Short-Term Working Capital Funding and Commercial Loans

There are two short-term working capital financing options which are often overlooked by business owners. These involve business cash advances and short-term commercial mortgages.

This article will describe alternatives such as short-term business cash advances and commercial mortgages. With an economic recession impacting business activity adversely, all working capital financing options should be considered. Business borrowers should not overlook short-term choices for commercial loans.

Due to misunderstandings about long-term commercial financing, short-term commercial loans are often not considered properly. Although long-term commercial real estate financing options are often appropriate, there are practical short-term business financing choices that will be more workable and profitable for commercial borrowers.

The most critical short-term commercial financing techniques typically include short-term merchant cash advance and credit card processing programs and commercial real estate loan programs. Both working capital funding approaches are frequently a source of confusion for business owners.

An underutilized commercial financing strategy for businesses is possibly the best commercial loan strategy to secure cash for their business: a business cash advance using credit card processing. Credit card financing is an effective business financing tool that is usually overlooked by any business accepting credit cards as a customer payment method.

The most likely candidates to benefit from this working capital loan strategy are retail stores, service businesses, restaurants and bars. To obtain business cash advances based upon sales volume, this funding strategy uses an under-utilized business asset (credit card receivables). This working capital cash strategy is also known as credit card factoring. Some business owners have used receivables financing or factoring which allows them to sell future receivables on a discounted basis.

Not all service and retail businesses can document business receivables to obtain a commercial loan. Businesses such as bars and restaurants do not typically have receivables to use for business financing. What these businesses do have in many cases is documented sales activity. It is this documented level of credit card sales activity that becomes a financial asset to the business and its working capital management strategies. Business cash advances from $5,000 to $300,000 can usually be obtained based on a merchant’s sales volume and future sales.

The commercial financing repayment requirement for working capital advances is normally under 12 months. For merchants that need the business cash advance program for a longer time, the arrangement can be renewed on a recurring basis.

There will usually be only a few business financing sources that are regularly successful at executing the credit card financing and processing. There are key difficulties to avoid with a working capital advance, and selecting an effective funding source is essential to an appropriate business cash advance program.

A long-term commercial mortgage is appropriate for many businesses that own commercial property. Commercial property should be financed with an appropriate combination of short-term and long-term funding. It is wise to consider long-term business financing of up to 30 years when a longer-term commercial real estate loan is feasible.

However there will be many commercial mortgage loan situations in which longer-term commercial financing is not appropriate for the business owner. In such circumstances it is important for a business owner to realize that there are viable short-term working capital strategies.

Short-term commercial loans should be explored especially for business owners who want to sell or sell the property within a few years. Most short-term commercial real estate financing will have more reasonable prepayment penalties and lockout fees than typically required with long-term commercial mortgages.

While we will not attempt to describe the technical aspects of commercial loan prepayment fees and lockout fees in this article, we will note that the absence of such fees in most short-term commercial mortgage loan programs is a very positive aspect of these short-term working capital management options. If a business owner needs to sell their commercial property during the time period which would have triggered prepayment fees and lockout fees in longer-term commercial real estate loans, the lack of penalties could mean a savings of 10% to 30% or more.

Although prepayment and lockout fees will typically be avoided with short-term commercial mortgage loans, there are some trade-offs to be made if a business owner selects shorter-term working capital loans. When short-term commercial mortgages are available, they will usually not be readily available for special purpose commercial properties, the interest rate will frequently be in the range of 11% to 13% and the loan-to-value will typically be under 70%.

Multi-family, warehouse, mixed-use, office and retail commercial properties are the best candidates for short-term business finance options. For a typical short-term commercial loan, business owners should be comfortable with a time period of less than three years.

Few commercial lenders are capable of successfully executing short-term business financing. There are also numerous problems to avoid with short-term commercial mortgage programs, so selecting a lender is critical to business owners wanting a short-term business loan involving commercial property.

It is sufficiently important to repeat that a vital key to successful short-term commercial loans and business cash advances is selection of an appropriate lender. Despite the potential benefits of shorter-term business financing, the choice of a lending source cannot be overlooked.

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