Undercapitalized Businesses Can Turn To Pre-Bank Funding When Money Is Tight And Options Are Scarce

Written by allroads. Posted in Funding/Lending

Borrowing money
When a small manufacturer gets a major, million-dollar order, but they don’t have the cash on hand to make the goods because their outstanding invoices won’t be paid for 60 days, where do they turn for quick cash? When an inexperienced restaurant owner hires an under-qualified family member to handle the business’s accounting, and that family member makes a payroll tax error that will cost the business its liquor license unless they pay in full within 30 days, how do they come up with money in a pinch?

Pre-Bank Funding: Expensive Money When Cheap Money Isn’t Available

In many cases, banks don’t provide a suitable financial salutation for businesses that have been operating for less than three years. Unfortunately, a lack of operating capital at the outset of business creation crushes so many otherwise healthy businesses. But there are other options, even if they aren’t always as cost-effective as a bank-approved loan. Pre-bank funding enables businesses to obtain the capital that they need in order to deal with unexpected hiccups. This type of funding is available in two types :

Asset-Based Lending: Selling Invoices For Cash Up Front

An asset-based loan (ABL) is a loan against a customer’s invoices. This may be a great option for the manufacturer who needs to fill a big order, but doesn’t have the cash because his invoices haven’t been paid.

With an ABL, that manufacturer can sell his future invoices for 90 or 95 cents on the dollar. He or she receives the cash up front, the order is filled, and life goes on.

Merchant Cash Advances Leverage Credit Card Receipts

Merchant cash advances (MCAs) are an excellent tool for new businesses that have only been operating for six months or so and who complete most of their transactions via credit cards (such as the restaurant owner with the looming payroll tax bill).

If $80,000 worth of credit card bills arrive at the end of the month, a finance company can purchase a portion of those receipts for 65 or 70 cents on the dollar. MCAs are short term, they’re expensive, and absolutely appropriate in situations where cash is needed and options are scarce.

When they’re well understood and strategically utilized, ABLs and MCAs are solid financial crutches for undercapitalized businesses to lean on in the short term. For companies that don’t have a strong enough operating history, don’t have great credit or simply haven’t been established long enough to obtain capital any other way, pre-bank funding provides an expensive but often necessary solution.