Applying for a small business loan can be a tricky process, as there are several requirements you need to meet in order to obtain one. Those requirements can be confusing, as lenders require everything from business licenses and cash flow history to business plans and personal financial statements. 

Whether you are applying for a business loan from a traditional bank, alternative lender, or credit union,  as a small business owner in need of financing, one of the ways you can untangle the process is to use the following small business loan checklist.  This checklist will help to ensure that you are ready to apply with confidence. Knowing what documents are needed for a business loan ahead of time will keep you organized and possibly help you get a reasonable interest rate on your loan. 

Things to Consider Before Applying for a Business Loan

Before even beginning to collect your business loan paperwork,  there are key factors you should consider:

Why do I need a loan?

This is perhaps the most important question you should ask yourself before applying for a small business loan. Getting a business loan just to have the money you borrowed sit around while you pay interest on it is obviously a bad idea. 

• Ideally, the proceeds of a business loan should be used towards growing your business so that it can increase its revenue. For example, if you need money to develop and market a new product; purchase or upgrade equipment; expand your business by hiring new employees; or adding to your inventory would all be ideal reasons to obtain a loan. 
• There are also financing products, such as working capital loans and business lines of credit, that can help your business operate during the offseason or when there’s a downturn in the economy. 

Can I afford a loan?

Everyone knows that loans carry interest rates, and those rates are, in part, affected by the current interest rate environment. The Federal Reserve has raised interest rates 10 times in the past year-and-a-half, and that’s going to make the interest rate on virtually every type of business loan you want to take out more expensive. If you can afford to wait, you might want to hold off on getting a business loan until rates drop again. 

What type of lender suits me best?

There are several types of lenders who can provide you with a small business loan. Those include traditional banks, alternative lenders, trade unions, marketplaces, and brokers. Each one comes with pros and cons that you should consider carefully. Some lenders, such as traditional banks and alternative lenders, offer financing products directly, while brokers typically offer you a marketplace of lenders. Also, some will demand higher business and personal credit scores than others, and some can deliver your funds more quickly than others. Carefully consider which one best serves your needs.

Can I get a grant instead?

There are, of course, several public and private business grants available to small businesses – some of which are backed by the US SBA. These grants often have specific criteria for applying. For example, some may be offered to small businesses in certain industries, and others may be offered only to women- and minority-owned businesses. Determine whether you qualify, but remember, applying for these can be a roll of the dice and you’re not guaranteed to win a grant. 

Do I have a plan B?

All small business owners have the best of intentions when applying for a business loan, but life happens, and sometimes it won’t go your way. Before you take out a loan, it’s a good idea to make a contingency plan if things go south and you find yourself struggling to keep up with debt payments. Bankruptcy should be a last resort. Do you have assets you can sell? Do you have a cash reserve that you can draw upon until you get back on your feet? 

Small Business Loan Documents Checklist

Go over this business loan documents list to make sure you are prepared for the sometimes overwhelming process of applying for a business loan. Doing so will simplify and hasten the process of getting the funding you need for your small business. 

Check your credit scores  

All lenders will pull both your personal and business credit reports. You can check your personal FICO scores online for free at the websites of the three main credit bureaus, Transunion, Experian and Equifax. You may have to pay a fee to get detailed reports so that you can check for errors. You can check your business credit score at the website of Dun & Bradstreet, the business credit bureau that is most heavily favored by lenders, for a small fee. 

If your personal FICO and business credit scores are less-than-stellar, you may want to consider taking 6-9 months to improve them so that you can increase your chances of being approved and get a better rate on your loan.

Prove that your business exists

All lenders will require documentation proving that your small business is registered as a tax entity. At the very least they will require your employee identification number, which is issued by the IRS, and proof that your business is registered as a LLC, “Doing Business As” (DBA) company, or an S or C corporation. Lenders will also require proof of identity, pay stubs, and your social security number as well. For an SBA 7a loan or a term loan from a traditional bank, the lists of documents required can be even longer and include items such as business licenses, business lease agreements, proof of equity injection and franchise, and licensing agreements if you plan to franchise your business.

Have a business plan

If you plan to apply for a term loan with a traditional bank or for a SBA 7a loan, chances are you will need to show your business plan. This is a plan that shows how your business is organized and typically includes a market analysis and what niche your products and services fill, how they differ from your competitors, and why you believe your small business will be successful going forward. In short, it details why you believe your business is going to make money.

Financial Statements

Almost all types of lenders will want to see your business’s financial documents that indicate it has a strong cash flow history, including, but not limited to 3-6 months’ worth of business bank statements, 2-3 years of tax returns, balance sheet statements and income statements. 

Run a cash flow analysis

Cash flow is one of the primary indicators that lenders use to understand the health of your business. Being able to show 3 to 6 months of positive cash flow can increase your chances of approval. It can even get you better financing terms for your small business loan. 

Collect your business bank statements 

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements for the past 3 to 6 months. 

Gather  supporting documents for unusually large deposits

Unusually large deposits can act as a red flag for lenders. While the  presence of these deposits can delay finalization of loans, they are not necessarily bad. Many businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process gathering copies of your account receivables and future contracts to support these large deposits.

Take care of delinquencies

Many lenders only want to lend to people whom they believe are of high character. This is especially true when you’re applying for SBA loans. As such, if you have any tax liens or are late on child support payments, you should take the necessary steps to clear those up before you apply. 

Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan set up on any open tax liens you may have before you apply for a loan. A payment plan on a tax lien, along with a very strong positive cash flow will typically be considered by alternative lenders and even some SBA lenders for loan approval 

Assess any collateral you may have

Before you apply for a loan package, you may want to sit down with a business loan specialist or an accountant to see if you need to put up collateral. This includes real estate, investment holdings, savings and even your car or valuable pieces of equipment you may own. Traditional banks often want collateral if your business credit or personal FICO score is shaky. In rare cases, alternative lenders may ask for collateral. Even if you have good credit, it might be worth applying for a secured bank loan or business line of credit because you may be able to notch a lower interest rate and a higher credit line or loan amount if you put up collateral. 

Get trade references

If your business credit score is borderline, you can boost it by getting positive references from either your suppliers or, if you lease a physical space, your landlord. You can give these references to your credit bureaus and, if you’re using a traditional bank, to the loan officer. Having these could mean the difference between obtaining a loan or getting rejected. 

If you get Rejected

Getting rejected for a business loan isn’t pleasant, but it can be a valuable lesson on how to get accepted the next time you apply. Traditional banks and alternative lenders want to grant you a loan approval because it’s the way they make money. As such, they will be happy to give you a detailed explanation for why you were denied, and, usually, it will take a bit of time to improve your business to the point where you can obtain that business loan.

While every rejection is different, some of the most common reasons for getting rejected for a business loan are:

Your business credit score is not high enough

Some of the ways you can raise your business credit score include:

•  reducing the number of creditors you owe money to
• making sure you make debt payments on time for at least 6-9 months
• having a strong credit mix. 

Other steps include being in good standing with your suppliers and increasing the assets of your business. 

Insufficient time in business 

Traditional banks typically won’t lend to a small business that hasn’t existed for at least three years, while alternative lenders may want to see at least two years in business. If this is the case, hold off on borrowing until your small business has been in operation for a sufficient time. If you can’t wait, see if you qualify for an SBA CDC/504 or SBA microloan, both of which only require 6 months in business. 

Too much existing debt

This is actually a common reason why small businesses get turned down for a loan. If you already have outstanding loans, you can always try to retire them with a new loan. Additionally, if you have a line of credit that is close to being fully drawn, you should take steps to pay it down before applying for a new loan. 

Your cash flow is not strong enough

If your small business’s cash flow is tight (meaning you are spending almost as much money as you are taking in), take steps to fix it by finding ways to reduce your expenditures. 

Your industry is too risky

If your small business operates in an industry in which there are higher than average bankruptcies, or if it operates in what lenders may consider “vice” industries such as gambling, alcohol, or legal marijuana dispensaries, you will most likely get turned down no matter how financially strong your business is. A quick Google search, however, can most likely lead you to legitimate online lenders who specialize in lending to companies in your industry.

Don’t Get Frustrated

Remember, when applying for a business loan, patience and weighing the pros and cons of different lenders are often the keys to getting the funding that you need to help your business grow. Go down the checklist of items that you need to take care of in order to be ready to apply, and carefully consider the pros and cons of the different types of lenders out there so that you can get the financing that is exactly right for your business. 

Most of us have faced financial hardship at some point that resulted in some missed debt payments, defaults or charge-offs, and this has negatively impacted our credit scores. After all, life has its ups and downs, especially when it comes to our finances. For small business owners who find themselves in this situation, one of the questions they may be asking themselves is, “Can I apply for a business loan with bad credit?”

The simple answer is yes. There are plenty of lenders that offer business loan options for bad credit, and there are several types of financing that don’t emphasize FICO scores as much as cash flow history and strong sales. So, if you’re one of the thousands of small business owners wondering where to get business loans with bad credit, you might be relieved to know that you have several financing options.

Before you delve into answering the questions of how to get a business loan with bad credit, there are several factors you should educate yourself on, such as how can you improve your credit score and what you can afford to pay in terms of an interest rate on your loan, given that loans for businesses with bad credit often charge a rate that’s on the highest end of the APR spectrum. 

What is Bad Credit?

When looking into how to qualify for a business loan with bad credit, the first thing you need to know is that a low credit score depends on the type of lender you are considering. Traditional banks are still the most popular type of small business lender, but they typically want to see higher credit scores for financing products such as term loans and business lines of credit than an alternative or online lender. Generally, they consider a FICO score below 680 to be poor. Alternative lenders and credit unions, however, generally – but not in all cases – will accept scores within the 650 – 680 range, depending on the type of financing the small business owner is seeking.

There are online lenders that will accept a FICO score as low as 500 but will charge an inordinately high interest rate (cost of capital), depending on the type of financing you’re seeking.

How to Improve Your Business and Personal Credit Scores

Generally speaking, having to obtain a business loan with a poor credit score isn’t an ideal situation. If you can afford to wait several months for a loan and take that time to improve your FICO score, you could save a good chunk of money in terms of the cost of capital. Doing so is not as difficult as you might think. 

The two types of credit scores you will need to improve: your personal FICO score, and your business credit score, if you have one. Most lending institutions and credit bureaus such as Transunion, Equifax, and Experian are happy to give you advice on how to improve your personal credit score. For a business credit score, Dun & Bradstreet is the credit bureau looked at the most by lenders. 

The main factors that affect your FICO score and how to improve them are:

• Payment history. Nothing will drag your FICO score down more than having a history of delinquent payments on your debt. This includes monthly payments on things such as credit cards, car financing, and mortgage/rent. If you want to dramatically improve your credit score, make sure to make on-time payments for at least 6 months. The longer you make on-time payments, the better your score will be.
• Debt-to-credit ratio (aka credit utilization). Credit bureaus do not look favorably upon small business owners who have a low amount of available credit compared to the amount of credit available to them, as this tells them that you are having a hard time managing your debt. If you have the time and discipline to do so, try to pay down as much debt as you can over the course of 6-9 months to bring up that ratio. You may even want to consider applying for a new credit card to bring that ratio up. Increasing this ratio will do wonders for your credit score.
• Length of credit history. While this is a big factor in determining your FICO score, it’s not one that can quickly be fixed. This is the age of the debt accounts on your credit report. The longer you have open account, in good standing with your creditors – including your credit card companies, car financing company, and your mortgage holder – the higher your credit score. 

A business credit score incorporates most of the same factors as your personal FICO score such as your business’ loan and payment histories. There are a few differences, however. First, a business credit score will look at: 

• Industry risk. Your business credit score will incorporate how risky the industry in which your small business operates is. If it operates in one that has a high failure rate, such as the restaurant/food service industry, that could negatively impact your business credit score. In this case, having a strong business plan becomes even more important. 
• Good relations with your suppliers. There is a little-known action that many small business owners can take to improve their business credit score: getting trade references. If you have good relationships with your suppliers and have a history of on-time payments to them, they can send a note called a trade reference to the credit bureaus telling them such. Doing this can immediately improve your business credit score.

Where to get a Small Business Loan with Bad Credit

If you need capital now and can’t afford to wait 6-9 months to improve your credit score, there are lenders out there that are willing to lend the capital that you need. Traditional banks are more risk-averse and generally won’t approve loans to those with bad credit. The lenders that do, however, include:

• Online lenders. A quick Google search will lead you to a host of reputable online lenders that are willing to supply you with an array of financing options such as term loans and business lines of credit and require a FICO score as low as 500. While every lender has their own set of terms, the cost of capital for these forms of financing is typically extremely high, with some being above 30%.
• Alternative lenders. Alternative lenders that operate outside the sphere of traditional banks often allow loans to business owners with lesser credit scores than their banking counterparts. They often charge higher interest rates and will accept borrowers with fair-to-good credit scores in the 620-680 range, depending on the type of financing you are seeking. This is because they often emphasize annual revenue and cash flow history as well as credit score.
• Trade credit unions. Credit unions are owned by their members, and many of them will give loans to small businesses in their own industries, even to those with less-than-stellar credit scores. Many credit unions will also look favorably upon small businesses that employ unionized workers.
• The SBA. While the SBA 7(a) loan – which is the first loan that most people think of when they think of the SBA – often comes with strict requirements such as a high credit score, other SBA loans do not. SBA microloans and CDC/504 loans do give loans to small business owners with less-than-perfect credit scores through intermediary lenders, and these loans usually carry relatively low interest rates. The two catches for these loans are that they usually do not offer high loan amounts (the maximum for each is $50,000), and depending on the lending agent, these loans are sometimes restricted to minority- and women-owned small businesses, or businesses in underserved communities that are committed to additional hiring and renovating their storefronts.
  

