Business Finance Funding With Credit Card Financing

In the face of a growing commercial finance funding crisis, many small business owners are exploring new options for commercial financing. Credit card loans and business cash advances are two working capital financing strategies which are proving to be practical and effective sources of operating cash for commercial borrowers.

The use of credit card financing often refers to business cash advances in which working capital is obtained by business owners based upon future credit card processing activity. Alternatively the use of personal credit cards to obtain a cash advance is also referred to as a credit card loan. With business finance funding shortages, small business owners are increasingly using both approaches to obtain operating cash for their business. The two financing approaches are not equal in terms of how they are viewed by commercial financing experts although the strategies might be called by the same name occasionally.

Many commercial lenders have suddenly reduced or cancelled business lines of credit and other forms of working capital loans. In response, many business owners have been forced to rely on cash obtained via their personal credit cards to sustain their businesses. We strongly urge all commercial borrowers to review our predatory lending discussion in The Working Capital Journal in order to prepare for some of the most undesirable actions being taken by many lenders which have a substantial credit card loan exposure.

There are two particular observations we want to emphasize about small business owners using personal credit cards to obtain operating cash: (1) This really is a business financing method of last resort that should be avoided whenever possible. Before assuming that this is the only source of capital available, commercial borrowers should consult with a working capital finance expert. The possibility of business cash advances and working capital loans should be thoroughly explored. (2) This questionable method of obtaining commercial finance funding will prove to be increasingly more difficult because credit card issuers are already cutting back on their unsecured lending programs.

Like reductions in their lending programs for business lines of credit, most banks are now making similar cutbacks in credit card lending. They are reducing or cancelling credit lines even when borrowers have a superb payment record. The rationale for banks reducing both credit card lines and commercial lines of credit is similar. With unsecured commercial loans or personal loans, banks fear that massive defaults are almost inevitable due to a very shaky economy and business lending climate. Unlike residential real estate financing in which real property is pledged as collateral, banks know that they have no collateral to fall back on with working capital loans and credit card loans because they are unsecured. Many small business owners use home equity lines of credit to obtain operating cash, and these funding sources are also diminishing in most areas of the United States. Although these lending programs are backed by collateral, the value of homes in many areas has decreased to the point that many outstanding loans exceed the current property value.

One of the most disturbing and frustrating occurrences in the current difficult commercial financing environment is the lack of clear information for many business owners about which funding options are realistic and possible. This factor alone has probably led thousands of commercial borrowers to obtain operating cash from their personal credit cards when there were better alternatives.

Due to the growing tendency of several major credit card issuers to exhibit predatory lending practices, the use of personal credit card loans should be avoided. At a minimum, each business owner should contact a business finance funding expert to determine if a business cash advance program or a working capital loan program can be used to obtain needed cash.

Business Financing Survives Despite Mixed Lending Signals

The usual political example of “mixed signals” is depicted by conflicting statements made by politicians in different settings, but the use of “mixed signals” is no longer restricted to the world of politics. As banks become more connected with politics, it should come as no surprise that “mixed signals” is now as accurate in describing the financial world as it is with the political world. Unfortunately for small business financing, “mixed signals” has become a regular description that applies to business loans and working capital.

As a descriptive phrase, “mixed signals” most frequently includes references to confusion and variation as well as deception. Particularly in a competitive business world where the mere appearance of confusion or deception can be devastating, this phrase is routinely intended to be critical and negative. With this viewpoint, it is striking to see how often “mixed signals” or similar words have been used to describe current banking activities (based on a recent online search). The use of “mixed signals” seems to be appropriate and accurate (especially when viewed through the lens of commercial borrowers and business owners) because the words and actions of many banks are currently at odds with each other.

Commercial credit lines have been increasingly reduced or revoked entirely and fewer commercial mortgages are being completed in most locations even though lenders have indicated that business lending is proceeding at a normal pace. A direct result of this is confusion among business owners about the true availability of business financing and commercial real estate financing. Due to mixed signals as well as other factors, many commercial borrowers are now reluctantly admitting that banks are just not what they used to be. In a way similar to many automobile manufacturers that are now a tarnished and shriveled version of what they once were, it seems like almost overnight most banks have lost the confidence of the public. With such changes, small business owners are facing a new commercial loan environment and must adapt quickly. Because their business banker is not as likely to be up to the task anymore, small business owners should not hesitate to admit that they must look out for their own best interests.

