When a business owner decides he or she needs a business loan often their first thought is a bank. However, for many small businesses conventional bank loans are not an option and SBA loans require collateral and a history of profitability and often take several months from application to funding. Additionally, if the business and/or its owners have less than ideal credit the aforementioned two options are often out of reach.
In this scenario, the business has many options if it has commercial accounts receivable – it can factor or obtain an ABL (asset based loan) loan. If it has certain kinds of inventory (think commodities) or equipment (heavy metal like John Deere, machine shop equipment, etc.) it can borrow against these “hard” assets quickly. Also, if the business owner owns unencumbered or under-leveraged real estate it can borrow quickly with a so-called hard money loan. However, many businesses such as restaurants, retailers and companies that provide services to consumers do not have collateral to borrow against and find themselves with limited options.
A finance product that has developed over the last decade is what we call “Revenue Anticipation Loans”. The first version were Merchant Cash Advances where a lender would advance against historical average credit card charges and collect against the loan by taking a small percentage “off the top” from the daily credit card receipts. Today, lenders now offer advances against all revenues by reviewing both credit card sales and cash deposits in prospective borrowers’ bank accounts. Using a daily ACH (automatic withdrawals) the loan is repaid by collecting a small percentage of daily revenues. Thus the collateral for these loans are future revenues as estimated from past revenue trends.
The size of these loans can be as small as $5,000 and generally not much larger than $500,000; most are between $50,000 and $100,000. They represent a quick solution for opportunistic cash needs of small businesses. Because the money can be somewhat expensive; credit card rates at a minimum and many are higher; it is best that these type of finance programs be used to capture opportunity or prevent loss of business (i.e. meet a regulatory requirement). I like to say that this money should put the business owner on offense, not defense. If used correctly “Revenue Anticipation Loans” can be an effective tool to finance growth.