Many small business financing options feel as though they have evaporated in the wake of the crisis caused by COVID-19. Many lenders tightened their credit requirements while others are stepping back altogether to wait out the storm and see what happens. 

As the Paycheck Protection Program winds down and is expected to stop offering forgivable loans to small businesses by the end of June, it will be more important than ever for small business owners to understand their options to meet their financial needs over the coming months.

Fortunately, there are lenders coming back online and others who are still making capital available to borrowers looking for cash to fuel growth, fund working capital needs and keep their doors open as they prepare for their customers to return.

2020 Will Be An Interesting Year For Small Business Financing

Business credit cards, which I have long considered a very good way for small businesses to establish or build business credit will likely start considering new borrowers through the second half of the year, but it will likely only be the most creditworthy. 

I also expect to see lines of credit difficult to come by until at least 2021. In the aftermath of the Financial Crisis of 2008, many lenders reduced their customers’ credit lines or canceled them completely. With the exception of SBA-guaranteed loans, we should probably expect to see many lenders reluctant to offer term loans to small business owners digging their way out of the morass caused by stay-at-home orders that temporarily shuttered many small businesses for most of the second quarter of this year.

Although nothing would make me happier than to be wrong, I expect the same thing to happen now, at least for the next six months. As a general rule, there are three questions lenders need answers to, which will be difficult for many businesses to answer today:

1. Can you repay a loan? 

Does your business have the revenue and cash flow needed to successfully service debt? This will be difficult to forecast if your business has been shut for the last 12 weeks.

2. Will you repay a loan? 

Do you have a track record of making regular and timely periodic payments? Even if lenders evaluate your creditworthiness strictly on pre-COVID-19 credit performance, there are many small businesses that simply don’t have a very strong track record.

3. Does your business have the ability to make payments regardless of what happens in the future? 

This question is likely even harder to answer today, with volatile financial and employment markets we haven’t seen the likes of since the Great Depression. Cash strapped businesses, starved for revenue for the last 12 weeks are having a difficult time navigating their cash flow needs for the next 12 weeks. Let alone making an accurate forecast for the next 12 months and beyond.

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Get Your Financial House in Order

Admittedly, this is the last thing business owners want to hear right now. But those lenders and alternative players still in the market will be looking for borrowers most likely to have the best answers to the three questions mentioned above. 

To do that you’ll want to make sure your bookkeeping is up to date and accurate, you have a good handle on your cash flow, and you understand your credit position so you can spend your time looking for financing in the places you will be most likely to find success.

I’m convinced it is also a good time to revisit your business plan and make sure it reflects a reliable strategy for your business moving forward. 

Many lenders today do not require a formal plan when you apply for financing. But the exercise of creating a plan compels you to think strategically about how you might address scenarios that could happen within your business—opportunities as well as challenges.

I’d guess that very few business owners thought about how something like a global pandemic could impact their businesses. They might be thinking in those terms now and it should be reflected in their business plan.

Look for Financing Where It Can Be Found

To be candid, our current financial crisis will probably compel us to look at options that might not be our first choice if we could time travel back to this time last year. That being said, there are financing options that can be leveraged to help a small business keep the doors open. Possibly even gaining momentum in today’s business environment in the hands of a savvy small business owner.

Merchant cash advance (MCA), sometimes called a business cash advance, is one of those options. This alternative source of capital isn’t really a loan, but rather an advance based upon the credit card sales that flow through your business’ merchant account. 

This type of financing can be expensive, but MCA providers are actively working with small business owners now, it’s relatively easy to qualify for an advance, and funds can be deposited into your account relatively quickly—often within a day or two of approval.

What Makes an MCA Different from a Small Business Loan or Line of Credit?

For starters, MCA providers don’t evaluate creditworthiness the same way a traditional lender would. They are primarily concerned with the volume of credit card transactions flowing through your business and whether or not they will supply enough cash flow to service the periodic payments. If your business is a restaurant, merchant, or other business that accepts credit cards, you may qualify for an MCA.

The language of an MCA is also different from a loan. MCA costs are typically not expressed as an APR, but rather a factor rate. Think of a factor rate as a calculation, rather than an interest rate. For example, if you are quoted a factor rate of 1.5, that means for every dollar you borrow you will pay back $1.50. In other words, if your advance is $10,000 at a factor rate of 1.5, you will pay back $15,000 to the MCA provider. $10,000 x 1.5 = $15,000.

Holdback is another potentially unfamiliar term you need to understand when considering an MCA. Holdback refers to the percentage of your daily credit card transactions that are debited from your account every day. Most MCA providers require a daily debit, but there are some that are using a weekly payment. The holdback percentage is usually between 10% and 20% of your daily receipts and remains fixed until the advance is paid.

Borrowers often confuse the holdback with the factor rate you will pay for the advance, but they are not the same. In the above example of a $10,000 MCA, if your holdback percentage was 15% and $5,000 was deposited into your merchant account today, the holdback would be $750. 15% of $5,000 is $750. If you received $8,000 in your account tomorrow, the holdback amount would be $1,200. 15% of $8,000 is $1,200.

Your holdback will vary depending on the credit card receipts in your merchant account but will continue until the balance is paid in full.

Is an MCA a Good Financing Option for My Business?

Many small businesses successfully use MCAs every year, but you need to make sure you understand all the costs and the repayment terms. That will be particularly true over the coming months.

Additionally, not all MCA providers are created equal. Costs, fees, repayment terms, and even their customer service can vary, so it will make sense to work with someone who can help you navigate the options and help choose the provider best suited for you and your business situation.

If you don’t qualify for more traditional financing options like a term loan, line of credit, or business credit card, and don’t want to try an MCA, it could be a great time to work on your personal and business credit profile and work to get lender ready for such time as more options come online. Additionally, if you do decide to give an MCA a try, you can also graduate to a lower-cost option down the road as they become available.

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AvatarTy Kiisel

Ty has been writing about small business and the business finance topics that impact a business' bottom line for almost 20 years. With over 35 years in the trenches as a main street business evangelist, author, and marketing veteran he makes the maze of small business finance accessible by weaving personal experiences and other anecdotes into a regular discussion of some of the biggest challenges facing small business owners today.