The analysis here is intended to be a candid and practical evaluation of a situation currently faced by many small business owners. When unwinding a long-term relationship with a bank or banker, some of the same trauma that occurs when any positive relationship suddenly goes sour is likely to be present. Parties are likely to move forward after doing the best that they can. When making decisions involving potential changes, a small business owner considering whether to fire their banker should analyze the likely consequences if no changes are made. If keeping the old bank is holding their business back, either by bad advice or inadequate business financing, most business owners will conclude that they should seek a new bank.

There appears to be an adequate supply of new small business finance sources to fill the void left by the exit of many banks and other lenders from commercial lending despite the confusing and complicated lending climate for small businesses. Having a reliable and effective business loan provider to consistently support the operational requirements of their business is what matters to most business owners after all is said and done. Several outcomes can be produced by small business loan confusion. Individual circumstances will cause final decisions to vary for commercial borrowers effected by mixed lending signals. One of the most difficult issues to be considered in the process of small business finance decision-making is the feasibility of finding a new working capital financing or business financing source.

Business borrowers should be prepared to take a more personal and active role in the commercial finance needs of their business in order to increase the chances of their business surviving despite mixed signals from commercial lenders. There are a number of business financing resources which will describe specific commercial finance issues in more detail for small business owners seeking to learn more about any mixed signals they are experiencing with business loans.

Business Financing Options Hurt by Commercial Lending Changes

Recent commercial lender changes are likely to impact most small business owners. If a commercial borrower wants to continue their present banking relationship, they will find (in most cases) that the business lending changes are permanent and cannot be avoided. A few new and more flexible commercial lending sources represent a welcome exception to this trend.

One of the biggest commercial lending changes involves new guidelines for working capital financing. Most banks appear to be quietly eliminating business lines of credit or severely reducing the amount they are willing to finance to a level which is not helpful to an average business. Very few businesses can survive without a reliable source of working capital, so this change promises to receive the highest priority from most small businesses. To replace the disappearing commercial lines of credit, the most practical options for business borrowers include working capital loans and merchant financing from one of the alternative commercial finance sources still active in small business financing programs.

The difficulty of locating investment property financing illustrates another business lender change. If the commercial property is considered to be owner-occupied (the owner occupies a substantial portion of the building), more banks will be interested in making commercial real estate loans. Investors that do not occupy the property often own business properties like shopping centers and apartments. For many banks, it appears that they are currently restricting their commercial lending activities to those which qualify for SBA loans (Small Business Administration) which generally exclude investor-owned situations.

A third significant business lending change is demonstrated by revised guidelines for refinancing commercial real estate loans. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. In some areas and for specific types of businesses, many banks will no longer lend over half of the appraised value. While this causes difficulties when attempting to buy a business, the problems for a commercial borrower reach a crisis magnitude when refinancing an existing commercial loan. In many cases the original business loan was based on a much higher percentage of business value than the bank is currently willing to provide. The lending problem is further compounded when a current appraisal reveals a decrease in value since the original loan was made. Due to a distressed economy which frequently results in decreased business income that then leads to lower commercial property values, such an outcome is especially common.

In a fourth example of commercial lending changes, for virtually all small business finance programs many small business owners have already discovered an inflated fee structure from most banks. Perhaps the bank perspective for some of the commercial financing fee increases is that they need to find a revenue source to replace the diminishing income from small business loans which has resulted from bank decisions to decrease commercial loan activity. When they encounter suddenly increased business financing fees levied by their current bank, business borrowers should seek different commercial funding sources except in unavoidable and unusual circumstances.