Types of Financing for Bad Credit

Many people just think of bank loans when it comes to small business financing. There are, however, several types of financing that don’t place a heavy emphasis on credit score and can even offer small business owners a lower cost of capital than they might otherwise be able to get:

• Secured business loan. If you have poor credit, securing a business loan with collateral may decrease your cost of capital and could even increase the amount you are able to borrow for your small business. Any savings, real estate, investment accounts and any other personal items of high value can be used as collateral. While you do risk losing these things if you fail to pay back the loan, having enough collateral can even convince a traditional bank to give you a business loan, despite a poor credit score. 
• Revenue-based financing. Revenue-based financing is offered almost exclusively by alternative lenders and is a form of financing that can quickly offer a lump sum of cash in exchange for a portion of your small business’s future receipts. It’s technically not a loan and lenders often look more closely at your business’ sales history rather than its credit score.  
• Equipment financing. Most traditional banks and alternative lenders offer equipment financing – loans that enable small business owners to purchase vital pieces of equipment. This type of loan is often made to small business owners with less-than-stellar credit since the piece of equipment being purchased acts as collateral for the loan. Like most loans, however, the lower your credit score, the higher the interest rate, so it’s important to shop around to find the loan with the lowest cost of capital. 
• Invoice factoring. Invoice factoring gives small businesses a lump sum of cash for their outstanding invoices, and therefore, credit score usually isn’t a factor when lenders decide to approve this type of financing. Rather, the creditworthiness of the customers who owe you money is. Invoice factoring is offered by both traditional and alternative lenders. When using this type of financing, it’s important for small business owners to read the fine print to find out the length of the contract and whether they will be on the hook for a portion of outstanding invoices in case customers do not pay the amount due. 
• Secured business lines of credit. A business line of credit gives small business owners access to a predetermined amount of cash when they need it and only charges interest on the amount borrowed. If you have poor credit, there are lenders willing to give you access to a line of credit but with a very high interest rate and a limited credit amount. If you offer to secure the line of credit with collateral, however, this could dramatically lower your interest rate and increase your chances of being approved. As with any business line of credit, it’s important to read the fine print to understand the repayment terms and minimum borrowing amounts. 

What to do Before Applying

Even if you have a fair or poor FICO score, there are steps you should take before you complete a loan application to get a business loan or other type of financing for your small business to ensure you get the best possible interest rate or APR, as well as avoid hidden fees if possible. 

• Wait to improve your credit score. As stated, there are better situations than having to get a loan when you have a poor-to-fair credit score. If you’re not in a rush for a loan, consider taking the time needed to improve your score so that you can notch a better interest rate. 
• Check your credit report. Check for mistakes on your credit report with all of the three main credit bureaus – Transunion, Experian, and Equifax. While you probably generally know what’s dragging down your FICO score, there could be errors and/or false charges on your report that are bringing it down. According to a study by the Federal Trade Commission, 1 in 5 consumers (20%) have at least one error on their credit report. 
• Compare interest rates. Just because you have a low credit score doesn’t mean that different lenders won’t offer you different rates. While most lenders don’t disclose rates upfront, ask what the rate will be once you’re pre-approved. 
• Read the fine print. Depending on the lender, it’s crucial that you carefully read the terms of whatever piece of financing you’re taking on. Some lenders may want balloon payments or origination fees, while others may demand weekly instead of monthly payments. Find the repayment plan you’re most comfortable with. 
• Be comfortable with your lender. This may sound intuitive, but make sure that your lender has sufficient customer service available to you. While you can always walk into a traditional bank, most alternative lenders also provide readily-available, personalized customer service by phone as well. 
• See if you can renegotiate later. Bad credit takes a bit of time to fix, but it can be done. Ask your potential lender if you can renegotiate the terms of your loan down the road when your credit score does improve.

Additional Advice for Businesses with Bad Credit

Obtaining a small business loan with bad credit isn’t impossible, but it most likely will be costly. If you need a loan and you have poor credit:

Use the loan proceeds wisely. Make sure the loan proceeds will be used in such a way that will increase the revenue of your business. This includes the development, marketing and launch of a new product or service, or for the expansion of your business. 

Develop a plan B. No matter what your credit score is, the risk of taking out a loan or other type of financing is that you fall into hard times and can’t pay it back. To offset this risk, some of the ways you can develop a plan B is to build a cash reserve or make sure your lender will be available to refinance until you can get back on your feet. 

Don’t overextend. The idea of being able to obtain financing, even with bad credit, can be an exciting one. However, try to only borrow or use the amount of credit that you need and know you can afford to pay back. Finding your small business drowning in debt is obviously not a good place to be. 

In all, while bad credit is certainly an obstacle, there are still financing options for small business owners who are seeking to improve and expand their businesses and take advantage of unexpected growth opportunities. Carefully explore the options available to you and, at the same time, work on ways to improve your credit score. 

Which is Best for Your Small Business?

The one ingredient every small business needs is capital – capital to grow, even out cash flow, and meet short-term expenses. The question of where you go to get a business loan, however, can be confusing, especially when it comes to choosing the type of lender. When it comes to financing, small business owners have two main choices for a lender: a traditional bank and an alternative business lender. Both come with pros and cons, different interest rates, different speeds at which funds are delivered, and different loan amounts offered so it’s important to fully know what your needs are and which type of lender is best suited for you. 

What are Alternative Lenders for Small Businesses?

Most business owners know they can walk into a brick-and-mortar bank and apply for a traditional bank loan, but since the 2008 financial crisis, alternatives have become increasingly popular. There are financial institutions that operate outside of the traditional banking sphere that typically offer financing applications entirely online, while giving borrowers the opportunity to speak to lending experts via phone or online channels. They are just as legitimate as banks and offer distinct advantages over them. 

Rise in Popularity 

While alternative lenders have been around since the late 1990s, their popularity began to soar after the 2008 financial crisis when many banks struggled for capital and tightened their requirements for getting loans. 

While alternative lenders were relatively obscure before the 2008 financial crisis hit, alternative business loans rose in popularity during the Great Recession. Before 2008, alternative lenders represented just 7% of the small business lending market, according to a study by the Federal Reserve. That figure rose to 12% after 2008. In 2016, 19% of small business owners turned to online lenders for their financing needs, and by 2019, the number jumped to 32%.

What is a Traditional Bank?

Traditional banks are the financial institutions in your neighborhood that can be regional or local banks or branches of larger banks such as JPMorgan Chase or Bank of America. They offer you face-to-face service with a loan officer specializing in helping small businesses. Depending on your FICO score, they usually offer slightly better interest rates than alternative lenders. Borrowing requirements, however, tend to be more rigid than alternative lenders, especially now that we’re in a high-interest-rate environment in which lending requirements have significantly tightened. 

Also, the application process is typically more complicated than with alternative lenders and, once approved, there could be a relatively long waiting period to get your funds. Still, if you have an excellent credit score, you most likely will notch a lower interest rate, which could save you significant money when it comes to your total cost of capital. 

Traditional Banks: Pros and Cons

Traditional banks are still the most popular types of lenders for small businesses and offer several advantages over alternative lenders, but there are also significant drawbacks as well. Small business owners should be aware of the pros and cons of using their neighborhood bank for a loan:

 Pros 

• Lower interest rates. While every bank is different, most offer lower interest rates on bank loans than alternative lenders. However, as interest rates are currently high right now, the difference in the interest rates on a small business bank loan between traditional and alternative lenders has tightened. 
• Face-to-face service. Many small business owners like to see a familiar, friendly face when they walk into a bank – a lending expert who is already familiar with their business – and this is a significant advantage traditional lenders have over their alternative counterparts. 
• Direct product offerings. Many traditional banks directly offer a full suite of financing products to small businesses, such as bank loans and equipment financing. Meanwhile, most alternative lenders are usually funded by asset-backed securities, so may not have the capital to directly offer a full suite of financing products, such as business lines of credit. This allows small business owners to directly negotiate the terms of their loans with the lending officer. Many alternative lenders, however, typically partner with several lenders to offer you a marketplace of financing options that they don’t directly offer.
• Offers other financial services. Small business owners can simplify things by having all of their financial needs met under one roof. This includes having a business savings and checking account, as well as a business credit card, all with one institution. Most traditional banks can provide this to you.

Cons

• Stricter lending requirements. While every lender has slightly different requirements, traditional banks generally have strict requirements for small business loans. You’re often going to be turned down if you don’t have an excellent FICO score (700 or higher). Also, to get a bank loan, your business usually needs to have higher annual revenue than what an alternative lender might want. Alternative lenders usually have shorter applications with fewer requirements.
• Longer application process. Traditional banks often require longer application processes than alternative lenders since they are generally more risk-averse.
• Slower funding times. In some cases, if you are approved for a loan from a traditional bank it could take several days or even weeks to get your funds. 

• May be Cumbersome to shop around. If you were shopping for an expensive item such as a new car, you’d probably want to visit several dealerships to get the best possible price. The same holds true for a small business loan. Shopping around for a loan from a traditional bank, however, means you may have to physically visit several local banks to get the best possible deal, and small business owners might not have the time to do that. Many large banks allow you to compare offers online. However, since alternative lenders operate almost entirely online, all you need is your laptop and an internet connection to compare offers. 
• Systemic risk. Systemic risk is essentially the risk that banks may collapse due to declining economic conditions. Banks shut down during the credit crunch of 2008, and recently, as interest rates have gone up, banks such as Silicon Valley Bank and Signature Bank were taken over by the Fed earlier this year in high-profile collapses. While this doesn’t happen very often, it’s still a risk when working with a traditional bank. 

Alternative Lenders: Pros and Cons

Alternative lenders have become a legitimate borrowing choice for small business owners since the Great Recession, especially when small business lending from traditional banks dropped by some 40% in 2009. These lenders offer significant upsides for small businesses, but they also carry some downsides as well. Here are some of the pros and cons of using an alternative lender:

Pros

• Relatively simple application process. Applying for small business financing from an alternative lender typically takes only a few minutes, and it can all be done online. With a traditional bank, there is usually far more paperwork involved and in many cases with regional banks, you need to visit a location as part of the application process. 
• Fewer requirements. Alternative lenders primarily judge you by your FICO score and cash flow history and require minimal paperwork compared to a traditional bank. Alternative lenders also sometimes require fewer years in business and less annual revenue than a traditional bank. Additionally, loan approval rates from alternative lenders remain far higher than traditional banks. If you’ve been turned down for a loan by a traditional bank because of a borderline credit score (let’s say in the 660 to 680 range), then you may still qualify for a business loan with an alternative lender if you have a strong cash flow history.

• Different Financing Products.  In addition to traditional business financing products, such as short-term loans, long-term loans and equipment financing,  alternative lenders offer some financing options that banks do not.  Including:
• Revenue-based financing. Revenue-based financing is when a lender gives your small business a lump sum of cash in exchange for a portion of your future receipts – a practice often referred to as factoring. This type of financing is often used when a small business needs cash for an emergency or to finance an unexpected growth opportunity. Most traditional banks don’t offer this, but many alternative lenders do, giving you another option when it comes to financing.
• Factoring. Factoring is a form of financing offered mainly by alternative lenders. A financing tool such as invoice factoring, for example, can give you cash based on your outstanding invoices. While this can be an expensive way to get quick cash, it is an example of the types of alternative financing that you can get with many online lenders.
• Rapid funding. If you qualify for financing with an alternative lender, you could receive your funds in as little as 24 hours, whereas with many traditional banks it could take several days or even weeks to receive your funds.

Cons

• Higher interest rates. Because alternative lenders are generally willing to take on a bit more risk when giving loans to small businesses, they typically charge a higher rate on those loans compared to traditional banks. However, in the current high-interest rate environment, the difference in the cost of capital charged by traditional banks vs. alternative lenders has dramatically tightened over the past year.
• Fewer direct products. Alternative lenders don’t borrow cash from the Federal Reserve, nor do they offer savings accounts upon which they can lend against. Therefore, many don’t typically don’t have the cash reserves to directly offer certain financing products such as business lines of credit or equipment financing. 

Many alternative lenders, however, do partner with banks and other lending institutions to offer a marketplace to small business owners seeking those products to get them the best possible deal. The potential drawback to this is that borrowers typically can’t negotiate directly with alternative lenders for the terms of certain financing products like they could with traditional banks. 

Key Takeaways

Small business owners in need of capital must make prudent decisions on where to apply for financing. Alternative lending and traditional lending each have pros and cons, so it’s important to be educated on both. Generally speaking:

1. If you have the time and meet the criteria, traditional banks are probably the best bet for financing. 
2. If you need funding fast, or have a borderline FICO score and a strong cash flow history, then an alternative lender might be the best choice for you to obtain capital.
3. While traditional banks generally offer lower interest rates on their loans than alternative lenders, the difference in those rates has tightened as interest rates continue to climb.
4. Traditional banks offer you the opportunity to conveniently have all of your financial services needs – including a business checking and savings account and business credit card – taken care of under one roof.
5. Alternative lenders have made great strides in providing personable customer service. Most offer small business financing specialists available by phone to help educate you and assist you in deciding which financing product is best for you. 
6. Whether you’re applying for a loan with a traditional bank or an alternative lender, make sure to have your paperwork ready. This includes past bank statements, tax returns, and an updated business plan. 

Before you decide how you want to get your business loan, it’s vital that you take the time to closely examine which type of lender best suits your small business needs. Make sure you know what to expect with both alternative lenders and traditional banks in terms of cost of capital and convenience. 

Looking to get your first small business loan? It can be a confusing process, especially when it comes to understanding the qualifications you’ll need to meet and why lenders have these requirements for a business loan. Both traditional banks and alternative lenders will judge your worthiness for a loan based on a specific set of risk criteria, whether you are seeking a basic business loan, an SBA loan, a line of credit, or any other type of financing. 

Before you apply for financing, it will help you to understand how lenders determine how much of a risk you represent so that you can be ready to get approved. While much of it depends on your personal credit score, there are other factors that weigh heavily as well depending on the type of financing you are seeking. 

What do I need to Qualify for a Business Loan?

Every lender, be it a traditional bank or alternative financing entity, will view you as a risk when you apply for a business loan, and will judge your risk based on specific factors before they approve your loan. Let’s run through the most common business loan qualifications and why lenders use them to evaluate whether they should approve your loan:

Personal & Business Credit Scores

FICO score. If your business is fairly new (2-3 years old) and you’re seeking your first loan or other form of financing, your personal credit score provides a quick snapshot of how well you manage your finances, both in the past and present. This indicates to potential lenders the likelihood of you making on-time payments toward a new loan. Three main credit agencies – Transunion, Experian, and Equifax – keep tabs on your debts such as credit card debt, mortgages, and car loans, tracking your payment history. Generally, the factors that make up your score are: 

1. Payment history. This is the factor that counts most heavily toward your credit score. The longer your history of on-time payments towards your debt, the higher your score. If you don’t have a perfect history, you may want to wait before applying for a loan so that you can have 6-9 months of on-time payments.
2. Debt-to-credit ratio. This indicates how much debt you have relative to your credit limits. If your credit cards are maxed out, this indicates that you can’t manage your debt well, regardless of how many on-time payments you’ve made. 
3. Debt history. Your credit score gets a boost if you have been in good standing with a credit card or other form of debt account for a long period of time. 
4. The number of hard credit inquiries. This is when a lender or some other entity requests a detailed report of your credit score. This usually happens when you apply for a mortgage, car loan, or new credit card. If there are too many hard inquiries, this could indicate to the credit agencies uncertainty about your finances. This factor, however, isn’t weighed nearly as heavily as the aforementioned factors. 
5. Credit mix. This indicates the number of different types of debt you have, including car loans, personal loans, mortgages, or credit card debt. This typically is not factored very heavily into your credit score, but it may be important if you don’t have a long credit history. 

