Financing Your Business – How to Obtain Working Capital to Grow or Start a Business

Whether you own a restaurant, dry cleaners, carpet store, medical practice or any other business that serves the general public financing a business is problematic in today’s economic environment. Traditional banks are not prepared to grant working capital loans to the well established business, let alone provide capital to start a new business. The bank’s security requirements are such that the business owners might just as well look to their personal resources or private capital sources. Over the decades it has been frequently said that banks only lend to those that don’t need a loan. This observation has never been more accurate than in today’s economic environment.

Most businesses need working capital to grow and prosper. The axiom “when you stop growing you start dying” is not far from a fact for many entrepreneurs. So where does one find access to working capital or a loan to start a business. The good news is that difficult economic conditions have fostered non-traditional funding sources that fill the void that the banks have found it necessary to create.

For instance, The Small Business Administration made sweeping changes to its loan programs in late 2010 and 2011 as a result of the U.S. Government’s focus on economic stimulus. Expanded lending criteria, low equity requirements and streamlining of the application process have served to make SBA financing not only a viable source of capital, but the small business’s preferred financing choice. The lending limits are now $150,000 to $5 million. SBA will finance working capital, furniture, fixture and equipment, purchase /refinance of the business’s commercial real estate or a combination of all of these needs at up to 90% of the cost with interest rates currently as low as 5.25% with terms up to 25 years. And yes, under certain conditions they will approve a loan to start a new business. SBA requires one new job be created by the business for every $50 thousand loaned. Some might say that this makes more sense than any other street level economic stimulus initiated by the administration so far. Supporting small business and creating new jobs in the process is an obvious assistance to economic growth.

Unsecured lines of credit (ULOC) up to $150 thousand are available to business owners with personal credit scores above 700 and no recent derogatory entries on their credit report. Interest rates on this program are surprisingly low particularly considering there is no income verification required and no financial statement or tax return requirement. These loans are approved based on the strength of the borrower’s ability to manage a business and their good credit. This is an ideal capital scenario for a start up business or franchise purchaser for several reasons. The maximum loan is $150,000 to each borrower legally associated with the new business. Family members, associates or partners with excellent credit might consider participating in a business for a negotiated interest in the future profits. This works exceptionally well for national and local franchise purchases because the lender will finance up to 90% of the franchise cost. The repayment structure is identical to a home equity line of credit where the monthly payment is based upon the actual amount outstanding, not the total maximum credit line available. To make it even more palatable for the start up business the lenders recognize that the business is not likely to generate much profit in the early stages so there is no interest charged in the first six months and there are no upfront fees. This is obviously not a bank loan. It is funded by institutional and private investor sources.

For quick and easy capital for almost purpose, many businesses find Merchant Credit Card Advance programs their most practical solution. These programs do not actually lend capital. They advance funds up to 200% of the average of the merchant’s previous four to six months of credit card receipts. What makes this source popular is that there are no upfront fees, no personal liability and no credit score or personal financial requirements.

Repayment is accomplished through a small percentage of future daily credit card receipts. There are no closing fees and it is affordable. The basic requirement is that the business has been in existence for six months and has a minimum of $5,000.00 credit card charges per month.

When the business owner looks beyond the local banks and traditional lending sources, there is a new world of capital resources looking for an opportunity to lend their money at reasonable terms. As always, the cost to the merchant comes down to risk verses reward. Even so, those with credit issues or marginal track records do not have to resort to the exorbitant cost of hard money lending to grow and maintain their enterprises.