A final example of commercial lender changes is depicted by banks changing their overall guidelines for small business financing. Many banks have effectively stopped making any new commercial loans to small businesses regardless of business income or creditworthiness. Unfortunately these banks are not announcing publicly that they have discontinued small business finance activities. This means that while they might accept business loan applications, they do not intend to actually finalize commercial financing in most cases. Whenever it becomes obvious that the bank has no real intentions of making a requested working capital loan or commercial mortgage, this approach has clearly frustrated and enraged business borrowers.

The five commercial lending changes described above are unfortunately the proverbial tip of the iceberg. As they approach business lenders to obtain commercial real estate financing, working capital loans and small business financing, business owners will need to be especially skeptical and diligent.

What Went Wrong with Commercial Lending and Business Financing?

By exploring what went wrong with commercial lenders and small business financing, business owners will be better prepared to avoid serious future problems with their working capital financing and commercial real estate financing. This is not a hypothetical issue for most commercial borrowers, particularly if they need help with determining practical small business finance choices that are available to them. Business owners should be prepared for the banks and bankers who caused the recent financial chaos to say that nothing has gone wrong with commercial lending and even if it did everything is back to normal. It is hard to imagine how anything could be further from the truth. Commercial lenders made serious mistakes, and according to a popular phrase, if business lenders and business owners forget these mistakes, they are doomed to repeat them in the future.

Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. Unsurprising negative results were produced by the attempt to produce quick profits and higher-than-normal returns. The bankers themselves seem to be the only ones surprised by the devastating losses that they produced. After two years of trying unsuccessfully to get someone else to pay for their errors, the largest small business lender in the United States (CIT Group) recently declared bankruptcy. We are already seeing a record level of bank failures, and by most accounts many of the largest banks should have been allowed to fail but were instead supported by artificial government funding.

When making loans or buying securities such as those now referred to as toxic assets, there were many instances in which banks failed to look at cash flow. For some small business finance programs, a stated income commercial loan underwriting process was used in which commercial borrower tax returns were not even requested or reviewed. One of the most prominent business lenders aggressively using this approach was Lehman Brothers (which filed for bankruptcy due to a number of questionable financial dealings).

Bankers obsessed with generating quick profits frequently lost sight of a basic investment principle that asset valuations can decrease quickly and do not always increase. Many business loans were finalized in which the commercial borrower had little or no equity at risk. When buying the future toxic assets, banks themselves invested as little as three cents on the dollar. The apparent assumption was that if any downward fluctuation in value occurred, it would be a token three to five percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. For banks which made the original commercial mortgage loans on such business properties, commercial real estate is proving to be the next toxic asset on their balance sheets. In contrast to the government bailouts to banks having toxic assets based on non-performing residential loans, it is unlikely that banks will receive similar financial assistance to cover commercial mortgage problems. As a result, a realistic expectation is that such commercial finance losses could produce serious problems for many banks and other lenders over the next several years. Much to the dismay of all business owners and as mentioned in the next paragraph, many commercial lending programs have already been dramatically reduced.

An ongoing problem is illustrated by misleading lender statements about their small business financing activities. While many banks have routinely indicated that they are providing business financing on a normal basis, the actual results by almost any standard indicate otherwise. It is obvious that lenders would rather not admit publicly that they are not lending normally because of the negative public relations impact this would cause. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone.

There are practical and realistic small business finance solutions available to business owners in spite of the inappropriate commercial lending practices just described. Due to the lingering impression by some that there are not significant commercial lending difficulties currently, the intentional emphasis here has been a focus on the problems rather than the solutions . Despite contrary views from bankers and politicians, collectively most observers would agree that the multiple mistakes made by banks and other commercial lenders were serious and are likely to have long-lasting effects for commercial borrowers.

Business Finance Survival Guide

Due to the increasing failure of banks to provide an adequate level of commercial funding, the strategies described in this article should be considered by most business borrowers in the initial stages of their commercial financing efforts rather than as a last resort. This article is designed to provide a practical starting point for a commercial finance survival guide, and finding effective guidance for obtaining small business finance help is likely to be a high priority for most business owners.

The necessity for small business owners to adopt aggressive tactics has been created by an ongoing failure of banks to provide adequate business financing options. An important goal for any small business owner is clearly surviving the current business finance crisis. This article will illustrate the importance for small business owners doing whatever it takes to survive in a tough commercial lending climate.

