Are merchant cash advances, term loans, or other bank loans right for your small business?
When planning and choosing a career, students may opt for graduating from A university under the misconception that only then will they find it easier to get a job and earn a high salary. Meanwhile, the students opting for completing an apprenticeship to develop a Tradesman’s Skill, are also afforded endless job opportunities, stable careers, and earn well, even becoming business owners.
Tradesman’s skills learned during on-the-job or apprenticeship training can be utilized across several industries, such as plumbers, electricians, and carpenters in the construction industry or tool-and-die makers, quality controllers, and metal fabricators in the manufacturing industry. A tradesman’s skill equips him to apply practical knowledge, even in tricky situations, whilst providing specific services. Once qualified and experienced a tradesman may feel confident in opening and running his own trade or manufacturing business.
Why would you need a short-term loan?
There are times whilst running a business that taking short-term loans becomes necessary. It could be for start-up business capital, or ready cash flow until customers pay. It could be to purchase the machinery required for running your business. It may not be for start-up costs, but necessary later on, for business expansion by upgrading and purchasing new equipment, or a property. Short-term loans may seem attractive when trade has been quiet, resulting in lower revenue. It could be to cover business debt incurred after several years of trade.
Let’s look at several short-term loan options.
- Trade credit is a good way of keeping money in your business longer for your own running costs and extending repayment terms from the usual 30 days to 45 or 60 or even 90 days.
- You can arrange a bank overdraft. This will enable you to draw cash from the bank for capital expenditure, or on a monthly basis if your business is not generating enough to meet the running costs. A limit is set and interest is added to the amount you borrow and a time set for you to repay.
- Credit cards offer interest-free loans, if you charge items, or withdraw cash and pay it back before the due date. This provides you with a short term loan of under 30 days.
- If ready cash is needed, factoring your Debtors can be an option. Basically, you turn customer invoices owed to you, into instant cash. Accounts receivable factoring companies give you money upfront that is due from your customer invoices. And they then wait to be paid by the customers. As your income increases, the factoring company gives you more working capital, based on your customer invoices. It is a safe way to operate, with credit protection and unlimited working capital. Online companies as well as banks, offer short-term loans, requiring applications to be completed. You would be required to provide your company records, reflecting your company sales and profit made, as well as your credit score. It is best to compare what rate of interest your bank would charge compared to an online company.
- MCA loans are merchant cash advance loans, asking for minimal requirements and paperwork, offering a fast approval rate, but the cash is loaned to you at a high-interest rate, some as high as 45% and up to 60 % by the time they are paid off. These loans are ready cash paid out to you in a lump sum, in exchange for your income still to be received. Or a payment plan allows the merchant to do a daily or weekly ACH withdrawal from your account. It is easy for a business to get trapped into relying on these MCA loans.
- Aware of the manufacturing industry’s importance on the country’s economy, SBA Loans were implemented to assist manufacturing companies that are unable to secure a loan from a bank due to risk. These are supported by the US Government, which absorbs some of the lender’s loss, in the event of the borrower becoming unable to pay the SBA loan
Always read loan agreements very carefully to see what you are signing for. If the Bank requires you to sign a personal guarantee, realise that makes you personally responsible for the company loan. The SBA loan will make you responsible for 100 % of the money borrowed. This gives the bank more security by making you personally responsible for the business debt. In the instance where a business cannot repay the loan, debtors invoices can be collected, equipment and assets sold, leaving the balance which they can sue you personally for. With full personal guarantee, some loans require your house, or assets to be collateral, and if you cannot pay they can be attached.
Short term loans
Short-term loans are easy to arrange without much paperwork or guarantees required. Unlike long-term loans that require sureties, lots of paperwork, even continued monitoring of your business records by the financial lenders, but with a low-interest rate. Having a short-term loan can have a long-term negative effect on a business. The interest rate is always high. Whilst experiencing difficult times, the assets and income are at risk. If you do not have enough capital to run the business and need to borrow, the business may not be sustainable. There is a risk in relying on borrowing money, as unforeseen expenses can deter you from paying back the debt, leading to further borrowing and more debt and even bankruptcy. Becoming a bad payer affects your credit score. Debt can affect your sale, putting prospective buyers off, or causing you to reduce your selling price. You cannot assume the buyer will be happy to inherit your debt. Often it is best to settle the debt out of your proceeds of the sale, obviously reducing your profit.
Selling your business
Selling your manufacturing business has a few golden rules, to make the procedure smoother. Just like when you sell your house, a neat clean appearance creates a good impression of your factory. Tidy up, clean your machines leaving the prospective buyer with a view of well-maintained machinery for sale and an orderly successful business.
Seeing as your manufacturing business needs to carry on until sold if possible employ a marketing specialist. They will advise what information prospective buyers will need to see, to attract a deal. Amongst others, your tax returns and financial statements will need to be up to date for the last 3 years of trade. They will want to see your income and expenditure, your ageing accounts receivable, and accounts payable. Very important will be a full list of assets and machinery, with all details such as make, model purchase price, and date.
Experienced and professional, they can take the time-consuming task off your hands, by advertising and sourcing buyers locally and internationally. The vetting process would be done confidentially and give you peace of mind with all the legalities covered and an offer brought to you to sign. They will advise you on dates of signature, transfer, selling price, and the best type of sale agreement, with a guarantee and payment plan for your peace of mind. A stock date with inventory will need to be done on the day of handover.
Short-term Loans do serve their purpose, but the power is in your hands as the owner of a trade business to decide if you need them? When, why and how best to repay and manage short terms loans, is your choice in most instances. To avoid a negative impact and rather achieve a positive impact on your trade business make sure they are paid back as quickly as possible and within terms as a minimum.