troubled mortgages are being over-flooded with businesses in need. Commercial property prices may fall as much as 40 percent, with prices down 11.5 percent from October 2007.

As you might expect, that doesn’t bode well with lenders specializing in commercial loans and venture capital funding. Due to the scarcity of cash, traditional banks and credit unions are reluctant to part with funds that may very well get eaten up in a bear market. Small business loans have never been tougher to secure, even for established businesses looking to expand.

Terror in a Representative Market
A report in Pacific Business News puts the economic spotlight on Nashville, Tennessee--a standard market that is pretty much a mirror to most section of the United States. Here’s what they found.

• Construction loans account for 4.5 percent of national bank assets. That number is 13 percent at Tennessee-based banks. It’s even higher in Nashville at 15 percent.
• Commercial real estate loans represent 7 percent of assets nationwide, compared to 14 percent at Tennessee banks.
• Tennessee banks have already written off $464 million in bad loans in 2008, with more expected.
  

Loans for Business: The SBAs Community Express Loan

At first, the concept was promising. The Small Business Administration’s new Community Express loan program. Loans were aimed at minority-, women- and veteran-owned small businesses in low- and middle-income areas. Fast to apply for, quick return of funds. But now the SBA seems to be singing a different tune: The benefactors are appearing to be small-business owners who are seeking less than $25,000.

A Case of Loan Profiling?
The Wall Street Journal lists several instances where seemingly perfect candidates for the SBA’s Community Express Loan have been shut out by local lenders in what appears to be applicant profiling.

• Loan Caps. The largest lenders have a cap of 100 loans a month, while others are limited to 10 a month.
• Restrictions. The SBA requires applicants to provide a business plan and says it is strictly enforcing the requirement.
• Potential Problems. Community Express has had high default rates and high overall expenses.
  

What the SBA Says
The Small Business Administration web page on the Community Express loan program itemizes changes that went into effect on October 1, 2008. It describes the program as one “which has been redesigned to better focus SBA’s financial and technical assistance resources on the needs of the Nation’s underserved communities.”

• Maximum Loan Amount. $250,000
• Interest Rate. Lenders may charge up to Prime plus 2.25% for maturities under seven years and Prime plus 2.75% for maturities of seven years or more.
• Turn Time. Mostly within 36 hours.

Restaurant Financing: Acquiring Special Purpose Loans Tough, But It Can Be Done

The law of supply and demand has more of an influence on obtaining restaurant financing than you might think. The truth is that wealthy restaurant goers are experiencing the brunt of an economic downturn just like the rest of us. And this phenomenon is making it harder than ever to secure restaurant financing. But the SBA is taking some positive steps to unclog the process and help you get special purpose business cash.

Even the Wealthy Foreclose
Reuters recently described the plight of the wealthy as they struggle to make house payments and avoid foreclosure. Says Reuters: ‘Along with their less moneyed fellow citizens during the housing boom, many wealthy Americans leveraged their home equity to buy anything from a car to stocks.’ Of course, another unfortunate side effect is that fewer people are dining out--a point not lost on business cash lenders.

Obtaining restaurant financing was difficult in the first place. But as more banks raise their standards and ask more profit-related questions, the process has gotten even stingier.

The SBA Tries to Shake Loose
The Small Business Administration recognizes that venture capital funding must be made available if the economy is ever to return to its normal functioning. To that end, the SBA has made two distinct changes in applying for business cash that will make a real difference over the long haul.

1. An interim final rule allowing new SBA loans to be made with an alternative base interest rate, the one month LIBOR rate (London Interbank Offered Rate), in addition to the prime rate, which was previously allowed. This move makes programs more flexible, increases opportunities to access capital and gives both lending partners and small business customers more options to meet their needs

2. A new structure for assembling SBA loans into pools for sale in the secondary market. The enhanced flexibility in loan pool structures can help affect profitability and liquidity in the secondary market for SBA guaranteed loans

Don't Confuse Merchant Cash Advances with Payday Loans

With the credit crisis reaching critical mass, traditional lending sources are raising the bar and tightening the purse strings. And despite the Feds revealing that they may create a collection of loans with insanely low rates, private banks are reluctant to follow suit. The merchant cash advance has emerged as a promising avenue for business owners looking for venture capital funding. Some dismiss the notion as “another payday loan.” But an MCA is far from it.

Payday Loans are for Suckers
Even the seniors know it. An article from the American Association of Retired Persons (AARP) sums it up quite nicely: “A payday loan costs at least ten times as much as a small loan from a traditional bank. You may end up paying an APR of 300%, 400% or even 1,000%.” And depending on how much business cash it will take to get your start-up up and running, you could easily be talking tens of thousands of dollars in interest alone.

If your business relies on invoice payments or accounts receivables as a part of cash flow, there’s a better solution. Particularly if your high-dollar customers take 60 or 90 days to pay.

Merchant Cash Advance: Sell--Don’t Borrow
Remove the traditional banks from the equation. Forget the payday loan. You can sell your future invoices for cash right now and not pay a cent in interest. Let a factoring company become the medium between you and your customers, leaving you with immediate cash to expand.