For many commercial borrowers, the option of firing their lender has not yet become apparent. In adopting an aggressive business loan approach that is increasingly essential for business owners impacted by widespread banking chaos, it is unlikely that their banker is up to the task anymore and therefore commercial borrowers should be prepared to look out for their own financial interests. One of the most predictive signs that a commercial borrower might need to fire their lender is when their commercial banker is unable to finalize the business financing which was initially discussed or offered.

The use of innovative financing tactics means that some small business loan options which borrowers previously ruled out because they were too costly or complicated might deserve another look to survive in an erratic lending climate. A key example of a commercial financing strategy which has probably been a Plan B for many small businesses but not their eventual choice for acquiring more working capital is a merchant cash advance program (also referred to as merchant financing and business credit card advances). With a sudden reduction in business lines of credit and an increased requirement for collateral by many commercial lenders, the use of credit card processing to obtain working capital now has more practical appeal for the typical small business owner who needs more cash for their daily operations.

A high priority for any commercial borrower is distinguishing the good banks from the bad banks. An ability to provide required commercial financing options is perhaps the most practical gauge for a small business owner to define whether a bank is good or bad. There are multiple reports confirming that most banks are no longer offering a normal level of business funding. It is reasonable to conclude that if a bank is not providing commercial loans as usual, it certainly might be because they do not have sufficient financial resources for small business lending. On the only scorecard that matters to most business owners, the few good banks will gradually become obvious based on their documented small business lending activities. In the meantime, business owners should expect to need some professional help in finding these few remaining good banks.

A lack of sufficient information can lead to devastating consequences as is often the case in many activities which are guided by technical aspects. Using a a business consultant who is a small business loan expert is a practical way for business owners to overcome a substantial information gap. The current business lending climate is likely to be discouraging for inexperienced borrowers when evaluating banks which are not functioning normally or are providing only complicated (and expensive) small business financing programs. Finding pragmatic solutions can be facilitated by business consultant experienced in the ways of overcoming commercial lending problems.

In all probability locating new and reliable business lending sources will be an essential element in surviving the commercial financing crisis. But in addition to considering new lending sources, new small business finance strategies should be reviewed. There are several other business finance choices which should be evaluated by business borrowers before arranging their commercial loans (in addition to the aggressive financing strategies already discussed). Receivables factoring is a key example. Difficulty in matching the timing of income with expenses is routinely experienced by many successful businesses. Arranging a business line of credit with a bank was previously how many businesses handled this kind of situation. Receivables financing has emerged as a primary commercial finance tool for many businesses because commercial lines of credit are rapidly disappearing as a realistic alternative. Like most of the promising business financing options which can effectively replace current bank financing, small business owners will need to take the initiative to explore and analyze such choices.

7 Critical Business Financing Mistakes

Avoiding the top 7 business financing mistakes is a key component in business survival.
If you start committing these business financing mistakes too often, you will greatly reduce any chance you have for longer term business success.
The key is to understand the causes and significance of each so that you’re in a position to make better decisions.
>>> Business Financing Mistakes (1) – No Monthly Bookkeeping.
Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making.
While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.
And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.
By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.
>>> Business Financing Mistakes (2) – No Projected Cash Flow.
No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.  
Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.
Even if you have a projected cash flow, it needs to be realistic. 
A certain level of conservatism needs to be present, or it will become meaningless in very short order.
>>> Business Financing Mistakes (3) – Inadequate Working Capital
No amount of record keeping will help you if you don’t have enough working capital to properly operate the business.
That’s why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.
Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.
When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle.
>>> Business Financing Mistakes (4) – Poor Payment Management.
Unless you have meaningful working capital, forecasting, and bookkeeping in place, you’re likely going to have cash management problems. 
The result is the need to stretch out and defer payments that have come due.
This can be the very edge of the slippery slope.
I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.
The primary targets are government remittances, trade payables, and credit card payments.

