The basics of short term funding - a tutorial

Recently, I've been seeing many business owners who are new to the private lending world. They generally seek information about how our industry works and what exactly is involved. In order to help their understanding (and yours, dear reader), here are some basics:

First and most important: Short term business capital funding's are NOT loans, they are factors which, simply explained, is the practice of "purchasing" future revenues for immediate cash at a discount.

Short term business lenders do not need collateral - they collect daily or weekly payments directly from the business checking account until the payoff amount is reached.

Short term business lenders' rates are NOT interest rates but factor rates. That is, how many cents per dollar received will the business will be responsible to pay. Factor rates are range between 1.10 - 1.49 which means the business is paying the amount they receive in cash multiplied by the factor rate.

For example, if a lender "purchases" $100,000 of future revenues from a business with a factor rate of 1.25 the payoff amount the business will be responsible for is $125,000. The payoff amount is spread over time and broken into either daily or weekly payments.

In other words, any qualified business can "front load" future revenues in lump sums this way paying them off in smaller increments over time.

This is a critical tool in any business arsenal because it gives them access to capital against future sales which haven't occurred yet. Most companies already have other outstanding loans in their debt profile such as SBA, commercial lease/mortgages, Equipment financing,etc. Revenue factors allow businesses to lever up beyond their normal debt load in order to meet specific needs, pay unforeseen expenses or capitalize on sudden opportunities without disturbing their existing debt profile.

The cost of these factors is generally higher than conventional loans because they carry higher risk for the lenders and they're unsecured. Many business owners prefer this method to raising equity capital however since they would rather pay a bit more for capital than give up a percentage of ownership interest in the company they have built just to access immediate capital.

All industries qualify although there are some that are restricted due to the nature of the business. Generally speaking, any company with over $30,000 of monthly revenue qualifies for short term commercial capital.