Securing Working Capital for Your Small Business in the Era of COVID-19
August 01, 2020
Alternative Loans Available to Re-Opening Businesses
With treatments improving and death rates down, businesses are opening in fits and starts, even as the COVID-19 pandemic continues to rage. Uncertainty abounds, but millions of people are ready to get back to work.
Much attention has been paid to the Paycheck Protection Program (PPP), one of the centerpieces of the $2 trillion relief package signed into law in April 2020. It created a class of Federally-guaranteed small business loans with interest rates of 1%, originated by SBA lenders, that was forgivable if the borrower met certain criteria (use of loan proceeds to fund payroll, rent/mortgage expenses, etc.)
Like many government programs, the PPP became mired in bad PR quite quickly. According to PBS, the initial PPP ran out of money in thirteen days. News broke of large companies, with lots of cash on hand, that got PPP loans while mom-and-pop shops went under. Subsequent relief packages have become mired in the politics of an election year.
What gets missed in the noise is that PPP loans aren’t a struggling business owner’s only option. Businesses headed for a grand re-opening should be looking at all their options in terms of business financing.
Here are three alternative loans for re-opening businesses that don’t want to depend on the uncertain future of the PPP …
A term loan is simply a loan that gets paid off in installments over a specified period of time. This could include a …
● Short-Term Loan. 18 months or less, usually offered to companies that don’t qualify for lines of credit.
● Medium-Term Loan. 1-3 years, with monthly installment payments.
● Long-Term Loan. 3-25 years, with monthly or quarterly installment payments.
Interest rates on a term loan could be fixed or floating.
Companies usually request term loans to pay for equipment, real estate, or some other fixed asset. A term loan usually requires collateral and a rigorous underwriting process to assess the borrower’s risk profile. Most lenders have established term loan programs.
Lenders vary in terms of their qualification requirements, but a typical term loan might require a credit score of at least 600, at least one year in operation, and at least $100,000 in revenue.
Merchant Cash Advance
Merchant cash advances are usually an option for companies that have a merchant account and take payment by credit or debit cards. However, other companies may be eligible for merchant cash advances as well.
Merchant cash advances are not loans—as the name implies, they are advances. Instead of interest rates, the repayment fees are determined by a “factoring rate,” ranging between 1.2 and 1.5 depending on borrower risk. The advance balance is multiplied by the factoring rate, and that is the total repayment amount.
For example, a borrower assigned a factoring rate of 1.2 might borrow $50,000. Multiple $50,000 by 1.2, and you get $60,000. That is the borrower’s repayment amount.
Repayment plans usually take the form of fixed payments, but they may also take the form of a set percentage of sales receipts. Payments are usually taken automatically by ACH (electronic bank draft or “eCheck”).
Business Line of Credit
A business line of credit is like a credit card—rather than paying a loan balance to the borrower as a lump sum, the lender establishes a credit limit on the line of credit, and the borrower can borrow up to that amount of money, at will. Once the borrower hits that limit, (s)he can borrow no more.
Repayment may take the form of monthly minimum payments, with interest assessed against carried balances. The minimum payment is usually not enough to fully amortize the loan over any period of time—to retire the debt, a borrower usually has to make more than the minimum payment.
Lines of credit get reviewed annually. As long as the lender is willing to extend credit, the borrower can take loans and carry balances indefinitely. Note that lines of credit tend to carry higher interest rates than term loans.
Some borrowers may be able to obtain an unsecured line of credit (no collateral) ranging from $10,000 to $100,000. Larger lines of credit may require collateral, like a certificate of deposit or a lien on assets.
Whether or not the PPP is here to stay or a distant memory, lenders are motivated to help small businesses get back on their feet. Entrepreneurs have many options to consider in the march toward re-opening.
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