I visit local small businesses every day. So I am often having conversations with small business owners in my community and seeing what it is like from their perspective. They tend to have a few things in common; 20 employees or less, fairly new, and lots of long, unpaid hours for the owners.
They also have another thing in common, which is poor access to business credit. They are usually renting, they use credit cards to pay business expenses, and they lose money on their taxes. Most business owners I know go into work every day knowing that one equipment failure or bad decision could close their doors, and that there wouldn’t be anyone willing to save them.
Few, if any of them, receive financing or credit through traditional banks, or have assets with equity in them. What they usually get is advances through “alternative” or “online” lenders. Sometimes they are advances on future credit card receivables, sometimes they are unsecured term loans.
There are a lot of stories about negative experiences with online lending products like merchant cash advances. Most of the business owners I know in South Florida find them to be very helpful. They are able to funds in times and situations where no one else would help them. Most cash advances actually have reasonable, affordable payments from lenders that offer good customer support. They can usually either pay the advance to maturity, or go back and get more funds after a few months of making payments.
Small business owners always have to be smart and vigilant in protecting their business’ financial future. They need to have other options in building revenue for their business. They need to be careful not to over-leverage their business credit through cash advances, or credit cards, and so on. There are thousands of businesses who are able to use unsecured credit options responsibly and successfully.
As long as business owners are smart, like the ones I talk to every day, they can manage things like business cash advances and come out much better from it.
Having a strategy for finances is very important. When a business owner simply waits until there is an emergency to get a loan, and then puts their finances back out of their mind until next time, problems can arise.
Merchants generally need to have an idea about how they are going to increase their access to credit over time. Even if they get a small, short-term advance, they also need to look ahead. Credit scores can be very important – merchants should always be thinking of small ways to improve their credit rating, including going through a credit repair process if need be.
If a business has taken on a lot of short-term debt, there needs to be a plan to eventually replace them with a better loan product. Merchant cash advances need to be paid off or consolidated at some point. Otherwise it is difficult to move towards longer and larger term loans. Credit lines are something else to look towards.
And even if access to traditional loans is impossible in the near future, merchants need to have a plan to get one eventually. Even longer-term debts and revolving credit lines can be completely replaced by programs like SBA 7(A).
Joe Alkobi founded Main Street Finance Group, which is based near Fort Lauderdale, FL and helps small businesses find the right sources of financing for their companies.