>>> Business Financing Mistakes (5) – Poor Credit Management
There can be severe credit consequences to deferring payments for both short periods of time and indefinite periods of time.
First, late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.  
Second, NSF checks are also recorded through business credit reports and are another form of black mark.
Third, if you put off a payment too long, a creditor could file a judgement against you further damaging your credit.
Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.
It gets worse.
Each time you apply for credit, credit inquiries are listed on your credit report.  
This can cause two additional problems.  
First, multiple inquiries can reduce you overall credit rating or score.  
Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.
If you do get into situations where you’re short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won’t jeopardize your credit.
>>> Business Financing Mistakes (6) – No Recorded Profitability
For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.
Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.
Before short term profitability is demonstrated, business financing is based primary on personal credit and net worth.
For existing businesses, historical results need to show profitability to acquire additional capital.
The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited accountant.
In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.
>>> Business Financing Mistakes (7) – No Financing Strategy
A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.
This sounds good in principle, but does not tend to be well practiced.
Why?
Because financing is largely an unplanned and after the fact event.
It seems once everything else is figured out, then a business will try to locate financing.
There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.
Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.
However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.
This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.

Small Business Finance: Finding the Right Mix of Debt and Equity

Financing a small business can be most time consuming activity for a business owner. It can be the most important part of growing a business, but one must be careful not to allow it to consume the business.  Finance is the relationship between cash, risk and value.  Manage each well and you will have healthy finance mix for your business.

Develop a business plan and loan package that has a well developed strategic plan, which in turn relates to realistic and believable financials.  Before you can finance a business, a project, an expansion or an acquisition, you must develop precisely what your finance needs are.
Finance your business from a position of strength.  As a business owner you show your confidence in the business by investing up to ten percent of your finance needs from your own coffers.  The remaining twenty to thirty percent of your cash needs can come from private investors or venture capital.  Remember, sweat equity is expected, but it is not a replacement for cash.

Depending on the valuation of your business and the risk involved, the private equity component will want on average a thirty to forty percent equity stake in your company for three to five years.  Giving up this equity position in your company, yet maintaining clear majority ownership, will give you leverage in the remaining sixty percent of your finance needs.               
The remaining finance can come in the form of long term debt, short term working capital, equipment finance and inventory finance.  By having a strong cash position in your company, a variety of lenders will be available to you.  It is advisable to hire an experienced commercial loan broker to do the finance “shopping” for you and present you with a variety of options.  It is important at this juncture that you obtain finance that fits your business needs and structures, instead of trying to force your structure into a financial instrument not ideally suited for your operations.     

Having a strong cash position in your company, the additional debt financing will not put an undue strain on your cash flow.  Sixty percent debt is a healthy. Debt finance can come in the form of unsecured finance, such as short-term debt, line of credit financing and long term debt.  Unsecured debt is typically called cash flow finance and requires credit worthiness.  Debt finance can also come in the form of secured or asset based finance, which can include accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government guaranteed finance.  A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is the advantage of having a strong cash position.
The cash flow statement is an important financial in tracking the effects of certain types of finance.  It is critical to have a firm handle on your monthly cash flow, along with the control and planning structure of a financial budget, to successfully plan and monitor your company’s finance.

Your finance plan is a result and part of your strategic planning process.  You need to be careful in matching your cash needs with your cash goals.  Using short term capital for long term growth and vice versa is a no-no.  Violating the matching rule can bring about high risk levels in the interest rate, re-finance possibilities and operational independence. Some deviation from this age old rule is permissible. For instance, if you have a long term need for working capital, then a permanent capital need may be warranted.  Another good finance strategy is having contingency capital on hand for freeing up your working capital needs and providing maximum flexibility.  For example, you can use a line of credit to get  into an opportunity that quickly arises and then arrange for cheaper, better suited, long term finance subsequently, planning all of this upfront with a lender.

Unfortunately finance is not typically addressed until a company is in crisis.  Plan ahead with an effective business plan and loan package.  Equity finance does not stress cash flow as debt can and gives lenders confidence to do business with your company.  Good financial structuring reduces the costs of capital and the finance risks. Consider using a business consultant, finance professional or loan broker to help you with your finance plan.