Fast Working Capital Options
Over the past few years we’ve seen a major change in financing products offered by both bank lenders and alternative institutional lenders. As financial technology innovations (FinTech) have come on board, the number of financing products and types of business loans have greatly increased. These new financial products — and the underwriting processes behind them — require less human analysis during the underwriting process and, instead, rely on algorithms to decide approvals and rates. By relying on new ways of underwriting business loans helps streamline the entire due diligence and underwriting processes as compared to financing processes of old. By streamlining the processes, working capital loans that may have taken a month (or months) to underwrite in previous decades, and now be done in the matter of weeks, if not days, leading to fast working capital funding for small business owners in need of quick financing.
Fast Working Capital Uses
- Expansion financing
- Cash flow
- Advertising
- Purchase machinery
- Purchase supplies
Generally speaking, the faster that a financing company is willing to provide funding, the higher the rates and shorter the terms associated with the loan will be. So in return for speed of funding, there is a trade off in that the business will end up paying a higher rate, and have a much shorter payback period (which increases the amount of daily, weekly and monthly payments). The most common types of fast working capital loans for small and medium-sized businesses include (among others):
- Term Loans
- Lines of Credit
- SBA Loans
- Alternative Loans
- Lines of Credit
- Merchant Cash Advances
| Rates | Terms | Funding | ||
|---|---|---|---|---|
| Bank | 6-10% | 3-7 years | 14-30 days | |
| SBA | 6-10% | 3-7 years | 10-30 days | |
| Line of Credit | 5-15% | 1 – 3 years | 7-30 days | |
| Alternative | 6-25% | 1-5 years | 5-7 days | |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days | |
| Invoice Finance | 1-2% weekly | 1 – 90 days | 1-3 days |
Cash Advance Working Capital
Merchant cash advance working capital financing is not an actual loan, but a business-to-business transaction consisting of the sale of the company’s future revenue from bank and/or credit card deposits. Rather than seeking a true loan through a bank or other lending institution, the business is able to access fast funding by simply selling a portion of their future deposits, and then payback the merchant cash advance company the amount owed plus an additional percentage (through use of a factor rate).
Cash advance process
The application process for a merchant cash advance is relatively easy and requires minimal credit and business documentation. How it works:
1. Credit Application
You’ll need to fill-out an application and have all owners who hold 20% equity in the company complete the form.
2. Supply most recent 6 months bank statements
The merchant cash advance lenders use the cash-flow from the previous 6 months to decide what the maximum amount of funding they will provide. Usually the max is 20% of annual sales
3. Receive cash advance offer
The cash advance company will then supply with an offer (including funding amount, terms and factor rate). After receiving your offer, the merchant cash advance company will need a voided check and a copy of photo ID.
4. Get funded
Once your bank account has been verified, the lender will then immediately wire funding amount to your bank account.
Fast Invoice Financing
Invoice financing (or “invoice factoring”) is a way for small businesses to leverage their unpaid 1-90 invoice to obtain necessary working capital. If a small company has an invoice they’d like to factor, they use the invoice as collateral to obtain a percentage as working capital, and then collect remaining amount when the invoice is paid. In return for providing a percentage of the value of the invoice, the factoring company will charge a fee. Each week the invoice goes unpaid, the factoring company will usually charge additional fees.
Invoice finance process
1. Credit Application
You’ll need to fill-out a basic application including information of all owners of more than 20%.
2. Supply invoice
The factoring company will then decide how much of the unpaid invoice they will forward to the seller of the invoice
3. Receive factoring offer
The factoring company will then set rates and terms associated with the factoring facility. Usually the company will forward up to 93% of the invoice, charge of a fee of 1-3%, and then charges additional fees for each week the invoice goes unpaid.
4. Get funded
Once you complete the contract offer supplied by the factoring company, you will be funded immediately
SBA Working Capital
While SBA loans have a reputation for having a very slow funding process (and they can be slow to fund) there are SBA financing programs that can provide SBA loans within two weeks of initial application. Using the SBA Express loan program, certain SBA lenders are able to qualify borrowers within minutes, and conduct a full underwriting within days. After that, the SBA is able to sign-off of the financing within 36 hours of receiving the loan request. Lenders are able to use their own paperwork (instead of SBA paperwork) which speeds-up the entire funding process.
SBA process
1. Provide documentation to SBA lender
The SBA lender (large bank, small bank, community bank, non-profit lender) will ask for the following financial documentation: 3 years business tax returns, 3 years business financials, 3 years personal tax returns, schedule of liabilities, personal financial statement and AR & AP aging schedules.
2. SBA Lender issues a term sheet
The lender will then offer a term sheet that state rates, term, amortization, SBA fees, lender fees, and equity injection.
3. Due Diligence
Once the term sheet is executed, the SBA lender will require business and/or personal documents required by both the lender, and the SBA itself, to conduct further due diligence and underwriting.
4. Get a letter of commitment
After due diligence and a full underwriting, the lender will then issue a Letter of Intent. After the LOI is executed, the SBA lender will then send entire package to SBA for approval.
5. Get funded
Once the SBA signs-off on the SBA lender’s approval, the lender will then move forward with funding.
Bank Working Capital
While bank term loans and lines of credit are, in fact, the healthiest of all the small business lending options, they also have the most stringent approval and due diligence processes of all commercial financing options. Because banks offer the lowest rates, they are also unlikely to take much risk. Therefore there is usually a due diligence and underwriting process (that requires extensive business and personal financial documentation) that takes around a month to conduct.
Bank process
1. Submit financial documents to lenders
Provide 3 years tax returns, 3 years financials, schedule of liabilities, A/R & A/P aging schedules.
2. Lender issues term sheet
Once all documents are gathered for initial approval, and if the financials make sense from the lenders’ perspective, they will then issue a term sheet noting the terms, rates, amortization and fees
3. Underwriting
Once a borrower has signed the term sheet, the lenders’ underwriters will then ask for additional documents for due diligence underwriting and purposes.
4. Get a letter of commitment
After due diligence and a full underwriting, the lender will then issue a Letter of Intent.
5. Get funded
After the bank has issued all documents, and once those documents are executed, the lender will then provide funding
Alternative Working Capital
For companies with decent credit who are looking for a fast short term working capital loan, without paying high-interest associated with merchant cash advances, there are a number of alternative loan options available. Using their own individual algorithms, mid-prime and institutional lenders are able to provide fast working capital in a week or less. A borrower is able to prequalify for a mid-prime loan within minutes, and can complete the funding process while providing minimal paperwork.
Alternative lending process
1. Submit application and 6 months bank statements
Once you’ve submitted an application and 6 months bank statements, an alternative business lender is able to prequlify a borrower within an hour.
2. Lender provides offer
The mid prime or alternative lender will then issue a range-of-terms to the borrower for the borrower to chose from.
3. Underwriting
Once a borrower has signed a contract with a range of terms
4. Get a letter of commitment
After due diligence and a full underwriting, the lender will then issue a Letter of Intent.
5. Get funded
After all documents have been issued, the lender will then provide funding