• Which lenders look at your FICO score? Just about every type of lender, including traditional banks, alternative lenders, credit unions, and online lenders will pull your credit score when you apply for a loan. Alternative lenders typically require a lesser credit score, usually in the 650-680 range, than a traditional bank, which often requires a score of 680 or above.
• For which types of financing is your FICO score most important? While your FICO score will be examined by just about every type of lender, the types of loans that it is most important to are bank loans, SBA 7a loans, and business lines of credit. There are also lenders that specialize in helping small business owners with bad credit. 

Business credit score. If your business is established and has used financing in the past such as a business loan or a line of credit, or even if you have a business credit card, your business has a business credit score. These scores are produced by credit bureaus such as Dunn & Bradstreet, Equifax, Transunion, and Experian, with Dunn & Bradstreet being the most popular credit bureau that potential lenders look at.

Much like your personal FICO score, your business credit score gives lenders a quick overview of how well your business has managed its debt and expenses. A good business credit score will make obtaining financing for your small business much easier; will make your business more trustworthy to suppliers, and can even help lower your business insurance rates. 

While you can usually access your personal FICO score for free, you might have to pay a small fee to one or all of the rating agencies to see your business score. A business credit score does consider additional factors beyond those that go into a personal FICO score: 

• How well you’ve managed your business’ debt. Much like your personal FICO score, if your small business has taken on financing such as a bank loan, SBA loan, or line of credit, a consistent history of on-time debt payments will be the biggest factor in determining your business credit score.
• Personal financial information. Even if your small business is strong, the credit bureaus will still factor in your personal financial information, such as your assets, liabilities, and personal FICO score. 
• The riskiness of your industry. If your small business operates in an industry where closures and bankruptcies are frequent (such as the restaurant industry, for example), this could negatively affect your business credit score.
• Assets. The credit bureaus will also take into account your business’ assets such as machinery, business vehicles, office equipment, real estate, etc. when determining your score. If your small business has a lot of valuable assets on its books, this could raise your business credit score. 

Which lenders look at your business credit score? All lenders look at your business credit score if your business has been in operation for a few years and has previous debt, even a business credit card.

For which type of financing is business credit score most important? Depending on the type of lender you are dealing with, you will need a moderate-to-strong business credit score to obtain bank loans, term loans, SBA 7a loans, and business lines of credit. Your business credit score will also be looked at for equipment financing, but won’t be emphasized as much since the equipment you are purchasing serves as collateral.

Debt-to-revenue ratio. One of the most fundamental questions on the minds of potential lenders is, “can this business afford to take on additional debt?” As such, they are going to compare the existing debt of your business to your business’s annual revenue. If the number isn’t strong, they could determine that your business is too risky to lend to. 

Which lenders look at debt-to-revenue ratio? Since this risk factor is so fundamental, most lenders closely look at this to determine if you qualify for a loan. 

For which type of financing is your debt-to-revenue ratio most important? Most small business debt products do require a strong debt-to-revenue ratio, including term loans, SBA 7a loans, business lines of credit, and equipment financing. 

Cash flow history/bank statements. Your cash flow is simply the amount of money that’s flowing into your business versus the amount of money that’s flowing out. A strong, consistent cash flow history indicates to a lender that you can afford to make future loan payments. It also indicates to them whether you spend money wisely on your small business and indicates the sustainability of your business. Doing this proves to your potential lender that your small business has a strong cash flow and will go a long way toward getting your loan approved.

• Which lenders look at your cash flow history? Again, almost all lenders will examine your cash flow history and will want to see several months’ worth of business bank statements.
• For which types of financing is your cash flow history most important? Your business’s cash flow history is generally most important to bank (term) loans, SBA 7a loans, lines of credit, invoice factoring, and revenue-based financing. For invoice factoring and revenue-based financing, lenders will want to examine your accounts receivables, the creditworthiness of your customers, and outstanding invoices.

Government documents. All potential lenders need to know that your business exists in the eyes of both your state government and the IRS. Before you are even considered for a loan, you need to show an Employee Identification Number for tax purposes. You also need to be registered as a LLC or a “Doing Business As” (DBA) company. If your small business is more profitable than most or has several different partners, you can register as an S corporation. 

• Which lenders look at your government documents? All lenders require this.
• For which types of financing are your government documents most important? Providing these documents is necessary for any type of financing. 

Business plan. Your business plan explains why your business is unique, what your market niche is, shows your current financial statements, and indicates how you plan to make money in the future, among other things. While it’s not an official business document, some lenders want to see one before they approve you for a loan, especially if you are seeking to borrow money to expand your business. 

Your business plan will tell potential lenders that you plan to wisely spend the proceeds of your loan, that you’ve done market research, and that you have a well-thought-out plan to increase your revenue. A quick Google search can lead you to several services that offer business plan templates, often for free.

• Which lenders want to see a business plan? Generally, traditional banks and SBA lenders will require a business plan as part of the small business loan application process. Alternative lenders often do not require this.
• For which types of financing is a business plan most important? Traditional banks often require a business plan for a bank loan or SBA 7a loan. 

Collateral. If you don’t have a strong credit score or your business is fairly new, a lender may require that you secure your loan with personal assets, such as your house, car, or any other possession of significant value. In essence, putting up collateral acts as a personal guarantee for a lender. While this may be a high-risk proposition for the borrower, putting up collateral on a loan could lower the cost of capital on the loan and increase the amount being borrowed.

• Which lenders require collateral? Traditional banks usually require collateral if they believe a potential borrower represents a high risk. Some alternative lenders may also require collateral in rare cases. 
• For which types of financing is collateral required? Many traditional banks may require collateral for term loans and lines of credit if they deem the borrower to be high risk. For financing such as equipment financing and real estate the loans, the machinery, or land being acquired becomes the collateral. 

Loans That Have Fewer Requirements

The requirements for obtaining a small business loan may seem overwhelming, but there are financing products that don’t require as much paperwork. These options are great for newer businesses and small business owners that have less-than-stellar credit scores. These include:

• SBA CDC/504 loans. These loans are partially backed by the SBA and administered through community development companies (CDCs). These loans can be up to $500,000 and are often given to businesses for community development, such as renovating storefronts or hiring locally, but the proceeds can also be used for other purposes. 

Small business owners typically don’t need stellar FICO scores to obtain this loan, and the interest rates are favorable. However, some CDCs have specific programs in which they only lend to women-owned and minority-owned businesses, or small businesses operating in underserved communities. 

• SBA Microloans. These loans are also backed by the SBA and carry very similar requirements as CDC/504 loans but offer small amounts – the maximum amount is $50,000 and in 2022, the average microloan amount was a little under $17,000.
• Working capital loans.  These loans are typically offered by online lenders and often charge high interest rates. They don’t emphasize credit scores as much as they do cash flow history, as they are meant for small businesses to keep their operations going during the offseason or when there is a downturn in the economy. 

Additional Advice on Business Loan Qualifications

Making sure you meet the qualifications to get a business loan can be a daunting process. To give yourself the best chance of obtaining a loan, make sure you go over a checklist of things you need to do:

1. Start early. Loan applications, especially from traditional banks, can be long and complicated. Don’t wait until the last minute to start filling it out. 
2. Get your paperwork in order. Most lenders require a mountain of paperwork, such as proof that your business is registered with both the state and the IRS, a business plan, a government-issued ID, and several months’ worth of bank statements and tax returns, among other things. Having this at your fingertips will make the process much easier for you.
3. Make sure you know why you’re borrowing money. Whenever you borrow money for your business, it’s crucial that you know exactly what you’re going to spend that money on so you’re not left with interest-bearing debt. Most importantly. You should be using borrowed money to invest in your business to increase your revenue to ensure that you can afford to make debt payments. 

While loan requirements can be complicated, all it takes is some careful planning to meet all of them before applying for a small business loan. When you speak to a loan representative at either a bank or on the phone with an alternative lender, it’s important to be ready to meet all of their requirements beforehand to ensure that you get the loan that you need to grow your business. 

If you’re ready to take on a loan or any other type of financing for your small business, you should give yourself a pat on the back. That usually means that your business has grown to the point where you’re ready to take on additional growth opportunities or you just need funding to keep your operations running smoothly. Before you get that business loan, however, one of the most important questions you need to ask is, ‘what type of financing should I get?’

Various types of small business lenders offer an array of loan options and other financing products for different purposes, and it’s crucial that you determine which product best suits your needs as a small business owner. While nobody really wants to pay interest, each financing option will offer a different cost of capital. There are also those that offer different repayment terms, while there are still others that are designed to fund specific business needs. 

What types of loans are there and which one is best for you? You have an array of options, and which one you choose should depend on how you plan to use the funds, your business and personal credit scores, as well as the loan amount you’re seeking. 

Types of Business Loans

Here are the different types of small business loans you can seek for your small business and how they can help you the most:

Term loans.

Term loans are offered by both traditional banks and alternative lenders. It is a large chunk of money that you receive all at once and agree to pay back over time with interest. The proceeds of a term loan (also called a bank loan) typically must be used for a specific purpose, such as expanding your business, developing and marketing a new product, or consolidating debt. 

Traditional banks usually offer slightly lower interest rates than alternative lenders, but often demand that you have a good to excellent personal FICO and business credit score. The application process tends to be longer and more complicated than alternative lenders, and the funds may take days or weeks to be delivered to you. Alternative lenders typically charge higher interest rates but offer a simpler application process, typically have less stringent qualification requirements, and can deliver funds to you in as little as a day.

Small Business Administration (SBA) 7(a) loan

SBA 7(a) loans are essentially term loans given out by both traditional and alternative lenders, while the US Small Business Administration guarantees a large portion of them and sets the general borrowing requirements for small business owners. These loans typically offer the best interest rates when it comes to term loans, but come with a long list of requirements such as an excellent FICO (680 and above) and a business (80 or above) credit score. Also, it may take weeks to actually obtain the funds. 

Working capital loan

These loans are typically offered by online lenders and typically don’t require a personal FICO or business credit score as high as a term loan. They are usually meant for small businesses with seasonal or uneven cash flows throughout the year that need to keep operations going during the offseason or when there’s a downturn in the economy. Depending on the borrower’s credit score, the interest rate can be very high.

Non-Recourse Loan

Non-recourse loans are often used in commercial transactions in which the real estate itself acts as collateral. In a non-recourse loan, the lender may only seize the collateral in the event of default or bankruptcy, even if the collateral does not equal the full value of the loan. A non-recourse loan, in rare cases, can also be applied to a secured term loan. 

Lenders usually offer this type of loan with strict requirements, such as a very high credit score or performance guarantees. The SBA also offers some non-recourse loans through intermediary lenders, which also usually carry exceptionally strict requirements.

Commercial Real estate loan

If you’re a small real estate company seeking to invest in a property or a small business owner who’s decided that it’s in your best interest to purchase the property from which your business operates, a commercial real estate loan is your best option. It is essentially a commercial mortgage from a traditional bank in which the property being acquired becomes the collateral, so your credit score may not matter as much as your business plan. 

SBA Microloan

An SBA microloan is offered through intermediaries, many of which are not-for-profit and are geared towards young small businesses (at least 6 months in operation) and carry fewer requirements and lower interest rates than bank loans. In some communities, these loans are offered exclusively to women- and minority-owned businesses, or small businesses operating in underserved communities. The maximum loan amount is $50,000 with the average amount in 2022 being slightly less than $17,000. 

SBA CDC/504 loan 

Like the SBA Microloan, these loans are typically offered through not-for-profit intermediaries and are typically granted to small businesses for the purpose of enhancing their communities through storefront renovation and increasing local hiring. They can also be used for land acquisitions and equipment purchases, and carry less strict requirements than bank loans. Unlike the SBA Microloan, they do offer larger amounts, with the maximum being $5 million.

Equipment loan

An equipment loan, commonly referred to as equipment financing, is just that: a loan that pays for the entirety of a piece of revenue-producing machinery (such as a business vehicle, tractor or manufacturing equipment) for your business. This is offered directly by traditional banks and alternative lenders. This type of loan usually offers an interest rate that is less than a bank loan, depending on the credit score of the borrower, since the machinery purchased acts as collateral for the loan. The catch is that the interest rate on this loan will usually be higher than if you went directly to a dealer and financed that equipment. However, if you buy directly from a dealer, you usually have to make a large down payment. 

Non-Loan Business Financing Options

While there are a lot of different types of business loans, there are also financing products that are not technically considered loans, even though they involve lenders giving money to businesses in exchange for the principal and an interest rate or “factor” fees. These types of financing products can come in handy for specific purposes and sometimes can be more convenient than traditional loans.

Business Line of Credit (BLoC)

A business line of credit, offered by traditional banks and alternative lenders, gives your small business a predetermined amount of debt to draw upon for any business need. While conceptually similar to a credit card in that way, there are many differences. A BLoC often offers a lower interest rate than a business credit card but doesn’t offer rewards of any kind. Additionally, a BLOC has to be renewed, sometimes on an annual basis. It often has minimum withdrawal amounts; penalties for non-use and repayment terms that include full payment at various intervals. 

BLoCs, however, are very flexible financing tools for a small business owner – the money can be used for any purpose at any time, including meeting payroll during the offseason or for purchasing additional inventory when customer demand unexpectedly swells. 

Revenue Based financing (RBF) 

RBF is a contract-based financing tool typically offered by alternative lenders. A lender will give a lump sum of money to a small business owner in exchange for a predetermined percentage of the business’ future receipts. The contract is based on a factoring model, which means that the portion of each receipt will be factored as a percentage to give to the lender or factoring company. 

While this is usually a more expensive form of financing than a loan, RBF can be very useful if a small business owner comes across an unexpected growth opportunity or an emergency business expense. One positive is that factoring companies usually don’t consider your credit score as the most important qualifier when deciding to do business with you.

Invoice Financing 

Often referred to as invoice factoring, this is a financing tool in which an alternative lender gives you money upfront for your unpaid invoices. The money upfront will be slightly less than the combined value of the invoices, but this type of financing enables small business owners to unburden themselves of the risk of slow-to-pay customers never paying. The potential drawback is that the small business owner may be forced into a longer contract than desired, and depending on the terms of the contract, may be on the hook for a portion of the money if the customers never pay their invoices.

