Business Financing

Introduction

CHAPTER 1: THE BASIC FUNDAMENTS OF LENDING FOR BUSINESSES

Get a better understanding

CHAPTER 2: TRADITIONAL SMALL BUSINESS LENDING

Banks and credit unions

CHAPTER 3: SHORT-TERM SMALL BUSINESS LENDING

Fast, but pricey solutions

CHAPTER 4: SMALL BUSINESS (SMB) INVESTMENT LENDING

Lenders who lend to invest in your business growth

CLOSING THOUGHTS FOR SMALL BUSINESSES

Deciding on the best choice for your business

INTRODUCTION

BUSINESS LOANS ARE THE MOST POWERFUL TOOL TO GROW YOUR BUSINESS

Deciding on financing options is one of the most difficult decisions a business owner will come across. Having the knowledge, benefits, and risks from the different options often will leave many business owners feeling overwhelmed. Being able to understand the complex trade-off between benefits and costs, along with other factors such as purposes, financial products, and the different vendors to choose from.

The following chapters is to help small and medium sized businesses (SMB) to have a better understanding and remove any overwhelming feeling and confusion pertaining to loans. Zip Loan will cover several different products available in the market today that will help you leverage your business success tomorrow.

CHAPTER 1 THE BASIC FUNDAMENTS OF LENDING FOR BUSINESSES

GET A BETTER UNDERSTANDING

In a traditional loan the approximate amount that you borrow or that is lent to you is called the “principal” which is repaid over a specific agreed time called the “term” at an agreed “rate” with an added “interest”.
The interest of a loan is calculated at the end of the month based on the remaining principal. Payments made on a monthly basis is a fixed amount and is to be paid until the end of the term, with the loan’s balance is zero and money is no longer
owned.
The lender of the original loan is accepting to lend money to the business at a risk, with the possibility the loan may not be paid back and go into default, which is why an interest is added to the monthly repayments to compensate such risk.

TERM LOANS

The most common type of loan is called a “term loan”. This type of loan requires fixed monthly payments that includes principal and interest, which has a specific Annualized Percentage Rate (APR)

AMORTIZATION

CREDIT LINES

A line of credit or credit limit is a financial product that gives a specific amount of credit in which a business can draw from. There is a specific credit line limit, once it is used up there will be no more funds available unless an increase is approved and granted
Unlike a loan, you only pay the interest of the current outstanding balance, the money you’ve drawn, as you continue to pay down the outstanding balance the monthly interest will also go down.
The Annual Percentage Rate (APR) is how a credit lines are priced in terms.

CONSUMER VS. COMMERCIAL LENDING

Most consumer loans such as home loans, car loans, and educational loans are regulated and stated in APR.
Commercial lending is different from consumer loans because a commercial lender is not required to state their financial products in terms of APR because unlike consumer loans that are regulated, commercial loans are not regulated
Oftentimes, business owners are unaware that their lender is not speaking or stating the loan terms based on APR, and most often the commercial lender will have their loan in different terms other than what the business owner is aware of. This will result in confusion and a lot more spending then anticipated by the business owner

CHAPTER 2 TRADITIONAL SMALL BUSINESS LENDING

BANKS & CREDIT UNIONS

The Small Business Administration is a government agency in the United States of America that provides support to business owners with the goal for them to succeed in order to strengthen and maintain the U.S. economy
Although the SBA doesn’t give out lend out money to businesses, they do partner up with banks, credit unions, and other lenders. The SBA provides a government-back guarantee of a partial amount of each loan. SBA loans were enhanced to provide 90% guarantee in order to increase a business’ chance to acquire capital.

BUSINESS LOAN CHECKLIST

These are the most commonly requested documents and paperwork by banks during the
loan application:

Personal Information (Legal name, social security, date of birth, etc.)
Professional Resume
A professionally written business plan
A copy of your most current personal credit report
A copy of your most current business credit report
Income tax returns from prior years
Financial Statements to prove the financial health of your business
All bank statements
All legal Documents pertaining to your business
Collateral (examples: automobiles, real estate, and cash accounts)

For more information, visit: www.sba.gov

TYPICAL QUESTIONS

Financial institutions often go through a specific process. Along with the required documents and paperwork, several questions will be asked. Make sure you aren’t caught off guard – do your homework and be prepared!

LENDER’S TIMELINE

Your loan may take a few days to a few months depending on the lender with great consideration that all your paperwork is in order and verified. The timeline from the time frame of the initial application submission to disbursement of funds takes a large amount of time on the lender’s part, so patience is definitely required. An SBA loan can take a minimum of 60 to 90 days, so if your business is in dire need for some funds fast then its best you look elsewhere.

BANK TERM LOANS

The more established and profitable a business is, the ability for them to get larger loans from financial institutions with low rates increases. Term of 5 years or more for repayment

CHAPTER 3 SHORT-TERM SMALL BUSINESS LENDING

FAST, BUT PRICY SOLUTIONS

FACTORING

Factoring is a financial transaction when a business sells its invoices (accounts receivables) to a third party which is called a “factor”. When a business has immediate cash needs, they will often factor their invoices in order to acquire funds for their business. The third party “factoring company” will collect the invoice for the business and keep a percentage.
Business that give net 10, net 15, net 30, and net 60 invoices often wait days and sometimes several weeks to receive payment from their customers. B2B businesses often find themselves depleting funds while they wait for payments on receivables, which is why factoring is common.

