by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
The Small Business Administration (SBA) is set to introduce a new working capital pilot program that promises to provide a significant boost to small businesses. This initiative, which is expected to roll out in the coming months, will offer government-backed credit lines of up to $5 million, making it a valuable resource for small business owners looking to manage their cash flow and invest in growth opportunities. Here’s everything you need to know about this upcoming program.
A Game-Changer for Small Businesses
The SBA’s new working capital lines are designed to be more attractive to both lenders and borrowers compared to the agency’s existing products. This program aims to address common challenges that small businesses face when trying to secure financing, such as high interest rates and stringent lending criteria. By offering more favorable terms, the SBA hopes to increase accessibility to much-needed funds.
Improved Access to Capital
One of the most significant benefits of the SBA’s new program is improved access to capital. Small businesses often struggle to secure financing due to strict lending criteria and high costs associated with traditional loans. The SBA’s backing reduces the risk for lenders, which can lead to more approvals and better terms for borrowers.
Generous Credit Limits
One of the standout features of the SBA’s working capital pilot program is the high credit limit. Small businesses will be able to access credit lines of up to $5 million. This substantial amount can help businesses cover operational expenses, invest in new equipment, expand their operations, or navigate through periods of reduced revenue.
Competitive Interest Rates
The interest rates for these working capital lines will be based on the prime rate plus an additional 3% to 6.5%. Given the current prime rate, this translates to an approximate range of 12% to 15% today. While this may seem high, it is important to note that these rates are relatively competitive compared to many alternative lending options available to small businesses, especially those that might not qualify for traditional bank loans.
Annual Fee Structure
In addition to the interest rates, the new working capital lines will come with an annual fee. This fee structure is designed to make the program sustainable while ensuring that it remains attractive to lenders and borrowers alike. The exact fee amount has not yet been disclosed, but it will be structured to support the needs of small businesses without being prohibitively expensive.
Stay Informed
As the SBA prepares to launch this pilot program, small business owners should stay informed about the latest developments. It’s a good idea to subscribe to SBA newsletters and follow updates on their website. Additionally, the SBA’s Export Finance Managers are expected to provide counseling to lenders interested in participating so they have the knowledge and resources to guide and support small businesses effectively.
by Jean Miller | Accounting News, Business Growth, News, Uncategorized
Securing the right funding for your small business is crucial for growth and stability. Asset-based lending is one option for financing for businesses that have strong assets and need access to working capital. But is asset-based lending the right choice for your small business? Below we go over the pros and cons of this approach to help you make an informed decision.
What Is Asset-Based Lending?
Asset-based lending (ABL) is a type of business loan that is secured by using a company’s assets as collateral. These assets can include a variety of tangible and intangible items that have value, such as inventory, accounts receivable, equipment, or real estate.
Asset-based financing can be easier to qualify for compared to other small-business loan options. However, if the borrower defaults on the loan, the lender can seize and sell the assets to recover their money.
The Process of Asset-Based Lending
In order to better understand your business’s financial health, your lender will first evaluate your business’s financial information, including its assets, financial statements, and credit history. Next, based on a thorough asset evaluation, your lender will offer a loan amount. This amount is typically a percentage of the value of the collateral, known as the “advance rate”. Generally, liquid collateral such as certificates of deposit or securities are more valuable to a lender because they can be easily converted to cash if you default on your loan. Finally, your lender will also establish the terms of the loan, including the interest rate, repayment schedule, and any associated fees.
Pros and Cons of Asset-Based Lending
Pros
- Access to quick capital. A primary advantage of asset-based lending is that it’s typically a quicker process than traditional loan approval. If your business needs funds urgently, such as covering unexpected expenses, this can be a significant advantage.
- Flexible terms. Because the loan is secured by business assets, this type of lending could be a better fit for businesses that don’t meet the strict criteria of conventional loans. Asset-based lending offers more flexibility than traditional loans, which can be beneficial for businesses that have a shorter credit history or imperfect credit scores.
- Lower interest rates. Because the collateral you provide reduces the lender’s risk, you’ll typically receive lower interest rates on asset-based loans compared to unsecured business loan options.
- Flexible financing. Funds from asset-based loans aren’t typically restricted. They can be used for various purposes, such as financing growth initiatives, covering operational expenses, or managing cash flow gaps.
Cons
- Risk of losing assets. If your business fails to repay the loan, your lender can seize and sell your business assets to repay the debt. If the assets you used as collateral hold strategic importance for your business operations, losing them could have adverse effects on your business.
- A thorough and time-consuming process. A lender’s assessment of your assets can be time-consuming and may require professional appraisals, audits, and legal documentation. Furthermore, some of your business assets may not qualify for an asset-based loan. Lenders generally prefer tangible and sufficient assets, so items such as specialized goods, perishable inventory, and equipment with high depreciation rates typically aren’t accepted as collateral.
- Costs and fees. While asset-based lending often comes with lower interest rates than other financing options, it’s important to consider other associated costs. Lenders can charge origination fees, appraisal fees, and ongoing monitoring fees, all of which can impact the overall cost of the loan.
Asset-based lending can be an effective tool for small businesses seeking access to capital, but the decision to pursue this type of lending should be made after careful consideration of your business’s assets, financial needs, and risk tolerance.