Purchase Order Financing 

Let’s say your small business receives a large order from a major retailer.  However, the cost to produce this order is beyond your reach right now or you’re just not comfortable using up that much of your available cash flow to fulfill the order.  This is where purchase order financing, another type of factoring product, can be incredibly useful. 

With purchase order financing – usually done through an alternative lender – the lender will pay your suppliers upfront for inventory in exchange for a small percentage of the purchases being made, which are referred to as factoring fees. While this can be a bit expensive compared to other types of loan products, the cost of purchase order financing is covered by the amount you would be paid when fulfilling the order. While it may eat into your profit a bit, that is profit you wouldn’t have had if you had to turn down the order due to a lack of inventory.  Additionally, high credit scores on your end will not be a requirement for this type of financing because the credit that is taken into account is the credit of your customer that made the purchase order. 

Consider a Checklist to Help You Select the Right Business Loan for You

Choosing from the different small business loans available to grow your small business, meet unexpected expenses, or keep your business running smoothly is one of the most important decisions you need to make as a small business owner. Before applying, you should go down a fundamental checklist of questions you should answer before seeking financing:

• Why do I need financing/what will the money be used for?
• How much am I willing to pay for business financing?
• Which types of financing are most convenient for me in terms of how I can use the money and how quickly will I receive it? 
• Which financing products am I most qualified for? 
• Do I have a realistic plan for making loan payments or paying the factoring fees? 
• Does my current cash flow justify taking on financing?

Answering these questions beforehand will help you make the wisest decision possible on what type of financing you need, what financing you’re able to afford,  and will – ultimately – help your small business flourish in the long run. 

Veteran small business owners are a strong community of achievers with a background in determined hard work. It’s no wonder so many veterans shift into starting and running a business when they rejoin civilian life. However, while time spent as an active duty service member can be an advantage when dealing with the demands of day-to-day business operations, it can also impede veteran business owners’ chances of obtaining business financing – with service-related gaps in financial history making it more challenging (and more complicated) for veterans to get business loans than their non-military counterparts. There are still great options out there, though.  It just may take a little more time and a little more paperwork to put your hands on some funds.  Let’s explore the most popular loan options for veteran small business owners.

Small Business Loan Options for Veterans

Veteran entrepreneurs can choose from a large selection of business loans and financing options provided by traditional banks and alternative lenders, along with loans that are backed by the federal government through the Small Business Administration (SBA).  Loan options vary by lender and will have their own set requirements laid forth by each lender. Depending on your specific situation, one loan type will likely serve you better than another so fully researching each option to select the best financing for your business is critical.  

Personal Loans for Veteran-owned Businesses

Let’s begin with one that you may not expect: It is more than possible to take out a personal loan to boost your small business. While business loans are frequently based on the overall financial standings of your enterprise itself, the terms of personal loans will be based on your personal creditworthiness and financial health. Using personal loans for your business, however, has its own set of rules and considerations.

Pros of Using a Personal Loan for Your Business: 

• While there are options for secured personal loans, the majority typically do not require collateral, which means you’re less likely to be risking any of your personal assets to finance your business with this option. 
• For new and very small businesses, it can be much easier to qualify for a personal loan than a traditional business loan.  In addition, you can use the funds from your personal loan for virtually any expense.
• You can get access to funds quickly – usually within a few days after you are approved, though some personal loans offer same-day funding.   And personal loans typically come with very reasonable terms, ranging anywhere from two to seven years (though some lenders will go out as far as 10-12 years for much larger personal loans.)

Cons of Using a Personal Loan for Your Business

• You will have access to less money with a personal loan.  In rare situations, some lenders do offer personal loans up to $100,000; but, typically, most lenders will only go up to $50,000 for very qualified candidates.
• APRs tend to be much higher with personal loans, with the average being about 11.05% in 2023, according to Bankrate.  In addition, interest on a personal loan isn’t tax-deductible, unlike interest paid on a business loan.
• Regardless of whether you go for a secured or unsecured personal loan, you will be putting your personal credit on the line.  If you do opt for a secured loan, you will also be putting personal assets at risk if you are unable to pay the loan. 

Taking all of the positives and negatives into account, veteran business owners should be cautious when they decide to leverage a personal loan for business use.  The scenario is best applied for new or very, very small businesses that aren’t likely to be approved for business-specific financing. 

Loans from Family & Friends 

Depending on your circumstances, taking out a loan directly from friends or family may be one of the best options available to small businesses – especially startups. While traditional financing will uniformly lay out terms and conditions (with the expectation of prompt payment), loaning money on a personal level requires a level of trust and understanding between both parties that extends beyond a pen-and-paper contract.

Pros of Friends & Family Loans:

• Friends & Family loans can be much more affordable for business owners, as individuals with this personal relationship often won’t charge as much in interest. In fact, they can waive interest overall for other benefits, such as a stake in ownership, royalties/revenue share, or even a lifetime discount for your products. 
• This type of loan also has the potential to add more flexibility than “official” lenders.  If you need to delay payment or you want to pay off the loan early, friends and family are more accommodating and less likely to charge you additional fees for these types of scenarios. 
• These loans are a particularly great option for veterans who have a limited credit history that precludes them from accessing financing elsewhere.  

Cons of Friends & Family Loans

• You’re making business personal which could negatively impact your relationships.  Missed payments, disputes over a loan agreement, or a sense of general awkwardness if your business isn’t making money as quickly as you’d hoped, could all lead to a damaged personal relationship.  
• While these loans are great options for those with limited credit, they can also be a detriment to your credit profile since they will not be helping you to build or improve your credit standing – which is something that you will need if you want to get more financing from a traditional lender down the line. 

Like personal loans, friends and family loans can be a great option for new and very small businesses.   They can also be a viable loan option for business owners with limited or bad credit. However, make sure you have a strong agreement – that both parties are happy with – in place to help insulate your relationship from any potential damage.

Term Loans

Term loans are what most business owners think of when they hear the word “business loan”.Term loans are one of the most straightforward ways to get a lump sum of working capital for your small business.  Interest rates on military business loans like these can be fixed or floating and they are available as both short-term and long-term loans. Business term loans can be used for virtually any business purpose, but some lenders do have restrictions on how you use the funds. 

Pros of Using a Term Loan for Your Business

• With business term loans you don’t have to give away any ownership of your business to get access to funds like you would with some other types of financing
• There are many types of business loans available so finding one to suit your exact needs and business situation is relatively easy so long as you qualify. 
• Unlike other kinds of financing, interest payable on a term loan is sometimes tax deductible. You should always check with your accountant prior to signing a loan contract to determine if you can take advantage of this tax deduction.

Cons of Using a Term Loan for Your Business

• Business term loans tend to have stricter requirements than other types of business financing (especially when it comes to credit scores) and they typically require quite a bit of paperwork – from bank statements and tax returns to financial statements and a business plan 
• If you are a newer or very small business, term loans aren’t typically a great option as they’re very hard to meet time in business and revenue qualifications set by lenders. 
• If you need money quickly, you may want to consider other financing options.  Business loans tend to take longer – from several days to several weeks – to get a decision on whether or not you were approved.  In addition, once you are approved, it can take another several days to weeks to get the funds in your account. 

SBA Loans

For honorably discharged veterans, service disabled veterans, active duty military members who are eligible for the TAP program, active reservists, and National Guard members, the SBA offers a number of loan programs designed to help you get access to the capital you need to start, grow and manage your business. Through their Veteran’s Advantage Loan Program, the SBA will provide “fee-relief” on small-dollar loans along with training courses and counseling that help veterans become “lender ready”. 

SBA 7(a) Loan

7(a) loans are the most well-known and the most common type of SBA loans, which actually represent an entire class of loans with limited fees, capped interest rates, and a partial guarantee of the total capital offered in the loan. Standard 7(a) loans can offer up to $5 million in capital.  The terms of a 7(a) loan are typically determined by your use of the funds.  For example, if you plan to use the loan for real estate, terms can go out as far as 25 years but if you plan to use the loan to purchase equipment, for example, terms are capped at 10 years. 

Under the Veteran’s Advantage program guaranty fees for standard 7(a) loans are discounted by 50%. 

SBA Express Loans for Veterans

SBA Express loans are a type of 7(a) loan that boasts an accelerated review turn time of 36 hours by the SBA.  These loans can go up to $500,000 and have terms that can extend up to 10 years.  Under the Veteran’s Advantage Program, your up-front guarantee fee for an express loan is 0%

SBA Microloans

SBA microloans are only offered up to $50,000 and are generally considered the best option for veteran small businesses still in the early stages of business. According to the SBA, interest rates will always depend on the intermediary lender, but generally range from 8 to 13 percent. Further, the maximum repayment term possible is six years.

Military Reservist Economic Injury Disaster Loan (MREIDL)

While not specifically for veterans, this is a helpful loan if you have an essential employee who is a reservist that was called up to active duty.  MREIDLs provide funds to assist eligible small businesses to meet their ordinary and necessary operating expenses that have been severely impacted due to the absence of the now-active reservist employee.  Loan amounts can go up to $2 Million, but the actual amount will be determined based on SBA calculations of the actual economic injury to the business. 

Pros of SBA Loans for Veterans:

• SBA loans tend to be the most cost-friendly loans available to all small business owners.  They are even more so for Veterans through the Veteran’s Advantage Program fee reductions.
• There is a variety of loan types that are backed by the SBA that come with favorable interest rates and longer payment terms making it easy to find a loan that can fit your current business needs

Cons of SBA Loans for Veterans

• There is a ton of paperwork involved when applying for an SBA loan and there are many strict requirements for qualification, including the fact that you need to exhaust all other forms of financing first.  In addition, collateral may be required for approval.
• While there are a variety of loans available, you are limited on how you can use the funds based on each loan type.  It’s important that you nail down exactly how you plan to use your funding to ensure that you apply for the appropriate type of SBA loan. 

Additional Financing Options for Veteran Business Owners

While there are several great veteran business loan programs out there, loans luckily aren’t the only financing option available for veterans.  Here are some alternative financing options that veterans should consider based on their needs:

Revenue Based Financing

Revenue based financing is a type of financing that allows businesses access to working capital through a pre-purchase of future revenue. Essentially, a financing partner or lender will provide you with a lump sum of cash based on expected future sales.  You “sell” this future revenue at a discounted rate to get money to run your business today.  This is a short-term type of financing with terms averaging around 6-12 months.  Payments are typically made daily, though some lenders allow for weekly or monthly payments and payment amounts are based on a pre-determined percentage of that day’s revenue.  This percentage is fixed, so if you make less in sales on any given day, your payment to your lender will be less that day.  If you make more sales, your daily payment is larger.  

Equipment Financing & Leasing

If you’re looking for financing to add or upgrade business equipment, equipment financing or leasing may be the way to go.  Depending on the lender you choose, you may be able to finance 100% of the cost of the equipment and the asset that you are purchasing typically acts as collateral. 

Business Line of Credit

A line of credit is one of the most flexible forms of financing available to small business owners. This revolving form of financing allows you to draw on funds when needed and you only pay interest on the amount you use.  Businesses can draw and repay multiple times throughout the term of the line. Lines of credit tend to suit the veteran business owner either looking to keep more working capital on hand during slow seasons or those who are expecting a repeating and predictable expense that would make too large of a dent in available cash flow.

Where Else Can Veteran Business Owners find Money to Grow?

If formal financing arrangements aren’t in the cards for you right now, there are still several great ways for veteran small business owners to connect with the capital they need.

Grants for Veteran-owned Businesses

There is a robust collection of organizations that offer grants specifically for veteran business owners. Beyond simply offering grants, several of these organizations offer additional resources for veterans, doubling as mentorship organizations and offering a great community for the veterans who join up. And at that, many also have connections for picking government contracting work or special resources for disabled veterans.

Crowdfunding

Americans love their troops and any veteran business owner with an interesting business plan or a charismatic screen presence ought to consider bringing their business to crowdfunding.  Crowdfunding is a way to raise capital for your business by tapping into your extended network, whether that be family, friends, customers, and/or individual investors. There are two primary forms of crowdfunding – rewards (where you offer something non-money related to those who contribute money) and equity (where you offer equity in your business in exchange for monetary contributions).  While the main purpose of crowdfunding is to raise capital, there are additional benefits as well including brand awareness, growing your customer base, and potential partnerships. 

Business Credit Cards

 A business credit card is a great resource, especially for filling small gaps in your operations or giving yourself a small cushion for your working capital. When choosing a business credit card, however, be certain to weigh as many options as possible as the sign-on deal of your card is likely the most lucrative benefit you can take advantage of.

Before You Apply for a Small Business Loan

Getting a business loan can be a complex and time-consuming process.  Each lender and each loan type comes with its own requirements, risks, and rewards so it’s important for you to do extensive research before even applying. From understanding your own business needs to breaking down the total cost of financing for each loan type, there are multiple steps you should take when going through the process of getting a business loan.  

Don’t let this deter you, though, as there is a world of veterans’ small business loans and other financing options just some clicks away.

It’s been noted time and time again: female entrepreneurs begin in the business world with a social impediment that their male counterparts don’t. But at the same time, today there are more female entrepreneurs than ever before. Women, however, are still statistically less likely to be approved for financing compared to men.

While there technically are no programs reserved specifically for supplying loans for female business owners, there are a number of resources available to women business owners to help them run and grow their businesses. Let’s discuss the state of women and the small business world on three levels:

1. Why women are less likely to get approved for financing
2. The top financing options available today, and how to better set yourself up for an approval
3. Grants and other development programs created specifically for the benefit of women-owned businesses

Why Are Women Being Approved Less for Business Loans?

Despite the fact that women make up a growing percentage of today’s small business owners, there is still a large funding gap when you compare business financing secured by women with that secured by men.  While there are many reasons for this gap, some of the largest are the result of being unable to meet the basic qualifications set forth by most lenders. Below are some of the primary reasons women have more difficulty securing business loans than men:

Industry: Every lender takes industry into account when reviewing a loan package.  Why?  Because some industries are inherently riskier than others. One of these risky industries is retail which tends to have higher expenses and lower profit margins.  Many women-owned businesses are in the retail sector.  

What can you do about this?  Completely changing the industry of your business is likely not an option, but there are a few things you can do – regardless of the industry you’re in – to help improve your options for the future including:

1. Figuring out ways to lower your business overhead
2. Building a plan to increase your revenue
3. Start by borrowing smaller amounts of money and ensuring that you pay them off on time

Time in Business:  Regardless of who owns a business, if the business is in its early stages of operation (typically under two years in business), many lenders will not provide financing because the business does not have enough history to show it can maintain profitability and meet payment obligations. The number of women-owned businesses has been picking up significantly over the past couple of years, so many of them simply haven’t been in business long enough to qualify for conventional financing. 

