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Restructuring Debt in the Small Business

Many small businesses find themselves in a precarious position. Far too frequently, they are forced to utilize what would normally be classified as short term funding and are forced to position it as a long term debt. For example, a small business may often take their business credit card accounts and utilize the available credit to carry operational costs or even fund expansion. Access to these types of credit lines are meant for satisfying short term needs, such as office supplies, travel, or emergency expenditures that cannot be entered in a line item on a pro-forma. Once these cards are used for working capital or major purchases, the debt is staged at high interest rates and the term is spread out over an extensive period of time. In addition to this, the small business loses the ability to access revolving credit in the manner for which it was meant for. Over the past several years, we have seen the addition of alternative lending products such as the merchant advance and business checking account advance loans as well as the more traditional invoice factoring programs enter into the short term capital space. Unfortunately, products such as these are expensive and have unfavorable repayment terms. Many businesses utilize these programs to free up revolving credit and in the process, debilitate their cash flow position.

Business-DebtsThe attraction of these finance products has been the relaxed qualification criteria and the speed with which these transactions are closed. With funds made available in a matter of days, business owners find themselves in possession of much needed capital. Often misguided by the thought that SBA financing and other more conventional products have stringent qualifications and take the upwards of several months, business owners tend to shy away from even inquiring as to what may be available to them. One such program, the Small Business Administration Section 7 (a) Small Loan Advantage program is actually mirrored in nearly every way to the alternative products that are in the marketplace. Like the alternative programs, credit qualifications are relaxed, documentation requirements are streamlined and the entire process from application to closing takes place in a s few as 7 business days. After these similarities, the differences are vast.

Merchant and business checking advance loans often require payments on a daily basis over short terms and at interest rates as high as 200%, as well as exorbitant origination fees. The Small Loan Advantage offers fixed terms of up to 10 years, interest rates as low as 6%, and origination fees typically half of their alternative counterparts. The difference that a loan from the SBA makes when compared to its competitor is staggering. Let’s take a look at a business that borrows 50,000.00. If we use the terms of a common place business advance loan, the following is the breakdown of the loan:

50,000.00 Loan Amount less 5,000.00 Origination Fee = 45,000.00 net proceeds. If payments are extended over 300 days at 120% interest, the daily payment is $262.41 total payback is 78,723.00

Under the Small Loan Advantage:

50,000.00 Loan Amount less 1500.00 Origination Fee= 48,500.00 net proceeds. Term of 60 months at 6% interest, the monthly payment is 966.64 total payback of 57,998.00

In addition to the dramatically more favorable monthly versus daily payment, the interest savings over the life of the loan is almost 21,000.00. The small business would be able to consolidate their revolving debt and markedly improve its overall cash flow. Restructured debt like this belongs in a longer term whereby the business can take advantage of the favorable terms and free up the revolving credit to be used as it was invented to be used for. For more information, please call 401-398-8930.

February 13, 2015

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