Financial Strategies

The current chaos in financial markets has changed how merchant cash advances should be evaluated. The use of credit card factoring and credit card processing to obtain working capital financing has recently become a more viable commercial funding strategy. Although this approach for securing business cash advances has been available, businesses historically seemed to prefer using other financing sources to get needed funds. While there are still other small business cash options which should be considered, the practical reality is that the choices available have changed dramatically for most business owners.

Recent changes in most commercial finance programs have resulted in many businesses scrambling to locate new sources for working capital and commercial loans. What has changed to make business cash advances a more feasible option for small business financing? Here are four of the primary reasons for a changing environment where business loans are involved.

First, the availability of unsecured lines of credit has all but disappeared for most small businesses. This was a favored method of business financing for years and will be sorely missed by many.

Second, in the recent past many business owners have probably used home equity credit lines to obtain needed cash quickly and simply. Most banks have reduced or eliminated these home equity loans in response to a nationwide residential funding crisis during the past year or so.

Third, banks are increasingly insisting on more collateral for their working capital loans and other commercial loans. For many business owners, providing additional collateral is not a feasible alternative.

Fourth, a growing number of local and regional banks are exiting the commercial lending business. In some cases, the business lending focus has shifted to larger businesses with long-term ties to a bank. This has produced an immediate and negative impact on relatively new and small businesses which especially need more working capital help in a challenging economic environment.

The four significant business financing trends noted above have resulted in a practical need for most business owners to now look much more actively at business cash advance programs. With such financing, businesses can obtain working capital cash based upon their credit card processing activity during the past six to twelve months.

Are there problems or pitfalls with this approach to obtaining small business cash? There are definitely problems to avoid with this specialized version of working capital financing. In fact I have prepared a number of special reports on this specific issue.

One major pitfall of business cash advances is the presence of a growing number of seemingly predatory lenders. These lending groups typically have one or more distinguishing negative characteristics.

One of these negative attributes is the apparent urgency by the lender to change the credit card processor used by a business. While there will always be legitimate reasons to consider changing the credit card processing arrangement, it should never be the first priority in a business cash advance program. If there is a rush to do so by the lender, it is probably due to a misguided attempt to obtain processing fees even if they are unable to provide a working capital advance.

Another negative characteristic is misrepresentation about how quickly business cash advances will be provided. While legitimate funding can typically be obtained in a month or less, business owners should be skeptical of agents who suggest that financing is routinely available in a week or less.

How can these seemingly predatory commercial lenders be avoided? Perhaps the most pragmatic solution for avoiding entanglements with one of these questionable lending sources is to have a lengthy conversation with a prospective lender prior to taking any action. Certainly it is especially unwise for a business owner to submit an online working capital cash application without having such a detailed discussion.

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In the face of a growing commercial finance funding crisis, many small business owners are exploring new options for commercial financing. Credit card loans and business cash advances are two working capital financing strategies which are proving to be practical and effective sources of operating cash for commercial borrowers.

The use of credit card financing often refers to business cash advances in which working capital is obtained by business owners based upon future credit card processing activity. Alternatively the use of personal credit cards to obtain a cash advance is also referred to as a credit card loan. With business finance funding shortages, small business owners are increasingly using both approaches to obtain operating cash for their business. The two financing approaches are not equal in terms of how they are viewed by commercial financing experts although the strategies might be called by the same name occasionally.

Many commercial lenders have suddenly reduced or cancelled business lines of credit and other forms of working capital loans. In response, many business owners have been forced to rely on cash obtained via their personal credit cards to sustain their businesses. We strongly urge all commercial borrowers to review our predatory lending discussion in The Working Capital Journal in order to prepare for some of the most undesirable actions being taken by many lenders which have a substantial credit card loan exposure.