What can you do about this? If you’re able to, you can opt to wait out this two-year period.  But, in order to keep a business running – especially in its early years – financing is needed.  Fortunately, there are some alternative lenders who are willing to be more lenient about this requirement if you show both good credit and at least six months of very strong revenue and consistent positive cash flow. 

More Risk-Averse: There are a number of studies out there showing that women are more averse to taking risks than their male counterparts.  This can show itself on many fronts in a business – including women being less like to bring in outside investors (they don’t want to have to run decisions by others) and being less likely to take on capital that comes with a higher cost, which limits their ability to take advantage of opportunities to grow their business. 

What can you do about this? Ultimately, being risk-averse can be a good thing – but in business, taking on some risk is necessary.  If you have a legitimate growth opportunity in front of you, it could be to your advantage to reconsider what financing options you are willing to use.  Absolutely still consider it as a risk, but be strategic in that consideration.  Run all of the numbers.  Determine if paying higher rates is worth the cost because, ultimately, your new endeavor will cover that cost of financing and give you additional profit at the same time. Truly consider if bringing in investors will impede your decision-making processes as much as you think.  Only you can answer these questions and make the final call, but it is definitely something that you should research and consider strategically before making that call. 

At the end of the day, it’s all a numbers game when it comes to lenders AND running your business.  Improve your numbers and you improve your chances of being approved and growing your business. 

Best Small Business Loans for Women

Let’s break down the types of loans that are available today, covering those that are not just popular but also attainable for many of today’s women business owners. There are several ways to connect your business with a business loan – from online lenders to traditional financial institutions. But before partnering your business with a lender, it’s key to consider each type of small business loan on the table and which may be best for you.

SBA Loans

 The Small Business Administration (SBA) doesn’t technically offer loans themselves but instead guarantees loans carried out by partner lenders and traditional banks. Because of this guarantee by the Federal Government, the interest rate of SBA loans tends to be much lower – following the Prime Rate (this is the interest rate benchmark set by the Federal Reserve System on a nightly basis). Lower rates and a federally-backed guarantee make SBA loans a great option for reducing risk for both the lender and business owners.

SBA 7(a) Loan

 The SBA 7(a) loan is often called the most popular of the SBA loans for women business owners. And for good reason: the SBA 7(a) loan is versatile. Business owners can finance up to $5 million with the 7(a) program. From real estate to payroll, an SBA 7(a) loan can meet just about any reasonable business need.

SBA Express Loans

SBA Express loans fall within the 7(a) loan program.  They come with lower loan amounts than the standard 7(a), capping out at $500,000 but they also come with an expedited review by the SBA.  Express Loans can be used for a wide range of business needs – from purchasing equipment or real estate or for basic working capital.  If you are a female veteran business owner, this is an excellent option for you to consider as the Veterans Advantage Program allows for significantly reduced fees with the SBA Express Loan.

SBA Microloans

Microloans from the SBA generally have smaller payouts and shorter repayment terms, as the name would imply. Specifically, SBA-guaranteed microloans are offered up to $50,000. The most notable difference between a 7(a) and a microloan, however, is that microloans cannot be used for refinancing or buying real estate. SBA Microloans are a great loan option for women with businesses in the startup phase because they come with fewer requirements than the popular 7a loans

Term Loans

Term loans are one of the most widely used types of financing available to businesses today. Term loans are generally what most people think of when they hear the word ‘loan’. Term loans are an agreement between a business owner and a financial institution to give an approved loan amount with a set repayment schedule. That repayment schedule is the ‘term’ in term loans.

Term loans generally give the full principle of a loan upfront. Because of this, term loans can be very helpful for getting more cash flow into your coffers. Depending on what you are looking to finance, term loans can last either a fairly short amount of time or several years. Of course, term loans with longer terms and more capital at stake will generally require a higher credit score, more time in business, and a strong history of positive financial statements.

Personal Loans for Business

If you’re in a pinch, it is entirely possible to take out a personal loan and use the funds as capital to better your business as long as your lender has no restrictions.  If you have decent credit, a personal loan could end up providing you with better interest rates than a business loan, which is always a win.  However, there are some drawbacks:  personal loans typically come with much lower amounts than traditional business loans.  In addition, you are potentially putting personal assets on the line if you fail to meet your payment obligations.   When used responsibly, this can be a great option for women-owned businesses, particularly those in the beginning stages of the business journey. 

Loans from Family & Friends

Taking out a loan from friends or family rather than a financial institution has a whole different set of rules. Rather than your financial record being the biggest indicator of your trustworthiness, you’ll functionally be relying on your social record. This is, once again, a rather common option for female entrepreneurs in the beginning of their business journey. 

And while there are several big-name success stories of today’s Fortune 500 who started their way with capital from a friend or family, the main rule of financing remains here: only borrow the money you are certain you can pay back. Instead of just affecting your credit, you risk breaking the ties that bind.

Additional Financing Options Women Business Owners Should Consider

Beyond small business loans, there are several other types of financing that are worth considering depending on your needs and current situation.

Revenue-Based Financing

Instead of paying central attention to your credit score and personal financial reputation, revenue-based financing approvals are based more heavily on exactly what you would expect: your revenue. While there are still minimum credit score requirements to be aware of, revenue-based financing generally allows the strength of a business to speak for itself.

Revenue-based financing is not a loan.  Instead, a lender will purchase a percentage of your future sales.  This gives you cash on hand today for sales you wouldn’t make until tomorrow (or over the next couple of months).  Because revenue-based financing is not a loan, there is no actual interest rate.  Instead, there is a factor rate that will not change throughout your agreement with the lender.  Repayment is made by paying a percentage of your daily, weekly, or monthly sales (depending on the contract terms with your lender) until the entire amount provided, plus the factor and any fees are paid back. Revenue-based financing can be extremely expensive, so it should only be used very strategically and is ideal for opportunities that would generate a large enough return to both cover the cost of the financing and put profit in your account. 

Business Line of Credit

A business line of credit is functionally a borrowing limit that allows your business to take out capital until a predefined upper cap. You pay interest only on the portion of the line you’ve used. And, once you pay back what you’ve used, you can use it again, making one of the biggest advantages of a business line of credit is its flexibility. 

For example, if you take out a line of credit with an upper cap of $50,000 and you only use $5,000 in a billing period, you would only pay interest on that $5,000 and not the entire $50,000. Further, if you pay the full balance of your line before the end of the month, you won’t pay any interest.

Lines of credit can be used for almost any business purpose, so it is a great way to cushion your bottom line and cover unexpected expenses.

Equipment Financing

Equipment financing is a great way to get expensive or timely machinery for your business. The logic goes that you approach a financial institution with the specifics on a piece of equipment you need for your business. 

The institution can agree to pay either a percentage or the entire price of the machinery on the agreement that you will pay back the principal with the assistance of that machinery. The equipment in question also tends to act as collateral or in some cases the lender may demand to take out a lien on the equipment in the place of collateral.

Choosing the Right Loans for Your Businesses

Considering the world of lending options available for women-owned businesses, it is essential to weigh the value – along with the cons – of each financing option available to determine which is best for your current business needs. Here are some tips to help you determine what loan option is right for your business.

Make a Detailed Plan

Female loan applicants ought to start by laying out a plan that considers every step of the loan journey – from completing an application all the way through to how you plan on spending your capital if you’re approved AND how to recover if you’re declined for a business loan. 

Step 1: Determine how Much Capital you Need

Before even looking at your loan options, sit down and find a firm figure as to how much capital you want and, further, how quickly you would like to get it.  You should list out all of the items/services your business needs and then research the estimated cost for each.  Once you have the list fully compiled, you need to prioritize them.  From there you can gauge a range of financing amounts that will help you accomplish your goals.

Step 2: Look into Your Prequalification Options

Several online lenders offer full prequalification at no cost to you. Using pre-qualification is a great way to learn how lenders see your business.  It can also help you determine just how much loan you can afford.  Once you’ve got your prequalification numbers, it’s time to go back to your list of needs and shuffle as necessary.

Step 3: Select your lender

Choosing your lender should not just be based on interest rates. Choosing a financial institution or online lender is a mutual recognition of value and trust. Remember that your lender is pitching themselves to you just as much as you are pitching your business to them. Look closely at their reviews to see how they treat customers.  Ask questions to see if their business practices will meet your needs – will they work with you to come up with the right payment plan for your business?  Do they allow early pay-off without any fees?  Do they provide support to their customers even after they are funded?  There’s a variety of ways to determine if a lender is the right financing partner for you – it all just depends on what, as the customer, would like to see in that relationship and then finding the best lender to fit that wishlist. 

Step 4: Gather paperwork

The best lenders are generally quite upfront about their paperwork requirements but the most common paperwork to expect and have handy are:

1. Six most recent bank statements. 
2. Two years of business tax returns
3. Business Plan
4. Financial statements, including your income statement and balance sheet
5. Budget and cash flow projections 
6. Government documents including all business licenses, your business registration and your EIN

Not all lenders will require all of these documents, but some will, so the specific paperwork you need will be determined by the lender you select.  Your chosen lender will be able to provide you with the full list that they require for underwriting and approval. 

Step 5: Apply for your loan

This is the easy part. If you have a good financing partner, application processes ought to be smooth and straightforward.

Step 6: Compare offers

Lenders will often give you multiple term options, some lenders, like Kapitus, even have the ability to offer you different financing products based on your single application. The best lending partners will consider your business structure and guide you toward the terms that make the most sense for you. But it is also essential to do your own research and confer with all those who are involved with your business’s finances.

Step 7:  Read the Fine Print 

We all know it. But let’s say it again for the sake of how serious this is: always read the fine print of your loan agreement and make sure you understand everything in your BEFORE you sign on the dotted line. 

Additional Financing Resources for Female Business Owners

There are even more alternatives out there for women entrepreneurs who are looking for more ways to boost their business’ cash flow.  If a loan isn’t right for you at the moment or if you’re simply looking to diversify cash flow sources, consider these options. 

Business Credit Cards

There are several well-known financial institutions that offer credit cards tied to the credit score and creditworthiness of your business rather than you personally. Choosing the right business credit card, of course, has its own key considerations, so be sure to thoroughly research all options. 

Crowdfunding

If your business has a fascinating plan for expansion or you’ve faced extraordinary hardship, you may want to consider creating a crowdfunding campaign. There are several women business owners who have found tremendous success through the help of others. 

Consider the success story of Hannah Kromminga and her company Silfir. Kromminga caught the attention of the crowdfunding public because of the unique style and quality of her workwear made with sustainable materials. Because of some snappy videos and effective marketing, Silfir more than exceeded her funding goal.  

And crowdfunding is a great way to get the capital your business needs while spreading the word about your business.

Grants for Women-owned Businesses

There are luckily plenty of small business grants reserved specifically for women business owners, minority-owned businesses, or female veterans. While loans will always expect repayment, grants are often obligation-free. Among the most reputable small business grants for women is the WomensNet amber grant which gives monthly small business grants to female business owners and has built an impressively active community of female business leaders.

Keep Going!

It is no small thing being a female business owner. In fact, each small business success from women today further opens doors for future generations of women business owners. So, don’t give up.  Keep learning.  Keep doing.  Keep growing.  Keep succeeding!

Life is a process of trials and errors, and there’s probably no one for whom that statement rings more true than a small business owner. This statement especially applies when small business owners apply for loans to gain much-needed capital to ensure their businesses grow or to smooth out their cash flows. What if, however, a lender denies your application for a small business loan, even though you thought you took all the necessary steps to obtain that financing? 

First thing’s first: while getting a business loan rejection is frustrating and disheartening, you need to keep a positive mindset. If your business loan was declined, don’t look at it as a failure, look at it as one of the many lessons you will learn as you run your business. There are specific steps you can take to make sure you get approved the next time around – and it might not take as long as you think. 

The following are steps to take after you’ve been rejected from a business loan and how you can improve your situation to increase your chances of approval on your next attempt.

Talk to Your Lender

The first thing you should do after being rejected for a small business loan is try to get into the mindset of the lender. 

Small business lenders – be it traditional banks, alternative lenders or credit unions – make money by giving loans and collecting interest and fees on those loans. Therefore, whenever a small business applies for a loan, they want to be able to approve it. So, if you do get rejected, give them a call, and they will be happy to give you the specific reasons why your application was rejected. 

Also, keep in mind that lenders are in the risk business. The simplest and most general reason that you, the small business owner, gets rejected for a loan is that the lender does not have enough confidence that you will be able to pay back the loan and believe that you represent too much of a risk of default. There are a lot of factors that go into deciding how risky you are as a borrower, and again, the lender will be more than happy to tell you which criteria you didn’t meet.

Improve Your Credit Scores 

When you apply for most types of business loans, the first two items the lender will look at are your credit reports – for both your personal credit score and your business credit score. One of the most common reasons small business owners get turned down for loans is that their credit scores aren’t high enough. 

You can find lenders that are willing to give loans to those with poor credit scores, but they charge exceptionally high interest rates. So,  if you’ve been turned down for a business loan because of your credit scores, it’s worth it to take the time and effort to take steps to improve those scores to avoid paying high interest rates. 

Some steps you can take are:

• Check your credit reports. You can easily access your detailed, personal credit reports through the three main credit bureaus – Experian, Equifax, and Transunion, and you should check your business credit score through the most commonly used business credit bureau, Dun & Bradstreet.  Check for any errors that may be dragging your score down. Remember, in 2022 it was found that on average, 1 in 5 people had errors on their reports. You may have to pay a small fee to gain access to your reports, but it’s worth it in the long run.
• Make sure you have at least 6-9 months’ worth of on-time payments towards your existing debts. This includes payments towards business and personal credit cards and any other debt your small business may have. Nothing hurts your credit score more than a history of late payments on your debt. 
• Pay down existing debt. Credit utilization (the amount of debt you have on your credit cards or business lines of credit vs. your credit limit) is factored heavily into your credit score, so if you can, take a few months to bring that number down. 
• Get another credit card. This might seem counterintuitive at first as you may be thinking, ‘The last thing I need is another credit card.’  However, getting another personal or business credit card (but not using it!) will decrease your credit utilization and can boost both your personal FICO and business credit scores.  BUT, note that this will only help in some situations and it may take some time for you to see the positive impact.  Getting a new card can initially lower your score due to the hard credit pull by the card issuers. In addition, a new card can lower the average age of your accounts.  However, the longer-term gain may just be what you need to tip the scales in your favor!
• Get trade references. If you have good relationships with your suppliers, you can try to convince them to write letters to your credit bureaus stating such. These letters are called trade references, and they can boost your business credit score as most business credit bureaus don’t initially factor that into your credit report. 