The basic components of factoring are as follows:

PROS & CONS OF FACTORING

MERCHANT CASH ADVANCE & DAILY DEBIT

A merchant cash advance is often used by retail businesses that do not normally qualify for regular bank loans. These short term loans are easier to obtain, but more expensive than bank loans. New businesses are often offered a merchant cash advance if they have limited funding options.
Unlike bank loans which often require larger payments and longer payment terms, merchant cash advances are often paid under 24 months with payments being made at the end of the day through your credit card receipts
The retrieval rate is anywhere from 5% to 20% depending on your credit card sales and repayment period. Repayment begins immediately after funds are received. MCAs often quote their loans in terms of “buy rate”.

MERCHANT CASH ADVANCE REPAYMENT

The lender will process all credit card payments for the borrowing business and retain a percentage of all credit card sales in order for the lender to receive their repayment.
The average repayment of merchant cash advance loans is 10%- 20%.
Since there is no fixed rate, the MCA lender will base their loans based on the specific business’ credit card sales.
Many MCA lenders will advance businesses anywhere from 80% to 150% of its monthly credit card sales. The stronger a business, the larger of a cash advance.
The disadvantage of a merchant cash advance is that they are very expensive and if your future sales are bleak your merchant cash advance may wipe out daily profits temporarily until loan is paid back.

This example shows one of the key, hidden downsides to own MCS loan: the significant impact on your monthly cash flow. This borrower might not realize how server the impact of retaining only 80% of their monthly cash flow could be.

DAILY DEBIT REPAYMENT

Merchant cash advance lenders also offer a daily debit repayment structure to borrowers. Rather than repaying the lender a specific percentage of the credit card sales a business can agree and authorize the MCA lender to withdraw a specific amount from the business’s checking account at the end of the business day.
While daily debit sounds like a more reasonable repayment structure it can impact many businesses negatively. For instance, businesses that make a majority of their sales on the weekends such as restaurants and night clubs, choosing a daily debit repayment structure might not be in their best interest unless they maintain a certain amount of funds on a daily basis to avoid falling behind.

PROS & CONS OF MCAs

CHAPTER 4 SMALL BUSINEE (SMV) INVESTMENT LENDING

LENDERS WHO LEND TO INVEST IN YOUR BUSINESS GROWTH

LENDERS WHO INVEST

When an investment lender sees great financial potential for a business they will take the risk in investing in the business with the intent to help grow the business and increase revenue.
The financial market has seen an increase in investment lenders in the last few years.
Most investment lenders will take the risk of investing in a small established business or small startups rather than investing in larger businesses. Smaller businesses have less risk in comparison to larger companies.

LENDING TERM LOAN

ASSET-BASED BUSINESS LOAN

An asset-based loan, also known as “commercial finance” or “assetbased financing”, is secured by collateral or business assets such as the balance of a business’s receivables, inventory, or other balance sheet assets.
A business is basically risking future revenue in order to gain access to funds right now.
An asset-based loan is more ideal for manufacturers, service companies, and distributors with a leveraged balance sheet.
An asset-based loan isn’t as easy to obtain. Lenders will sort through all your customers and determine if your customers pay in 60 days or less. A business who have customers who are often late in paying their invoices may not get approved for an asset-based loan

PROS & CONS OF INVESTMENT LOANS

For small businesses that are less established and lack the credit to get a traditional business loan, an investment loan can be a great option.
Unlike traditional banks and credit unions that look at stability and pass revenue of a business, investment lenders look at overall health, ability to grow, and the business’s potential. Investment lenders look at a business as an investment. Many businesses will get turned down for a bank business loan, but may get approved for an investment loan.
Investment lenders often structure the loan to fit the needs of a specific business. Bank rates may be lower than investment loans, but investment lenders offer more competitive pricing.

CLOSING

CLOSING THOUGHTS FOR SMALL BUSINESS

DECIDING ON THE BEST CHOICE FOR YOUR BUSINESS

GET EDUCATED BEFORE GETTING LOCKED INTO A LOAN

You have several financial products available to you as a business owner. Whether one suits your business better is all up to you. You also must factor in your business health, stability, assets, and future revenue. Once you decide on your best choice, make sure you have a complete understanding of what’s involved such as repayment structure and costs. In the end it is your money and you want your loan to be as beneficial to your business rather than bury you in debt.

WHAT’S RIGHT FOR YOUR BUSINESS?

You are applying for a loan because you need the money to run your business, but being in need of funds shouldn’t blind you to the reality of a loan. The main question you should ask yourself before choosing the right financial product is: Will I be able to repay this loan and still have leftover revenue? How will this loan affect my companies cash flow?
If you are trying to obtain a loan to pay off a debt, you may find yourself just getting by in order to pay off your debt, in this case you should seek both a financial consultant and business consultant to help guide you to make better business decisions.
Below is a graph of the different loans you just learned about, giving you a better understanding and to determine which one meets your business needs.

HAVE ANY QUESTIONS?

Our highly-knowledgeable, friendly, and experienced financing professionals at Zip Loans are always eager to help you make the right decision so your business can flourish. We work for you and are looking out for your best interest as we answer all your answers and inform you on your best option. At Zip Loan we want your business to “Grow with Us”.