There are two particular observations we want to emphasize about small business owners using personal credit cards to obtain operating cash: (1) This really is a business financing method of last resort that should be avoided whenever possible. Before assuming that this is the only source of capital available, commercial borrowers should consult with a working capital finance expert. The possibility of business cash advances and working capital loans should be thoroughly explored. (2) This questionable method of obtaining commercial finance funding will prove to be increasingly more difficult because credit card issuers are already cutting back on their unsecured lending programs.

Like reductions in their lending programs for business lines of credit, most banks are now making similar cutbacks in credit card lending. They are reducing or cancelling credit lines even when borrowers have a superb payment record. The rationale for banks reducing both credit card lines and commercial lines of credit is similar. With unsecured commercial loans or personal loans, banks fear that massive defaults are almost inevitable due to a very shaky economy and business lending climate. Unlike residential real estate financing in which real property is pledged as collateral, banks know that they have no collateral to fall back on with working capital loans and credit card loans because they are unsecured. Many small business owners use home equity lines of credit to obtain operating cash, and these funding sources are also diminishing in most areas of the United States. Although these lending programs are backed by collateral, the value of homes in many areas has decreased to the point that many outstanding loans exceed the current property value.

One of the most disturbing and frustrating occurrences in the current difficult commercial financing environment is the lack of clear information for many business owners about which funding options are realistic and possible. This factor alone has probably led thousands of commercial borrowers to obtain operating cash from their personal credit cards when there were better alternatives.

Due to the growing tendency of several major credit card issuers to exhibit predatory lending practices, the use of personal credit card loans should be avoided. At a minimum, each business owner should contact a business finance funding expert to determine if a business cash advance program or a working capital loan program can be used to obtain needed cash.

Commercial financing has changed dramatically during the past few months. The net result has been a reduction in commercial lenders as well as stricter standards for acquiring commercial loans and commercial mortgages. Unfortunately there has also been no shortage of misinformation about the availability of commercial funding, so an important change issue is to realize that for commercial lending there are both apparent changes and real changes.

As is often the case with financial changes, it remains to be seen how many will be temporary or permanent. But from a practical perspective, commercial borrowers are left with no choice but to adapt to the changing commercial finance environment. Regardless of how long the changes might be kept in place, small business owners must be prepared to operate within a more complicated climate for commercial real estate loans and business financing.

Perhaps the most dramatic change has been a significant reduction in business lending activity overall. This has been due to several events occurring almost simultaneously. Several major commercial lenders have gone out of business altogether. Many banks have stopped business finance lending while continuing consumer lending. Numerous business lenders have enacted stricter standards for the commercial financing transactions they are still willing to consider.

What should commercial borrowers do about this? A primary option that business owners should explore involves looking beyond their local market area for help with commercial real estate financing and other commercial loans. To accomplish this, it should be helpful to contact a working capital financing expert operating throughout the United States.

In addition to fewer business lenders to choose from, there are two other significant changes which must be anticipated by small business owners before seeking new business financing. First, most lenders have cancelled or are about to eliminate unsecured lines of credit for many businesses. Second, commercial lenders are increasingly demanding more collateral for virtually all commercial finance funding.

One effective commercial financing strategy for overcoming the combined obstacles of fewer lenders, more collateral and fewer unsecured credit lines is to consider a business cash advance program based on future credit card processing activity. This is proving to be one of the few sources of commercial funding that has not been adversely impacted by recent events. To learn more, it will be advisable to discuss the potential with a small business financing expert who can provide advice about business cash advances as well as other business finance solutions.

Another key change issue for commercial mortgage loans and working capital loans is simply the likelihood that more changes will be forthcoming in the near future. It is increasingly obvious that many banks will continue to modify their business lending programs in response to changing conditions as they occur.

To adequately prepare for future commercial finance changes that might (or might not) occur is a daunting task for a business owner. A commercial financing expert familiar with Plan B contingency financing for commercial loans will prove to be a valuable resource for any borrower wanting to seriously deal with both current and future changes impacting the financial health of their business.