Reconsider Your Financing Options

A term loan from a traditional bank isn’t the only way to get the capital you need for your small business, nor are traditional banks the only types or lenders out there. There are financing products in which lenders don’t put as heavy of an emphasis your credit scores, such as:

• Secured loans. A secured bank loan or business line of credit will emphasize credit scores less since they are backed by collateral. 
• Equipment loans. Equipment loans use the equipment being purchased as collateral, so your credit scores typically don’t have to be as high as they would for a standard business loan. 
• Small Business Administration (SBA) microloans and  504 loans. These types of SBA loans are backed by the SBA and are often geared towards younger small businesses, women- and minority-owned small businesses and small businesses that operate in underserved communities, so lenders typically don’t heavily emphasize credit scores when approving these loans. 

Also, if you’ve gotten a loan rejection from a traditional bank (especially for a SBA 7a loan, which has very high standards) because your credit scores are borderline, you may want to try applying with an alternative lender. Alternative lenders often have simpler business loan applications and are more willing to approve borrowers with borderline credit than traditional banks. 

Improve Your Cash Flow

Almost every type of lender will want to see several months worth of bank statements for your business, as well as several years of tax returns in order to gauge your cash flow history. Cash flow is simply the money flowing into your small business vs. the money that’s flowing out. In some cases, you could get rejected for a loan if your cash flow isn’t strong enough. 

In this case, you may want to seek ways to improve that cash flow, but it may be a painful process. The most immediate way to improve your cash flow is to curb your business expenditures. This may mean letting some employees go and curbing excessive business expenses such as trips, business meals, cutting down on low-selling inventory, etc. Doing so could very well get you approved next time. 

Improve Your Business Plan

Traditional banks often require you to present your business plan, especially if you are applying for an SBA 7a loan, which has strict borrowing requirements. If you’re seeking a loan to expand and grow your business, you need to convince the lender that you are going to increase your revenue stream. This is where a business plan comes in handy. 

A detailed business plan tells a lender that you’ve done your research about the market your business operates in, why you believe your business has an edge on its competitors, and how you plan to make money. A convincing and detailed business plan can mean the difference between an approval or a rejection. You can find business plan templates online, and many of them are free. 

Take an Inventory of Your Assets

If your credit scores are borderline, a traditional bank or credit union may ask for a personal guarantee for your loan, which often means putting up collateral. Collateral can include any investment accounts you may have, personal items of high value or even the deeds to your house or car. Keep in mind that these assets can be seized in the event that you default on your loan payments.

Of course, putting up collateral presents a high risk to you, the borrower, but it does have potential rewards. Collateralized loans or business lines of credit can notch you a higher borrowing amount and lower interest rate, as well as cut down on fees and required balloon payments. In essence, collateral can dramatically cut the cost of capital on your loan. 

Try to Expunge Your Record

While it’s rare, small business owners may get rejected for a loan because many lenders want to do business with people of “high character.” This means that if you’ve made a mistake in the past and have been convicted of a crime, late on child support payments, or have an IRS tax lien on your finances, lenders will consider this a red flag and you may get rejected for a loan. If this is the case, you may want to speak to your attorney to see if you can get your record expunged, and get caught up on any child support payments or back taxes you may owe. 

Don’t Give Up

We all know the line made famous by The Godfather: “It’s not personal, it’s just business.” 

This is precisely the case when you’re turned down for a business loan. If you do get rejected, don’t take it personally, and don’t give up. All a loan rejection means is that you need to take steps in order to get approved next time so that you can get the funding you need to improve your small business. Follow the above outlined steps to improve your situation so that, next time, you can get the funding you need to enhance your small business. 

There are many ways to describe what it’s like to start a business: exciting, ambitious, and passionate, to name a few. Almost every small business owner would agree, however, that there’s one word they would never use – easy. For all types of businesses, one of the most difficult challenges for any new small business owner is obtaining capital to launch your new endeavor. After all, some 47% of small businesses that fail after two years do so because they run out of money.

Apart from new dentists and doctors’ offices, traditional banks generally don’t offer loans to brand-new businesses, so startup business owners must look elsewhere for funding. The good news is that there are business loans available for new business owners, but each carries a different interest rate, terms, and personal credit score requirements, so it’s important to get educated on the different sources of funding available. 

How to Qualify for a Startup Business Loan

Before you begin exploring the best business loans for a startup, take steps to make sure you qualify. This means that you need to check factors such as:

• Your personal credit score. Much of your personal credit score (or FICO score) is determined by your debt repayment history, your debt-to-credit ratio, and how much outstanding debt you have compared to your income. As soon as you begin your application process for a small business loan, this is the first factor that lenders will look at. 

If you have less-than-stellar credit, some of the ways you can improve your FICO score are by making sure you are current on all of your credit cards; paying down as much of the outstanding balances as possible. It’s also crucial to check your credit report with the three major credit bureaus to get rid of any errors that may be on it. 

• Your Repayment Plan. Ask your potential lender for a detailed repayment plan on the types of financing you’re considering. You can impress your lender by showing them a detailed plan of how you intend to meet your payment obligations. This could be in the form of a simple document demonstrating the income you believe your business will achieve and how you believe you will be able to handle the repayment terms. 
• Potential collateral. Many private lenders will require collateral as a condition of approving the loan, especially for startup business owners with poor credit. If you own a house, have money in your personal savings, or own other items of high value, the lender may require that you put those up as collateral.
• Your sales pitch. If you need a loan to start a business, or you need working capital to fund your new business, you’ll need to convince a lender that your business is viable as part of the application process. This means explaining to your potential lender why you believe your business will make money, who your market is, and what differentiates your small business from your competitors. Lenders will be impressed if you show them that you’ve done a thorough evaluation of your market and have a sound marketing plan to sell your products and services. If your business has been running for a short time, it would also help to show your potential lender your financial statements to demonstrate a strong cash flow.

Assess Your Financial Needs

Before considering a small business loan or other types of financing for your new venture, you need to itemize what you need to spend money on, and what the general costs are. This will give you an idea of how much money you need to borrow and the type of loan you should consider. Once you’ve come up with your unique idea and product offerings for your business, assess what you will need to spend money on to make it happen:

1. Manufacturing and inventory. Whether your business is online or operates out of a brick-and-mortar location, it won’t get very far if you don’t have products to sell. Manufacturing your product and having enough inventory will cost money. It’s crucial that you realistically gauge the market and determine the amount of products or services that you expect to sell and figure out how much that will cost.
2. Marketing strategies. Your great product or service won’t do you much good if potential customers don’t know about them. Determine who your target audience is and devise a marketing strategy to reach them. This may involve having to purchase marketing software that enables you to reach your potential customers via SMS, email, social media, and search engine optimization strategies. Determine what software you need and estimate the cost.
3. A website. No matter what type of business you are running, having an online presence– even a rudimentary one – is crucial, as most consumers today begin their search for products and services online. Even if you use a website builder and hosting service such as Wix or Squarespace, there can be fees involved. Do your best to estimate the cost for this vital business component.
4. Equipment/machinery. If you’re planning to launch a new restaurant, construction company, or any other small business that offers physical services, you’re going to need equipment to run your business. Assess what equipment you’re going to need and the costs.
5. Rent money for a physical space. If your business will operate out of a physical location, shop around to determine the ideal location and price for your space, as well as the cost to design it.
6. Outside contractors. There’s no shame in admitting that you can’t do something, and if you have the means to do so, contracting outside help for things like logo and website design and marketing could make your life a lot easier and greatly improve your business. These services are expensive, so shop around and guestimate the cost if you feel bringing on contractors is necessary.
7. Employees. Whether you’re opening a plumbing business, small accounting firm, or construction company, you will probably need employees at some point. A small business loan can help you get started on payroll until your business is pulling in enough revenue to pay your employees.

Where to Get Start-up Business Loans

There are not many types of start-up loans available.  There are even less start-up loans for those with bad credit.  So, getting an unsecured loan for your startup business will be difficult but not impossible. While most traditional banks and many alternative lenders do not offer them, as many of them view startups as too risky, there are some options:

Startup Business Loan Options

• Online Lenders. There are online lenders that specialize in giving loans to startup businesses, even to new small business owners with less than stellar FICO scores. These finance options can include term loans, lines of credit, and equipment financing. 

Drawbacks: Because they are taking on so much risk, these lenders often charge very high interest rates – in some cases as much as 30% – to new small business owners, depending on their FICO scores.

• Personal Loans. Personal loans have become popular over the past decade as online lending has become more prevalent. They are often easy to apply for, have far lower requirements than a standard business loan, and funding is typically quick. They can be a good source of bridge financing to pay for the startup costs if your personal savings aren’t enough to cover everything.

Drawbacks: Personal loans usually don’t offer as much money as business loans, so you may not be able to borrow the amount that you need. Additionally, depending on your FICO score, the interest rate on a personal loan can be extremely high. 

• SBA Loans. The SBA loan program offers two specific types of loans that new small businesses may be eligible for: the SBA Microloan and the SBA 504 Loan. These loans have much lower requirements than the popular SBA 7a loan and pay relatively small loan amounts to new businesses and offer much lower interest rates than online or personal lenders. They are typically offered through not-for-profit intermediaries, often called community development companies (CDCs), although some for-profit private lenders may offer these types of loans as well.  

Drawbacks: These loans are usually offered to small businesses that have been operating for at least six months, with some form of working capital foundation, so if you can somehow be in business for that long, the loan may be worth it. Additionally, CDCs and lenders often only provide business loans for minorities, those that operate in underserved communities, and veteran-owned businesses. The biggest potential drawback is that the amount you borrow may not be enough to cover your costs – while the maximum amount you can borrow for a microloan is $50,000, the average SBA microloan size in 2022 was a little more than $16,000.

• Personal Credit Card. If you’re desperate for funding and have no alternative sources of capital, then your personal card gives you a line of credit to draw upon to fund any start-up expenses. Make sure to get receipts so you can separate your personal expenses from your business ones so that you can take advantage of business tax deductions. 

Drawbacks: Personal credit cards typically carry a much higher interest rate than a business loan. Plus, startup business costs are usually high, and this will cause you to draw down your available credit significantly. That, in turn, will affect your FICO score, as your credit utilization rate is a big factor when calculating your score among all three major credit bureaus. 

• Home Equity Line of Credit (HELOC). A HELOC allows you to establish a line of credit using the equity in your home as collateral. You can use the money for large purchases, such as the cost of funding your new business. 

Drawbacks: This might not be an option for you if you recently bought your house, as most banks require you to own a certain amount of equity in your home to use this type of finance option. Also, when you borrow against the equity of your home and are somehow unable to repay the debt, you could risk losing your home. 

• Friends and Family Loans. Hey, you can always remind your friends and family members that Michael Dell started Dell Computers with a $1,000 loan from his parents. Seriously, if you have family members and close friends who trust you and you’re possibly willing to share with them a piece of your future success, this is always an option.

Drawbacks: If you were a troublemaker as a kid or never paid back that $100 your friend spotted you back in the day, then asking your parents or close friends for a loan may not be an option, no matter how much begging you do. So, if you’re planning on asking, try to make amends with them beforehand.

What to do if You’re Declined

Rejection is always a bitter pill to swallow, but if you are turned down for a startup business loan, you shouldn’t see it as a failure, but as a valuable lesson. Lenders make money by giving loans and charging interest on them, so in most cases, they want to see your small business succeed. As such, if you are turned down, they will usually be happy to specify why they turned you down and give you advice on how to get approved next time. The most common reasons for getting turned down are credit score, lack of assets, and a poor business plan. The ways to improve this are:

Make sure you are caught up on your bills. Having at least six months’ worth of on-time payments toward your current debt will go a long way toward improving your FICO score.

Apply for new debt. This may sound counterintuitive, but a strong debt-to-credit ratio is a big part of your credit score. The more unused debt you have, the more favorably a lender will look upon you. 

Save money! Of course, this is easier said than done, but if you have savings and any other assets of value such as your house, lenders will see that you have potential collateral, thus making it easier for you to qualify for a loan.

Have a strong pitch! Improving your business plan to include careful market research will improve your chances of getting a loan. Some of the questions you need to answer are: What differentiates your products and services? How will your business turn a profit? Do you have a strong marketing plan? 

Other Financing  Options for Startups

If getting a startup loan isn’t an option, worry not, as there are avenues to explore to obtain capital for your new venture. 

1. Crowdfunding. Over the past decade, crowdfunding has become a popular way to raise funds for start-up businesses. It is the practice of raising funds through popular crowdfunding websites. Setting up a crowdfunding campaign is relatively easy and typically done through a crowdfunding platform.  Once you’ve set up your account on the platform, write up a compelling description about your company and its products, and indicate the amount of money you are seeking to raise and how you plan to use it. To attract investors, your business plan and products must strike an emotional chord.  One of the biggest perks of crowdfunding is that you can retain full ownership of your business.  While equity crowdfunding is an option, you can also focus on handing out rewards – such as discounts, special product releases, or profit-sharing – to your investors. 
2. Small Business Grants. There are several grants available for startups through both private entities and the federal government that could reward you with thousands of dollars in start-up cash, especially if you are launching a woman-owned, minority-owned, or veteran-owned business. 
3. Small Business Credit Cards. Since there are limited business loan options available for startup businesses, you may want to consider applying for a business credit card as a temporary alternative. Business credit cards issued to startups will require a strong FICO score, which helps to mitigate the risk the card issuer is taking due to your lack of time in business. Like with any credit card, interest is only charged on the amount you use.  As an added bonus, business credit cards typically come with perks – such as cash-back rewards, travel points and discounts with select vendors – helping you save money at the same time. 
4. Venture Capital. VC funds usually have the most stringent requirements, and only invest in companies that are in an industry with the potential for high-margin growth. To invest, VC managers will require a strong business plan, showing growth and revenue milestones you plan to hit and how you will accomplish them.  In return for investing VC managers may want high ownership stakes, a seat on the company board of directors, right of first refusal, and anti-dilution protection. VC funding is not easy to obtain.  There are hundreds to thousands of businesses vying for funding at any given time. To make their own selection process more seamless, most fund managers will only accept pitches through referrals.

