One of the major reasons why small businesses are failing very often is the inability to secure business funding which is required to keep the business afloat. It has even been shown that about two in every 3 new small businesses are likely to fail within the first five years of operations. This is quite alarming considering that it is the small business sector that is responsible for the employment of more than half of the entire workforce of the United States, constituting about 90 percent of all the businesses in the country. There are quite a number of reasons why small business owners seek out retail finance providers, and the reason is unique to each business. Let us take a closer look at some those reasons.
Situations where obtaining short-term business finance is the optimal choice
Most small businesses simply are in need of business funding in the form of short-term loans in order to meet up with the day to financial requirements of the business. There is no doubt that if a business is unable to meet up in running the business as a result of lack of working capital it might be forced to close down. Retail finance providers also make loans available to small businesses so that they keep stock of raw materials as well as finished goods. In addition, when a business has ready access to business credit it is able to offer credit sales to worthy customers.
This is because when a sale is made on credit to a customer there is no telling exactly when the customer will pay the debt; so, during this period when the business is waiting to recover its debts, it can continue production with money obtained from retail finance providers. Short-term business funds are also needed if a business needs to increase its volume of production in a very a short notice. In such a situation it would almost certainly be counterproductive if the business goes seeking the loan from commercial banks because of the huge delay that could be involved. Above all, retail finance is required to make for good cash flow during the operating cycle of a business.
Some merits of short-term finance
From what has been discussed so far it can be concluded that short-term financial help small businesses meet their temporal financial requirements. There are significant advantages that come with opting for short-term loans from retail finance providers instead of long-term financing, some of which are going to be considered.
The main reason a small business might not think twice before obtaining short-term business funding is that it is actually economical. Since most short-term financing especially those obtained from alternative lending sources can be obtained in a short notice, there is no significant cost of rising. The amount of interest charged especially in the case of commercial bank loans is quite affordable. Meanwhile, retail finance providers also offer loans that are truly flexible, since they can sometimes be raised as and when required. A good example of this kind of credit facility is cash credit, and perhaps bank credit. Apart from the fact that most short-term financings do not require the borrowing business to give a share of the business, or to allow some level of interference in management, it could also be used for long-term purposes. For example, although cash credit is granted for an initial period of one year, it can be extended for another 2 years.
Some of the best retail finance providers
The most common source of business finance has always been the commercial banks which provide credits in mostly in the form of cash credit, loan, and overdraft. Jointly referred to as bank credit, they all serve the all-important purpose of making cash readily available for a business to fund its activities. There are notable differences between cash credit, loan and an overdraft.
Comparing a bank loan with an overdraft
For a bank loan, interest is charged on the total amount that is borrowed; while in the case of a bank overdraft the interest is only charged on the actual amount that is drawn. Still considering the bank loans and overdrafts, it is known that the amount that the retail finance providers can offer to a business is not limited. A business is able to borrow any amount depending on the kind of collateral it can provide. But in the case of an overdraft, the amount is very much limited and can only be offered to a business that has an account with the bank already. For an overdraft, the renewal process is quite simple and straightforward. In order for an overdraft to be renewed all that is required is for the business to show a positive balance sometimes at the last Friday of each month.
This is in contrast to what obtains in loans, where the loan has to be repaid at the expiry period first before the business can request a new loan—in which case it has to. Meanwhile, it is much easier for a business to obtain a draft from its retail finance providers—in this case, a commercial bank—if it is deemed creditworthy by the bank based on past dealings. However, for a loan to be issued there to a business, it has to provide collateral. Above all, a bank overdraft is more flexible in that it enables a business to withdraw, deposit and make withdrawals as long as the limit is not exceeded. But, for a bank loan, the amount sanctioned is fixed and higher interest rates are charged.
Comparing a bank term loan with cash credit
One other form of funding which can be obtained from retail finance providers like a commercial bank is cash credit. Cash credit is somewhat similar to a term loan except that is granted only for an initial period of one year, although a maximum of two renewals can be allowed. A business does not need to have an account with the bank before it can be granted cash credit. Usually, the money is paid into a separate, unlike an o overdraft which is granted to. Just like a loan, however, cash credit is obtained using collateral, and the amount borrowed is dependent on the nature and value of the collateral a business can provide.
Invoice factoring firms and online lenders
Apart from commercial banks which offer cash credits, loans, and overdrafts which have so far been discussed, there are other retail finance providers, who, though, are not part of the traditional lending institutions, have risen to challenge of making short-term financing available to small business owners. In this sector of alternative finance, invoice factoring firms are huge players. Invoice factoring does not provide cash directly to a business. Instead, it buys the debts of a business at a discounted price which is determined by the likelihood of the debt is recovered. Factors that could help the invoice factoring firm determine how likely it is for the debt to be recovered include how long the debt has been owed and whether or not the debtor is a major firm or a small one. Generally, invoice factoring firms prefer newer debts from possibly huge companies.
Online lenders also serve as retail finance providers to small business. One thing that has endeared small businesses to online lenders is the fact that the loans are made available to businesses very quickly. It is possible for an online to be delivered in a matter of hours since online lenders basically make use of powerful algorithms to underwrite the loan applications. In spite of the obvious advantage of speed associated with online lending, there are some reasons for second thoughts. After all online lending is still in infancy and it is possible for lending platforms to close down abruptly as has occurred sometime in the recent past.
Merchant Cash Advance as a viable alternative to bank loans
Merchant cash advance vendors are a class of retail finance providers to be reckoned with. Merchant cash advance providers seek to remove the many obstacles that have hitherto made it difficult for small businesses in particular to obtain commercial bank loans. For example, merchant cash advance providers do not demand collateral security before giving out cash to a business. What is important to the merchant vendor is whether or not the business is raising enough revenue to enable repay the advance. Unlike a bank loan, it is not required for a business to have a good credit score before it can obtain an advance. These two factors combined could possibly account for why small business owners are finding the merchant cash retail finance providers very attractive.
Because of how difficult it is for small businesses to find retail finance providers in the traditional lending sector, there has been a need to look in other directions when seeking small business funding. Of all the options that are often open to small businesses, merchant cash advance has proven to the one that is most suited to the needs of small business even though it might be more expensive. Although small business owners are just beginning to embrace merchant funding, one might not be wrong in expecting that merchant cash advance will eventually be the number one option for small businesses.