Expanding a business can be a special time in the life of an entrepreneur. Bringing a vision into reality to where it can then begin to grow is an achievement a business owner can take pride in.*
One reason many small business owners fail to grow is due to a lack of funds. Some businesses can finance expansion through cash flow, but many need financing.
Pepperdine University polled 2,693 business owners between June 29th and July 17th, 2015. The results were reported in the University’s Private Capital Access Index.
The study reports that 60.3% of small and medium sized businesses with any financing needs will tend to use funds for growth. 64% of businesses under $5 million in sales, who will seek capital in the next 6 months, will likely use the money for planned future growth or expansion. Additionally, 51% of those businesses looking for capital cited growth or expansion, (including acquisition) as the main reason for seeking financing.
The study also reports that 67% of businesses with under $5 million in sales find it difficult to raise new external financing. 48.9% of these businesses attempted to acquire a loan through a bank during the prior 3 months, with only 30.1% finding success.
Bank financing can be accessible to some businesses, but the results clearly show that most small business owners will need to look further to access the capital they need.
Can Merchant Cash Advances Fuel Business Growth?
It’s common for small business owners who can’t get a bank loan to turn to options such as merchant and business cash advances to finance growth. Entrepreneur Magazine recently published an article, Getting a Merchant Cash Advance is Easy but Repayment can be Onerous. The article explains that in many cases, the high-cost, short-term nature of these products can create bigger problems than they solve.
These problems can arise from the large size of the payments, which are due on a monthly basis. Consider a $100,000 loan that must be paid back over 6 months. The “typical” six-month advance includes a factor rate of 1.25. This means for every $1 advanced, $1.25 must be repaid. Accordingly, receiving $50,000 under these terms would entail repayment of $125,000. Payments may be presented as $1,000 per business day, which equates to an average of $20,833.22 monthly.
Additionally, most loans are presented in terms of an annual percentage rate, or “APR.” Business and merchant cash advances, however, do not carry the same type of disclosures. This can make it more difficult for some borrowers to compare terms on an “apples-to-apples” basis. For instance, the corresponding APR to a $125,000 paid back against $100,000 over six months is a 96.32% interest rate.
While the above outlined financing may make sense in some very limited cases, often business owners may find there are more sensible ways to obtain funding to expand a business.
Term Loans for Business Expansion
Some small businesses that have been declined by a bank do not realize that short-term, high-cost financing is not the only option. In many cases, a term business loan can be a good alternative.
When compared to cash advance products, term business loans generally feature:
- Lower rates
- Lower payments
- Longer Terms
Consider the $100,000 loan just discussed that could result in monthly payments of $20,833.22 and a 96.32% interest rate.
LoanMe offers a term loan product for business owners who happen to also own their home. Not all applicants would qualify for this product, but for comparison, this loan features:
- 10-year repayment term with no prepayment penalties
- Interest rates from 14.99% to 24.99%
- Monthly payments from $1,607.24 to $2267.89
- Loan amounts from $76,000 to $250,000
Note that the required monthly payments would be from $18,565.33 to $19,225.28 lower than with a corresponding daily payment loan at a 1.25 factor rate.
For small business owners, who do not own their homes, LoanMe also offers loans ranging from $6,000 to $75,000. The interest rates and terms of these loans vary based on a business’ situation and a detailed model of the terms available by state can be found here.
In many cases, when seeking a business expansion loan, term loans can cost significantly less than some commonly used options such as a merchant cash advance. It is important to consider the total cost of funds, both in terms of monthly payments and interest rates.
*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Copyright © 2015 LoanMe, Inc. All rights reserved.