Steps to Take Before Applying for a Startup Business Loan

Before you seek a loan to fund your startup, there are several steps you need to take first to set up and establish your new business. These include:

1. Making sure that the federal government knows your business exists. Okay, this may sound strange, but it’s really not – in order for your business to operate, get a loan and take tax deductions, the IRS must know that it exists. That means that you need to obtain a federal Employee Identification Number (EIN) from the IRS. This is a number needed for the IRS to identify your business. You can apply for one on the IRS website.
2. Registering your business. For tax reasons (and to also make sure your company officially exists), you should register your business within your state as a limited liability company (LLC), “doing business as” (DBA), or a corporation. Sole proprietors typically become LLCs or DBAs so that they can tie their business’ revenue with their personal incomes, which has tax benefits. Higher-margin small businesses that have multiple owners sometimes register as S corporations, which also have tax and legal benefits. Registration must be made in your state, and each state has slightly different requirements. Either a tax attorney or online legal companies such as legalzoom.com can assist you with this for a fee. 
3. Creating a business plan. Small business lenders may ask for a business plan before approving you for a loan. A business plan is like a resume for your business. It defines your business, what makes it unique, and states why you believe it’s going to make money, among other things. You can find templates for business plans online, or if you have the means, you can hire someone to do it for you. 
4. Getting your paperwork in order. Whenever you apply for a start-up loan it’s a good idea to get your paperwork in order BEFORE you start the application process. If you’re seeking to borrow for a startup business, lenders will probably want to see any financial statements you have at this point, your personal tax returns, and a business plan.

Hang in There

Creating a business from scratch is one of the most difficult – albeit rewarding – challenges that anyone can take on, and obtaining capital for your new venture may be the most difficult challenge early on. There are, however, borrowing opportunities and other sources of money that you can tap into besides your personal savings. Carefully evaluate your funding options to make sure you select the one that is right for your business. 

As small businesses look to grow and reestablish themselves in the wake of the COVID-19 pandemic, businesses with good personal and business credit scores may have access to more simplified application and speedy approval processes through online lenders than they would typically see from more traditional commercial lenders.

Whether you’re a small business services office, construction company or independent medical practice, access to cash to grow your business or get caught up with expenses is crucial. The first thing you need to do is fFind out your personal credit score, which you can quickly obtain online – and often for free – through various services such as Experian, Equifax or Nav.

Online Lenders are Better for Small Businesses Because They Offer More Choice

“Technology like blockchain and artificial intelligence will bring in new players that will challenge the hegemony of the traditional banks, and this competition will make it better for small businesses with various options,” said Hitendra Chaturvedi, Professor of Practice, Supply Chain Management at Arizona State University’s School of Business, in a recent interview with AdvisorSmith. “Post-pandemic, this could be the birth of a new small business landscape as we know it—and all for the good.”

While credit history, time in business, cash flow and business collateral will always be factors considered by all lenders, online lenders do offer some unique advantages over traditional lenders:

#1 Fewer Application Requirements

A traditional loan may require long and tedious paperwork from an applicant. Some traditional lenders may require you to submit an outline of your ongoing business plans and give presentations outlining your business goals and objectives. They will also probably require tax returns and other IRS documentation, as well as personal credit card statements and outstanding invoices.

Online lenders, however, often only require a signature, credit score and your three most recent bank statements to apply.

#2 Amount, Flexibility of Funds

What if your business only needs to borrow $10,000 or less? Traditional brick and mortar lenders are typically interested in larger loan amounts in order to make more money. Online lenders, however, are usually more flexible in the amount they are willing to lend and more nimble in their terms for the loan.

Additionally, traditional lenders often will require you to specify how the borrowed funds will be used and may require you to commit to using those funds for the exact reason stated. That requirement is often more relaxed with online loans, which typically allow you to use funds for any legitimate business purpose.

#3 Faster Approval and Underwriting

While all traditional lenders are different, some may take 10 -30 days to review and approve your loan. In some cases, small business loans such as SBA loans may take up to 45-60 days, depending on the lender. Traditional lenders will investigate your credit history, collateral of business and the current and projected income of your business. While online lenders do examine many of the same factors, your approval can happen the same day.

Plus, online lenders often use underwriting sources in loan applications that traditional lenders will not, such as a business’s credit card sales and accounts receivable. As such, small business loans from online lenders may be more suitable to small businesses that may not qualify for traditional bank lending.

#4 Personalized Service

Historically, one of the advantages offered by traditional lenders is the ability to speak face-to-face with a banker who will listen to your story. However, more and more, online lenders such as Kapitus have financing specialists who are also able to hear your story, assess your unique situation and incorporate human factors into the online underwriting and approval process.

In addition, many online lenders use their own proprietary risk models, considering factors such as industry, time in business and current external forces. For example, many online lenders will view the COVID-19 pandemic as an extraordinary event and are willing to consider your three-year cash-flow history to get a better idea of your ability to pay back the loan.

#5 For Those With Less-Than-Stellar Credit

Traditional lenders are likely to reject your application if your personal credit score is less than 680. Online lenders, however, may be more willing to give you a loan with a higher interest rate, depending on why you are looking to borrow and what you plan to use the assets for. You should have a chat with your accountant or a financing specialist about your chances of getting approved in such a case.

#6 Financing for Any Business Needs

Online lenders offer a variety of ways to finance a unique business. They often do not ask to see a business plan and are primarily interested in your business revenue history.  Regardless of why you need the money, online lenders, such as Kapitus can offer financing to fit that need. From money to launch a new product, to heavy equipment financing, to lines of credit to handle basic day-to-day operations, online lenders can help you achieve your vision.

No matter its size, no business is recession-proof. And this goes double for small businesses. And with the increasing number of concerns about a future recession, it’s more than fair for small business owners to be looking into ways to financially insulate their businesses. 

One of the best ways to protect your business is to increase your financial options. And one of the financial options small business owners ought to consider is a business line of credit. While a lump sum you’d get with a business loan is helpful and definitely has its place, a business line of credit offers more flexibility and doesn’t force you to start repaying upon access to the funds. 

With lenders traditionally tightening their underwriting requirements in a recession, now is the time to consider the benefits of a business line of credit. 

Key Takeaways

• Stabilize your cash flow with a business line of credit
• Cover payroll if you experience an economic downturn
• Gain a reliable supply of working capital
• Pursue recession-based investments and opportunities
• Taking out a line of credit benefits forward-thinking businesses

Benefits of Opening a Business Line of Credit in 2023

Odds are, the US economy is nearing a recessionary environment, with economists predicting a 70% chance of a recession this year. Opening a business line of credit gives your business a credit-based cushion. That credit can help you take advantage of new opportunities or simply take the pressure off your current expenses. 

Let’s examine why several business owners are considering the benefits of a business line of credit this year. 

1. Flexible Access to Business Funds

Recessions can hit hard and fast, and with that drop comes a drop in consumer spending. A recessionary environment doesn’t just drop your access to customers either; it can also make materials and even general inventory harder to get ahold of.

A drop in working capital and a lack of cash flow is the perfect recipe for a business closing its doors. Having access to a line of credit gives business owners the chance to weather the impacts of slow seasons or outright recessions. 

2. Only Pay Back What You Withdraw

A line of credit benefits the business owner that doesn’t have a clear borrowing timeline. As a form of revolving credit, lines of credit only require you to repay what you borrow from or draw on the line.

 As long as you stay within your credit line’s limit, you can continually draw on and repay until the line expires. 

3. Improve Cash Flow

Decreased cash flow is one of the biggest threats to your business. And that threat gets even more menacing during a recession. On that, a study found that approximately 82% of small businesses fail because they need more capital to cover payroll, materials, and outstanding supplier invoices. 

While not every business weathers a recession in the same way, businesses with already thin margins are at the highest risk when the economy takes a downturn. According to CNBC, these are the five industries historically affected the most by recessions: 

• Construction
• Travel
• Manufacturing
• Hospitality
• Real estate

Industries that have high upfront investment and pay in sometimes have equally high margins – eventually. In an example like this, businesses may spend their first years building up a customer base and recognition while making a minimal profit. Once their initial investments pay off, (be it machinery, a facility, or even an aggressive marketing campaign) businesses like these can see much bigger profits. But this can only come to pass if a business is financially strong enough to make it through their opening years. A business line of credit can be a great tool for a company already in their journey to increase their financial options while making a bigger investment in their business.

 Businesses with a lower profit margin can use a line of credit to help get them through slower seasons or while they are waiting on payment from customers. 

4. Cover Unexpected Expenses

Recessions put pressure on every branch of your business. And that pressure can lead to the weakest branch snapping. In business terms, recessions force small businesses to perform in less than stellar conditions. You may be forced to spend more on materials you depend on or find yourself paying more for utilities. 

These unexpected business expenses can leave you unable to invest in other areas of your business or prop up the battered arms of your organization. 

Taking out a business line of credit adds a cash flow barrier to a business’s bottom line – meaning that unexpected expenses can now have a place in your budget.

5. Build Your Business Credit

Using a business line of credit responsibly and within your means is also a great way to potentially build up your business credit. Habitually drawing manageable amounts of your line of credit and paying them back on a timely basis can only be a good thing for your business.

6. Protection Against Revenue Dips

During the 2008 recession, the US GDP fell by 4.3%. Prices and expectations for supplies changed overnight and proved no business can be too prepared. We’ve seen similar supply issues over the past few years as a result of the pandemic and inflation.  Having a line of credit is like having a first line of defense against downturns or increased prices. While you can’t depend on a line of credit solely, businesses with access to viable credit are often the most likely to weather downturns or outright recessions where cash flow cuts fast.

7. Help Meet Payroll in Slower Months

In slower seasons, recessions, or even with day-to-day operations like a large inventory purchase, it’s possible to use a business line of credit to cover operational expenses, like payroll. While this, once again, can’t act as a permanent solution, a business line of credit gives businesses the flexibility to test out new ventures or as a means to hold on during slower seasons. 

If you’re expecting slower months ahead in 2023, take out a line of credit now as an additional layer of protection. 

How Can a Line of Credit Help Your Business Expand?

Rising inflation, increasing interest rates, and a looming recession don’t affect all businesses equally. Where some businesses may be forced to hunker down for the length of a downturn, there are other businesses that may be able to expand during a recessionary environment.

 Here are some ideas for how a line of credit can lead to new opportunities: 

• Invest in New Inventory – It’s not just small businesses that face price fluctuations during a recession. Suppliers see it too. Pay close attention to your supply lines. While some suppliers will certainly raise prices, others looking to increase cash flow could do just the opposite. A business with a good line of credit could then take advantage of the timing and increase its inventory.
• Expand Your Marketing – While many businesses may choose to lower marketing costs during a recession, this just means that your business can take up a more competitive edge. Invest in your marketing during a recession to potentially increase your overall reach and find new customer bases.

Opting for a line of credit is both an offensive and a defensive measure for small business owners. Not all lines of credit are the same, so ensure you choose a lender that you can trust. At Kapitus, we specialize in getting ambitious business owners lines of credit (along with a number of other financing options) with strong track records of success.

Get ahead of the competition and take advantage of the multitude of benefits that could come with a business line of credit. To secure the financial future of your business, apply now for your line of credit.

KEY TAKEAWAYS

• Private investors can share in your profits, unlike traditional business loans, which require repayment, creating a potentially mutually beneficial arrangement.
• Accepting investors may mean giving up decision-making control.
• Private investors often opt for equity investments, aligning their interests with your business’s success.

Running a small business requires a constant and considerable flow of capital; and getting a small business idea off the ground requires just as much (if not more). While there are several kinds of financing geared toward sustaining and expanding small businesses, another option to consider when looking for capital is taking on private investors. Private investors can come in many forms but most frequently operate as venture capital firms or seed funds, also known as angel funds. But not all private funding falls into those two categories. In truth, private funding encompasses all non-bank and non-financing routes for getting capital into your business from a third party. Today, we are specifically addressing the potential pros and cons of accepting investments from private persons into an existing business.

Pro: Let Your Business (Not Your Credit) Speak for Itself

Convincing a private investor to support your business is a completely different process than if you were to seek funding at a bank or online financing company. While banks and all secured financial institutions blanketly require seeing your credit score, and frequently your entire financial history, private investors are often interested in different elements of your business. Specifically, private investors want to be certain their money will make them (and you) more money and that you, the business owner, are a reliable mast with which they can knot their sail.

Working with investors gives you the freedom to sell yourself and your business on the merits which truly excite you; the best investors will match your excitement and see that as a reason to trust your business. Private investors are a great source of capital, then, for newer businesses with a shorter credit history or businesses that can meaningly convey their plans to expand and make investors’ money expand as well; banks and financial institutions don’t get excited for your business’s growth in the same way an investor might.

Con: Investors Expect Influence in Your Business

A private investor, especially one making a major contribution, can want a decision-making seat at the table of your business. This is something all publicly traded companies deal with regularly; but in the case of small businesses the investor and business owner relationship can play out in many ways. At the very least, investors will anticipate that their input and ideas will be genuinely considered and that they will have a legitimate outlet to voice them.

As a small business transfers into the space of equity and investment, it can feel unnatural to become beholden to investors after having truly been your own boss, as many small business owners will attest that the freedom of making your business’s decisions is one of the high points of running your own operation. Taking on investors is both a structural and emotional changing for a business and a business owner

Pro: Private Investments aren’t Always Paid Back Like a Loan

When a private investor puts money out on your business, they are the one taking in the risk. Very often, an investor’s capital is paid back to them in the same way you would pay back a loan. While there are examples of “investment loans” in which the business owner pays back private investors their principal plus interest, those are much less common compared to equity investments. In cases of equity investments, the business owner exchanges the investor’s capital for a negotiated stake in your company with which they then receive a proportional amount of your company’s profits as you earn them.

Consider as well that if your business fails or is bought out, you can’t default on an investment. That investor’s bet on your business has no protection; as the equity value of your business fluctuates, as does the value of that investor’s initial capital.

Con: Unlikely to Benefit Smaller, Local Businesses

Private investors and venture capital firms are large, capital-heavy forces. Private investors also have an understandable interest in making money. They are most frequently attracted to businesses with a wide reach and near-certain potential to grow in a significant way. If you are, for example, a construction firm servicing the greater New England area with no interest in expansion or going national, it is unlikely you will find private investors lining up at your door. This isn’t because our hypothetical business isn’t successful, it’s because that business’s success and continued revenue doesn’t offer extraordinary growth for investors’ capital. Investors want a bomb primed to blow, or more specifically, a bomb primed to blow their investment sky-high. Private investors prize ambition and potential above all else, and it is essential to understand that not all small businesses are likely the right partner for private investors.

