Businesses That Commonly Need Funding to Stay Afloat

Businesses That Commonly Need Funding to Stay Afloat
Ronis Gracie
on March 20, 2020
Read in 5 min

It’s the daily grind that often pulls even the best-run business down. The need for capital never ends. Without it, you can’t pay your employees, keep your inventory stocked, make repairs and upgrades or pay the rent or the mortgage. If your business is flourishing, you can use some of your profits to keep things humming, but even that can be difficult sometimes. The bottom line is this: Finding funding is a necessity for most businesses at one time or another. See if any of these company descriptions look familiar to you. Maybe then you’ll feel better about the idea of reaching out for cash when you really need it.

Restaurants and Retail Stores

restaurant
These types of businesses make up a large percentage of small enterprises in this country. Keeping them afloat can often be hand-to-mouth, with only the slimmest profit margins. For many, it is customary to operate at a loss for years. Owners struggle to hang on, trying every sales gimmick or new menu that comes down the pike. The whole process can be exhausting, and the burn-out rate for these entrepreneurs is high. Obtaining funding can truly be a lifeline for these business owners.

When contemplating taking out a business loan, many restaurant and retail store owners mistakenly believe that there are no options available to them. This is because many have a poor credit history simply due to the ups and downs of running their operation. Furthermore, many do not have collateral that they can put toward getting a loan.

Fortunately, there is a lending solution that works well for businesses like this: a merchant cash advance loan. Here’s how it works: A lender gives the entrepreneur a specific amount of money. Instead of paying it back with fixed payments at a set interest rate over a certain time period as would be the case with a traditional fixed-term business loan, the merchant pays off the loan from a percentage of the proceeds of her daily credit card sales. As a result, the amount she pays will fluctuate according to how brisk or slow her sales were on a given day. The loan is considered resolved when all of the original amount borrowed, plus lender fees, has been repaid via the business’s credit card sales.

Restaurants and retailers can benefit greatly from the quick cash provided by merchant advance loans. They can use it to support their daily operations, including paying their staff, attending trade shows, developing new products or training staff. Purchasing assets, including office or cooking equipment, inventory or furniture are also made possible with these loans. They can even cover the cost of economic downturns or partner buy-outs.

While merchant cash advance loans are appealing to a wide spectrum of restaurant and store owners, they’re not for everyone. Businesses that deal mostly in cash transactions would not do well with a loan predicated on credit card purchases. Furthermore, the fees associated with these loans can be high, making it all the more important to pay them off as quickly as possible through sales proceeds. If a business would potentially have difficulty doing so, another type of loan would be better.

Design Firms

professional creative graphic designer desk
Times can often be tough for these types of businesses. This may be because they market ideas, concepts, and illustrations of how a product or structure might one day look. Often, the projects on which they embark span a lengthy period of time, and their customers tend to pay with plastic. These businesses have virtually no choice but to extend credit to their customers and allow them to pay for the goods or services they buy at some point in the future. While it is a good business practice to offer this courtesy to customers, doing so ties up a great deal of an entrepreneur’s working capital, making it difficult to make crucial purchases of supplies and even keep paying the salaries of staff. This is when obtaining an invoice financing loan, also known as an accounts receivable loan, can be a lifesaver.

Simply put, invoice financing involves selling a business’s outstanding invoices to a lender and getting cash in return. Once the owner agrees to make the sale, the lender will immediately provide him with a large percentage of the invoices’ value, generally 80 to 85 percent. The remainder is kept by the lender, who uses it to pay the initial fees. On a regular basis from that point on, usually weekly, the business will be charged a factor fee and a percentage of the outstanding payment until the loan is paid off. When your customer pays off the invoice, you will get whatever is left of what the lender put in the initial reserve fund, minus fees.

There are several advantages of invoice financing. First, the cash comes quickly. In a matter of days, an entrepreneur can receive an infusion of funds to be used for virtually any need that has arisen. For design firms that have been turned down by banks or other lenders, this is definitely a viable option that immediately allows for the freeing up of capital that can provide a much-needed shot in the arm. With it, owners can hire new staff, purchase advertising or expand their product lines. Furthermore, invoice financing frees up the owner’s time. He can then use the hours he would otherwise have spent contacting customers and asking them to submit their payments on other important areas such as sales and business development. No collateral is required, meaning that owners don’t need to put their personal vehicles or home on the line to save their design firms. Finally, the entrepreneur does not need to forfeit ownership of his business. With these loans, he maintains possession of the company while simultaneously getting the cash he needs to run or expand it.

Of course, there is a downside to invoice financing as well. First, some customers perceive the need to take out this type of loan as a sign of failure. Anyone with an outstanding invoice will be informed that his invoice has been turned over to the lender, leaving you open to this type of concern. In addition, the owner forfeits some control to the lender. Although he still owns the company, the lender can stipulate which customers he can and cannot do business with on the basis of their credit history. Finally, these loans can be costly. Owners can expect to lose between 1 and 4 percent of the cost of their receivable, plus interest.

Contractors

Indian male contractor engineer
If anyone needs ongoing access to cash, it is contractors. After all, skilled labor and raw materials are the life-blood of their businesses. Without them, their operations will quickly grind to a halt. If their company is well-established and they have collateral to lay down, one of the best lending vehicles available to them is a traditional fixed term business loan. In this arrangement, the owner borrows a specific amount of money with set interest terms over a fixed period of time. A company’s credit situation and revenue will determine the amount that can be borrowed. Because of the predictable nature of term loans, contractors can always be sure that they have the monies they need to keep their enterprises afloat. That being said, it is the very consistency of these lending mechanisms that can be frustrating to entrepreneurs, who cannot change the length or terms of the loan once it has been put into place. Furthermore, the application process can be long and drawn-out and the contractor might be required to take out insurance on the assets purchased via the loan. Finally, late fees are usually charged if payments are not on time.

Do any of these business models sound familiar? If you find yourself in a sticky financial situation, you’re not alone. Fortunately, lending solutions abound. Find the one that matches your unique needs and business situation, and your money worries can become things of the past.

Ronis Gracie Finance Journalist

A serial entrepreneur experienced with building several small companies from the ground up and consulting for many others, Ronis understands the finer points of small business financing. He’s passionate about small business & is committed to simplifying small business lending for others.
LinkedIn