The Small Business Association (SBA) has done a lot for the growth of small businesses and is a reliable support for them. The SBA offers loans to finance small businesses that are unable to secure loans on reasonable terms from traditional financing sources.
Small businesses were flourishing before the economic slump hit them. Consumer’s disposable income was high, sales were up and businesses maintained optimum stock levels. Now, consumers are holding on to cash and businesses are stuck with their inventory. Money is required to continue operations, but is no longer forthcoming from customers.
Many small businesses are getting SBA loans to stay afloat until times get better. However, the SBA does not have funds of its own. So, where does it get the money for the loans? That is where SBA loans can become risky for small business owners.
Risk of SBA loans
Funds lent out in the form of SBA loans are really being financed by banks. The SBA is only the originator and facilitator of the loan. This means that the SBA loan carries the same risks as a bank loan.
Bank loans once lent have to be repaid and there is no chance for renegotiation. Banks are particularly tough now as they are already facing loan defaults and cash deficit. Businesses going through a financial low face heavy penalties on late payments. The bank has the legal right to recover the debt from the business owner and can take over personal assets in case of non-payment of the loan.
In February 2009, CNNMoney.com reported that SBA loan default has risen to 11.9% in 2008 from about 2.4% in 2004. Though the government is trying to address this problem, there is not much to be done when a firm is unable to do sufficient business to repay its debts. The bank has no option except to seize the personal collaterals of the business owner, such as residence, car, etc.
Merchant Cash Advance (MCA) finances without collateral
The SBA may not approve of MCA providers, but MCAs can pull a business back on its feet. Survival of the business is paramount and MCA provides the finance when the business needs it most and does not have many other options.
Businesses can apply for an MCA and get the cash approved anytime between 2 days to 2 weeks. There are no need of a personal collateral or lengthy paperwork involved. The business sells a percentage of future credit card receipts to the MCA provider in exchange for the cash advance.
The reduction in credit card sales will definitely affect the bottom line of the business for some time, but at least the business is still standing. A clear plan on repaying the advance as soon as possible will reduce the overall cost of the advance to the business.
It is recommended that small business owners facing financial deficit, consider taking out merchant cash advance rather than an SBA loan. Current interest rates on bank loans have reached a high and with the lack of flexibility in the repayment model, banks are no longer the best financing sources. MCA providers offer fast and timely service to give businesses a second life. Though the cost of the MCA is high, it can be reduced through careful planning.
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