Disadvantaged businesses often lack sufficient access to business financing options. Some reasons for this might include a lack of collateral, lower net worth, too little credit and banking history, or other tangible and intangible barriers. To pursue certain opportunities, businesses also often need faster approvals and access to funds than banks and other typical lenders can offer. Because of these obstacles to obtaining traditional loans, disadvantaged business owners may need to consider business financing alternatives, such as invoice factoring.
Over the past several years, Capstone has served as a primary or secondary financing source for a variety of minority, women, and disadvantaged business entities, or in short “MWDBEs.” We’re experts in making sure that companies can obtain the funding they need to pursue growth opportunities. Business owners can always contact Capstone with questions about business financing.
Has PPP Run Out of Funds to Lend?
Early in May 2021, the SBA announced that it could not accept more PPP loan applications. Out of $800 billion in forgivable loans meant to support small businesses through the pandemic, the fund only had $8 billion left, according to CBS News. Because of rapidly depleted funds and current borrower targeting, most small businesses cannot apply or get approved for PPP loans any longer, though the SBA said it would still process applications that had already been submitted.
The government earmarked the small pool of remaining funds for community banks that mostly serve MWDBEs. Even for disadvantaged businesses, the $8 billion is not expected to last long after considering it only took 13 days to use up the initial $350 billion in funding.
Alternatives to PPP for Small Businesses After PPP Ends
With the chance of obtaining one of these forgivable PPP loans largely gone, small businesses must compare other funding options. To get started, take a brief look at various financing alternatives, including invoice factoring, current SBA programs, bank lines of credit, business credit cards, and merchant cash advances.
| Source of Funding | Invoice Factoring | SBA Loans | Bank Lines of Credit | Business Credit Cards | Merchant Cash Advances |
| Approval/ Processing Time | 2 to 7 business days | At least 90 days and up to 6 -12 months | 1 to several business days | Instant to several business days | 2 to several business days |
| Qualifications | Creditworthy customers, quality account receivables | Multiple and varies by loan but typically includes collateral, prolonged history of financials, a certain length of time in business, and credit | Size of Corporate Balance Sheet, corporate liquidity, and value of personal assets; may require a prior relationship with the bank, above-average personal credit, and a personal guarantee | Excellent credit | Prior sales history, projected future sales, and a personal guarantee |
| Fees / Interest | In general, range from one to four percent fees for 30 days | Modest, interest rates vary by lender | Typically 15 percent APR or more | Typically, 15 percent APR or more | Expect 30 percent APR or more |
| Maximum Amount | No maximum; percentage of invoice or contract | $5,000,000 maximum | Varies | $15,000 – $30,000 maximum | Percentage of future revenues |
Invoice Factoring
Instead of having to wait 30 to 90 days for customers to pay invoices, qualified businesses can sell all or some portion of their accounts receivable to an invoice factoring company. This makes invoice factoring a great option for companies that are new, have faced some credit challenges, would rather not take on debt, or simply need funding fast.
Factoring fees usually range between one and four percent, making invoice factoring a low-cost alternative when compared to the interest rates on most small business funding options. Generally, a business is able to obtain an advance for their accounts receivable within a day or two once initial underwriting has been completed.
How to Apply and Qualify for Invoice Factoring
Qualified businesses usually generate invoices for other businesses or government contracts. Since the factoring company will assume responsibility for collecting accounts receivable, they’re mostly concerned about the creditworthiness of their client customers and quality of the accounts receivable. Processing time typically ranges from 48 hours to seven business days.
SBA Loans
The SBA has multiple programs, include some for traditionally disadvantaged business owners. Benefits of SBA funding may include competitive rates and flexible terms. Some even come with extra resources, like business mentoring, counseling, and education. Depending on the loan program and qualification, loans can range from as little as $500 to as much as $5 million. Some SBA loans impose restrictions on how the borrower can use the money.
Qualifying and Applying for SBA loans
Qualification depends upon the loan program. SBA might qualify businesses that have been declined by banks and other traditional lenders. Still, businesses typically need to demonstrate their ability to repay, and have a prolonged history of financials, certain length of time in business, and demonstrate that the company engages in sound business practices. Processing times and required documentation varies; however, typically expect to supply plenty of documentation and to wait at least 90 days and even up to 6 – 12 months for a loan decision.
Bank Lines of Credit
A line of credit from a bank can offer businesses a flexible way to draw upon funding when they need it. Lenders will offer each borrower their own maximum credit limit, which generally won’t exceed $250,000. Similar to credit cards, businesses can usually keep drawing on and repaying their balance, so long as they adhere to the terms. Interest rates for business lines of credit can vary wildly, but typically are around 15 percent or more.
Qualifying and Applying for a Bank Line of Credit
Banks generally want prospective borrowers to demonstrate creditworthiness and steady revenue over at least the past couple of years. Some online lenders also offer business lines of credit and may focus mostly on revenue and not even require business credit scores. Other lenders generally want to see credit scores of at least 600 to 650. Generally, the bank may have certain requirements for the size of the corporate Balance Sheet, corporate liquidity and value of personal assets. The borrower may also need at least six months of revenue, collateral or personal guarantees to secure financing.
Business Credit Cards
Business credit cards work somewhat similarly to lines of credit, though they typically have much smaller maximum balances. For instance:
- Credit card issuers generally limit maximum balances to around $15,000 – $30,000.
- Also, except for cash advances, businesses mostly use credit cards for purchases. Cash advances on credit cards usually come with higher interest rates than purchases too. A line of credit actually deposits cash into the business account.
Qualifying and Applying for a Business Credit Card
Qualifying for the best business credit cards generally requires good to excellent credit, with scores over 720. Even so, interest rates often range from 15 percent or more. Some credit cards also charge an annual fee.
Credit card companies offer online applications and can even provide instant approval decisions. Otherwise, expect to wait from 10 days to two weeks to get approval and a credit card in the mail.
Merchant Cash Advances (MCAs)
Targeted to businesses with steady receipts of credit and debit card sales, a merchant cash advance is a form of non-bank lending that gives businesses the chance to obtain an advance against future sales. The business repays the advance through an agreed-upon percentage of sales which the MCA company automatically withdraws on a daily or weekly basis from the business’s bank account. Fees vary considerably, but compared to most other financing sources, they’re extremely high, from a 30 percent APR up to triple digits. Generally, merchant cash advances can land small business owners in a never-ending cycle of debt and should be avoided at all costs.
Qualifying for a Merchant Cash Advance
Lenders will consider historical sales volume to estimate future revenues and will require a personal guarantee to secure funding. Very often, lenders can execute this process and offer approval decisions within a day or so.
Don’t Wait Until Your PPP Funds Run Out – Call Capstone for Business Funding Today
Capstone offers flexible factoring options for businesses in many industries. In particular, we understand the unique challenges faced by MWDBEs and we have been able to structure a funding platform specifically to support the working capital needs of these types of businesses. Capstone can serve as a primary funding source or can work within an existing bank relationship for opportunities that banks and other lenders have declined or take too long to approve.
Contact us today to tell us more about your business needs, and we will work hard to provide you with the best solution.
