Many folks have their hopes resting in a vaccine in order for life to return to normal. Unfortunately, the situation is a bit more complicated than that. Even with a vaccine, small businesses have been closing left and right. Many small business owners don’t know how much time they have left in business. Why? Revenue has been declining, payment terms have been extending, and now business owners are realizing they are out of cash.
Injection of Cash
One method of financing that has been appealing to small business owners right now are MCA loans. Merchant Cash Advances offer a tempting quick injection of cash to a business. In return for a future portion of your sales, you receive a one time sum of money. Unfortunately, this method of financing is going to hurt your cash flow. Every day or week, depending on your specific contract, the MCA lender will automatically withdraw cash directly from your account. If your account doesn’t have enough capital to cover the withdrawal amount, you will face penalty fees and possibly lose your business. MCA loans typically come at extremely high costs, so while this could save your business today, it might destroy it tomorrow.
Injection of Cash…Without Side Effects
So let’s say your business is looking for an injection of cash but not the side effects that come along with an MCA. A term loan from an online lender or bank could provide the injection of cash that you need immediately. Online lenders are currently struggling to underwrite loan applications. This is because their underwriting relies on an algorithm that determines loan amounts based on revenue. Since most businesses had their revenue fall off a cliff overnight, this algorithm is struggling. Banks are usually the cheapest method of financing, but banks are shown to decrease their lending to small businesses during times of uncertainty or recession. The major national banks are currently stockpiling billions of dollars rather than lending to small businesses due to potential credit risks. So for the most part, bank loans are unavailable to small business owners unless you have an established relationship and outstanding credit. If you have a bank loan, be sure that the drop in your revenue has not thrown your ratios out of balance and led you to possible breach your banking covenants.
Immediate Financing That Covers Long-Term Business Health
Invoice factoring is an alternative method of financing compared to a bank loan. In fact, factoring is not a loan at all. There is no debt or repayments to make. Factoring is a cash flow solution that works both short and long-term depending on the needs of your business. Here is how it works:
Factoring services are when you sell your open invoices to a factoring company like Eagle Business Credit in exchange for immediate payment. Your business has the cash on hand to keep making sales, meet payroll, and cover operating expenses. Factoring companies are not scared of economic uncertainty or recession. Factoring is a consistent source of cash flow that also provides extra credit protection to your business. It truly is the vaccine to COVID business ailments.