Five ways to finance your antiques business without a bank loan

This article was originally printed in Antique Trader
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why don't banks offer loans to antiques dealersApplying for a bank loan for your fledgling antiques business is a quick and easy process: you fill out the loan application, and the bank says “No!” It’s sad but it’s true. Bankers just don’t understand the antiques trade. Unlike most bankable retail businesses, the antiques trade has no published operating benchmarks, too many variables in valuing inventory and is overwhelmingly undercapitalized.

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These days, even well-established antiques retailers and auction houses can be turned down for a loan. Since the banking crisis of 2008, the standards for small business loans have become so stringent that 70 percent of all small business loans are turned down. It’s no longer enough to have good credit and cash flow. In most cases, loan applicants must also have adequate collateral and show strong revenue growth and profitability for the past three years. How many antiques businesses do you know that have had strong revenue and profit growth in the past three years?

A loan officer can’t make an exception for your loan just because you have been their customer for 30 years.  Banking is a heavily regulated industry. A bank must adhere to its lending standards or federal regulators can fine them or shut them down. So, antiques dealers in need of a loan must seek funding sources outside of a bank. There are five choices that small businesses sometimes use for quick cash. Let’s sort through the good, the bad, and the ugly of them to see what might make sense for your business.

Credit Cards
OK; we’re back to the bank. I mention this because it’s the first place that many small business owners turn when they need cash quickly. Using credit cards to fund a business is a terrible idea. Credit card interest rates are subject to change, fees can be excessive, and the payoff period is open-ended. Dealers who abuse their credit cards will soon find themselves at a different bank: bank-ruptcy.

Social Lending
Social lending has moved beyond getting a loan from your Uncle Harry and sending him occasional payments. Virgin Money (owned by Sir Richard Branson’s Virgin Group; you know, Virgin Records, Virgin Airlines, Virgin Mobile, etc.) will provide you and Uncle Harry with all the paperwork you need to make your loan “official”. When the paperwork is done, Virgin will (for a small fee) service the loan, collect all the payments, and hold your feet to the fire if you don’t pay on time.

Peer-to-Peer Lending 
If you don’t have an Uncle Harry with a few extra bucks, there is a new twist on social lending called Peer-to-Peer (P2P) lending. In P2P, lending clubs are formed and the members invest in and borrow from each other. Lenders and borrowers congregate at websites such as LendingClub.com and Prosper.com. Borrowers request loans and are screened for credit, and investors purchase the notes created by the borrowers. Investors receive higher interest rates than they would get from most common investments, and borrowers get lower interest rates than they would get from a bank. Everyone wins.

Applying for a P2P loan is a lot easier than applying for a bank loan. P2P applications can be done online in complete privacy and completed in just a few minutes. Usually, all that is required to qualify for a P2P loan is adequate income and the good credit of the borrower. In fact, the amount of money available to borrow and the interest rate that will be paid are tied directly to the borrower’s credit rating.

Merchant Cash Advance
Antiques retailers and auction houses that take a lot of credit card payments find that a Merchant Cash Advance (MCA) can be used as a quick-cash solution. An MCA is an advance on future credit card receipts. Since it’s not a loan, the qualification standards are different than they would be for a bank loan. Unlike the bank loan application process, a business does not have to produce tax returns, financial statements and a business plan in order to get an advance.There is no collateral required, and no requirement that the money be used for a particular purpose. Also, approval is not entirely based on the owner’s personal credit score.  

In order to qualify for a Merchant Cash Advance, you have to have:

  • $2,500 minimum in credit card sales per month
  • 4 months as the current business owner
  • Be current on the property lease
  • A FICO score of at least 500 (better credit = more funds and lower rates)

The benefit of a Merchant Cash Advance:

1.  There is no fixed payment; re-payment of the advance is done from credit card receipts. When sales are down, the payment is low.  When sales are up (and you can afford it) the payment goes up.   

2.  There is no fixed repayment term. The time it takes to repay the advance will vary according to credit card sales. A merchant cash advance is cash-flow friendly: you pay more in good months, less in slow months. Simple.

3.  Interest is not charged on a merchant cash advance; it can’t be. Interest calculations are based on borrowing a fixed amount of money for a pre-determined amount of time. Since a cash advance has neither fixed payment or fixed length of time, interest cannot be calculated.  Instead, a portion of a business asset – credit card receivables – is being sold at a discount.

4.  There are no personal guarantees. Of course, dealers who fraudulently enter into a Merchant Cash Advance are open to prosecution. For honest merchants who operate with integrity, a merchant cash advance is a valuable financial tool.
 

A word of warning about Merchant Cash Advances: you’re mortgaging your future cash flow. Make sure that the payback terms will leave you with enough future operating cash.


Retirement Funds

Both an Individual 401K and a Roth IRA can be tapped for a business loan. What’s nice about using retirement funds is that, in a strict sense, it is not a loan; it’s your money. What’s not so nice is that you risk losing your retirement. 

An Individual 401k loan is permitted using the accumulated balance of the Individual 401k as collateral for the loan. Individual 401k loans can access up to 1/2 of the total balance of the 401k up to a maximum of $50,000. A loan from an Individual 401k is received tax free and penalty free, provided that the loan payments are made on time. The monthly loan payments of principal and interest are repaid back into your own Individual 401k.

Roth IRA money can be accessed by choosing the Self-Directed option rather than having your banker invest the funds for you. With a self-directed IRA, an entrepreneur sets up a Limited Liability Corporation which holds the IRA account funds. As the primary investor, the IRA is the owner of the LLC, and the dealer acts as the directing member of the LLC. The directing member is free to invest the IRA funds however they please. All of the profits from the business stay in the LLC account, earning compound interest. The key word here is "profits": the expenses of operating the LLC – including a reasonable owner’s salary and perks – are all deducted from operating income in order to determine profits.

Antiques dealers who need money for leasehold improvements, inventory purchases, can sometimes find funds in one of the above five places. A final word of caution: don’t borrow money to cover operating expenses. If you can’t pay your bills from the regular cash flow of your business, it’s time to liquidate and close the doors.



Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears monthly in Antique Trader. Learn more at www.waynejordanauctions.com, 276-730-5197 or auctioneer.wayne@yahoo.com.

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