Every small business can’t reinvent the wheel, nor does every small business have massive or international ambitions for expansion. But this borders on common sense; businesses who are actively seeking investors likely already have a firm list of reasons why. Private investors aren’t backing every one-location pizzeria and bodega in America, but those pizzerias and bodega who see bigger, equity-based futures for their business may have a different story.

Pro: Trusted Investors Can Become Valuable Partners

A private investor willing to take equity in your company likely both believes in your mission and has existing industry expertise with which they found your business a suitable partner. Your investors have just as much interest in the success of your business as you do; being that your financial success also means financial success for them.  You and your investors (especially in the small business space) are likely to become close partners in managing big-picture projects. Adding experienced and educated voices to the large decisions in your business can only be a good thing.

What this section and others before it has hinted at is that taking on investors is as much your decision as it is the decision of the investor. Being that your investors will – in a way – represent your business, you have every right to decide who will become your partner through private investment. Being that your small business likely isn’t on the open market, you have the final say as to whose venture capital funding you want to take on. If an investor or team doesn’t seem like the right fit, you have every right to keep looking.

Invest in Your Business. One Way, or Another

Private investors likely aren’t the right match for many true small businesses but in those cases where small businesses see themselves becoming medium-to-large companies in the future, convincing private investors that your plans are feasible may just be the next step in your business journey. No matter if your business is right for private investors or not, the mentality and presentability that attracts investors is attractive and healthy for any and all businesses. Show your ambition and make detailed plans for the future of your business if not for private investors, perhaps for yourself and your most trusted staff. The good practices that come with attracting investors are in no way restricted to businesses on that certain path. Invest in your business’s future, one way or another.

The modern lending marketplace gives small business owners a bevy of options for financing or access to capital. While this is overall a great thing for business owners, it’s easy to get overwhelmed by the number of sometimes quite similar options in the marketplace. Specifically, most small business owners have probably asked themselves whether a business credit card or line of credit makes more sense for their business’ needs. Knowing the answer to that question actually takes more than knowing your needs; you also need to know the key benefits of and differences between the two products.

KEY TAKEAWAYS

• Business credit cards can help your business build good credit.
• Your business line of credit helps you access revolving financing on demand.
• Interest rates and your credit limit vary depending on the financial product.
• Using financing products responsibly is a great way to foster business growth.

WHAT ARE THE PRIMARY DIFFERENCES BETWEEN A BUSINESS LINE OF CREDIT AND A CREDIT CARD?

While a line of credit and a credit card serve mostly the same high-level purpose, access to drawable credit, there are several considerable differences between the two products. Learning about the unique qualities of each product can help your business pair up with that option that best fits your needs – both current and future..

Credit Limit

Depending on how large of a credit limit you need, a credit card or line of credit may make more sense for your business. The credit limit on a business line of credit are typically considerably higher than the average credit card. With lenders like Kapitus, you can access a business line of credit to borrow considerably larger sums.

Credit cards are designed for smaller, short-term purchases. For example, you can use a business credit card to make small purchases of incidentals or to cover a business dinner. On the other hand, lines of credit are ideal for larger investments, such as purchasing inventory, covering payroll or buying more expensive equipment.

Interest Rates

Interest rates are one of the most important factors to think about when taking up any financing product. Being aware of your interest rates is essential to running your business, and taking on a new financing product like a credit card or line of credit requires serious vigilance on the part of the business owner.

Interest rates can vary wildly between a business credit card or a business line of credit.

While credit cards often come with higher interest rates than lines of credit, and holding a balance on your credit card can quickly become very costly, you may be able to completely avoid paying credit card interest if you pay your balance in full at the end of each billing cycle.

With a line of credit interest is charged on the principal balance, but lines of credit often come with monthly maintenance fees, so even if you’re paying your balance in full there can still be that additional monthly cost.

Draw Period

Your draw period defines how long you can continue to borrow money after getting approved. Using a business credit card will enable you to continue to borrow for as long as your account is open and remains in good standing.

Lines of credit are a form of revolving financing with a fixed draw period. Your draw period depends on the lender, but it’s not uncommon for draw periods to last for two to three years and in some rare cases going out as far as five years.. You can continually borrow up to your credit limit during the active draw period.

Fees

Line of credit providers commonly charge origination fees that will typically range anywhere from 1-5%. In addition, some lenders may charge maintenance, draw, and late fees. It pays to speak to your lender before applying for a business line of credit to determine the full scope of fees you can be charged. Every lender has different criteria and every lender charges different fees, so be sure to compare options.

In contrast, business credit cards sometimes come with zero fees, whereas some could charge serious sums per year. Other fees can apply to your business credit card, including cash advance, over-limit, and foreign transaction fees and an annual fee for holding the card.

Payback Periods

The payback period is essentially another word for your billing cycle. The billing cycle determines how quickly you’ll need to make your initial repayments.

Most business credit cards have payback periods of 28-31 days, meaning you’ll need to repay what you borrowed before the end of the billing cycle to avoid being charged interest.

Lines of credit, on the other hand, can have repayment terms of daily, weekly, bi-weekly or monthly, depending on your agreement with your lender.

Added Perks

Credit card companies have become increasingly competitive in an attempt to pull in clients. This means that modern credit cards often come with a collection of incentive perks that, if used wisely, could become a big reason for choosing a business credit card over a line of credit. Some premium business cards tout their perks as a major bonus for becoming a client.

Some of the added extras available via your card could possibly include:

•       An introductory APR
•       Purchase protection
•       Extended warranties
•       Complimentary airport lounge access
•       Reward points for cash back, gift cards and travel

Choosing a card based on perks alone doesn’t paint the full picture of what your experience with the card may be, of course. When choosing a credit card, think of perks as a bonus on top of terms that your company is already comfortable with.

Finding the Right Fit for Your Business

Finally, what if your business is looking to cut borrowing costs in the face of rising interest rates? With the right lender, a credit card may offer lower lending costs because of an introductory APR. However, you only stand to gain if you can pay off your outstanding debt before the end of the billing cycle. Further, introductory low APRs generally only last for the first year of using a card.

On the other hand, if you’re a more established business and need a revolving credit line to help cover larger unforeseen expenses or to cover some operating costs in a down period, a line of credit may be a better option for you.

It could also make sense, in some instances, for a business to have both a credit card for smaller everyday expenses and a line of credit as a “nest egg” or to cover those larger expenses.

WHAT ARE THE PROS AND CONS OF A BUSINESS LINE OF CREDIT?

Your business line of credit is a form of revolving credit that enables you to borrow generally larger amounts on demand for a defined drawing period.

Like all types of financing, there are pros and cons to your line of credit.

Pros of a Business Line of Credit

• Higher Credit Limits – Lines of credit enable you to borrow larger amounts over a specified period. It’s not inconceivable to borrow more than $10,000 as part of a single credit line.
• Repeated Access to Capital – Repay the outstanding balance, and you’ll have no problems continually borrowing large amounts against your credit line until it expires.

Cons of a Business Line of Credit

• Shorter Payback Period – Some credit lines have very short billing cycles, and you could be making payments on your balance daily or weekly.
• No Rewards – Unlike credit cards, there are usually no additional perks or earned points to getting approved for a line of credit.
• Potentially High Fees – Some lenders levy larger fees to maintain your line of credit. In some cases, the annual maintenance fees can outsize standard credit card fees.

WHAT ARE THE PROS AND CONS OF A BUSINESS CREDIT CARD?

While more than half of small business owners don’t have credit cards (meaning they often rely on long-term financing options), they shouldn’t be discounted as business credit cards can play a role in driving growth within your business.

To decide whether a credit card makes sense, here’s a rundown of the pros and cons of having one for your business.

Pros of a Business Credit Card

• Effective Credit Building – Regularly using your business credit card and paying the full monthly amount due will likely help improve your business credit.
• Rewards – Credit card rewards – like points – can be especially lucrative for businesses that regularly draw and restore large amounts of their credit. These rewards can sometimes be redeemed as direct cash back.
•  Employee Cards – As the primary account holder, you can distribute secondary cards to your employees. This means that travel or other necessary expenses can be charged directly to your company card. This is both a big convenience for your employees and a good boost to your business image.

Cons of a Business Credit Card

• Qualification – Qualifying for a business credit card generally asks for a high credit score; this may be difficult for some newer businesses.
• Lower Credit Limit – Business credit cards often have lower limits compared to lines of credit. This means that if you plan on using your credit for larger purchases, you may find a credit card more difficult to manage.
• Personal Liability – Failure to repay could lead to personal liability, which could also damage your own credit history.

USE CASES FOR A BUSINESS CREDIT CARD VS. BUSINESS LINE OF CREDIT

Consider the following use cases to better understand whether a business credit card or line of credit may suit your needs.

Business Credit Card

Business Line of Credit

Financing your business’s future requires choosing the right financing option at the right time. Credit cards and lines of credit may seem like similar products, but the two have massive differences in terms of how much you can borrow and how much you can expect to pay.

If your business needs to have fast access to cash, having a business line of credit (BLOC) in place can be invaluable. Before you apply for one, however, one of the first questions you need to ask is whether a secured or unsecured business line of credit is for you. Both options come with pros and cons, so it’s crucial that you carefully consider which is best for you.

What is a Line of Credit?

Secured and unsecured lines of credit are types of financing that give your business the flexibility to borrow funds at will with pre-agreed upon payback terms and credit limit. Whether you need cash to meet a business emergency or to meet payroll during the offseason, you can use the borrowed money to finance any aspect of your business that you see fit. 

Secured and unsecured lines of credits, however, have different risk profiles for the borrower, so they  usually come with different limits and interest rates. 

What’s the Difference? 

A secured BLOC is a form of financing that requires collateral to ensure that you pay back the borrowed amount, while an unsecured line of credit does not require collateral. 

An unsecured line of credit typically requires a high FICO score, a certain number of years in business (usually at least two years) and a strong cash flow. This type of line of credit normally ranges between $10,000 and $100,000, depending on the needs of the borrower, and comes with a variable interest rate often pegged to the prime rate plus several percentage points.

A secured line of credit, while typically reserved for business owners with lower credit scores, requires borrowers to put up valuable assets as collateral. That collateral can include real estate, equipment, present and future invoices and inventory. If you operate a pass-through business, you may even have to put up personal assets such as your house or personal savings. That said, however, a secured line of credit does have distinct advantages:

#1 Secured Lines of Credit Usually Offer Lower Interest Rates

The Federal Reserve has hiked interest rates five times so far this year with more probably coming, so cost of capital is a major concern for borrowers. Since a secured line of credit is collateralized with tangible assets, the lender takes on much less risk when providing this type of loan, so therefore, depending on your FICO score and the amount of collateral you put up, there’s a good chance that the interest rate on a secured BLOC could be lower than an unsecured one. 

#2 Your FICO Score can be Lower

Almost all lenders consider a high credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to secure a loan may be a frustrating experience. Since a secured BLOC is backed by assets, your chance of getting approved with a lower credit score is far higher than if you were applying for an unsecured line of credit.

#3 You Could Secure a Higher Line of Credit

A secured line of credit could come with a higher limit than an unsecured one.

While not in all cases, an unsecured BLOC usually tops out at $100,000 to limit the risk of the lender. Even for small business owners with great credit who are able to get approval for an unsecured BLOC, they often have to put up collateral if they want a limit exceeding $100,000. Depending on the value of the collateral being put up, a small business owner is more likely to obtain a higher limit with a secured BLOC than an unsecured one. 

#4 Secured BLOCs May Have Longer Repayment Terms

Securing your line of credit brings a host of benefits, and one of them is that your repayment term will usually be longer than with an unsecured BLOC. Putting up real estate as collateral can be especially beneficial, as the lender may increase the repayment term and the limit since the value of real estate usually increases over time. In some cases, the repayment term on an unsecured BLOC can be up to 10 years, whereas with an unsecured BLOC, it is usually far less. 

Cons of a Secured BLOC

While a secured BLOC does have its advantages, there are also potential drawbacks to consider before applying for one:

#1 You Risk Your Most Valuable Assets

To get approval for a secured BLOC, you need to put up valuable collateral. These can include your home or a highly valued piece of property. If your business relies on expensive pieces of equipment such as tractor-trailers or medical devices, or the future payment of invoices, those assets could be put up as collateral but would be at risk if you fail to pay off your debt. Therefore – just as you would with a personal loan – it is crucial that you make sure you can meet the repayment terms before you take out a secured BLOC.

#2 More Paperwork is Involved

You’ll probably need to consult with an attorney when applying for a

A secured line of credit will involve a lot of paperwork, as well as advice from a business attorney.

secured BLOC. That’s because you will need an expert to hash out the terms of repayment, especially if calamity hits and you are unable to pay back the amount you borrowed. An attorney can negotiate terms of what assets you will have to surrender in case you default on payments. 

#3 Interest Rates Vary

While the interest rate on a secured BLOC is generally lower than an unsecured one, the rate will still be variable, meaning that it will fluctuate as interest rates fluctuate. This underscores the importance of making sure you understand the exact terms of the secured BLOC before you take one on. 

A BLOC is not a Credit Card!

There is a common misconception that a line of credit is like a business credit card, but don’t be mistaken – the two are not the same. Yes, they both provide a line of credit and only charge interest on the amount you borrow. However, a line of credit ideally should be used for bigger, foreseeable expenses than a credit card since the interest rate is typically lower, and in some cases, you won’t get the cash from a line of credit for 24 hours. Plus, lines of credit have term limits and different repayment terms than a credit card. 

A business line of credit is a great tool if you need to get new office furniture or appliances, if you need cash for a business emergency, or if there is unexpectedly high demand for one of your products and you suddenly need to purchase more inventory. On the other hand, a business credit card is handy for sudden cash needs, such as picking up the tab for a business meal, or if your flight gets canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks such as travel miles, but generally charge a higher interest rate than a BLOC. 

Carefully Weigh Your Options

A secured BLOC can give you great benefits if you need access to cash to grow your business or for an emergency. However, you need to carefully consider the terms of this type of financing, and like you would with your personal finances, you shouldn’t spend more than you need to.

Illinois, or the Prairie State as some call it, is home to 2.1 million small businesses, with over 232,000 located in the Windy City of Chicago, making it one of the most populous states for small businesses. During the COVID-19 pandemic, nearly 35% of the state’s small businesses were forced to shutter either temporarily or permanently, and rising interest rates, worker shortages and spiking inflation are further squeezing them.

Now is the time for small businesses in the state to search high and low for grant opportunities and contests in which they can gain access to free money in order to survive. Here is a list of grants and contests on both a national and local level that are still available to Illinois-based small businesses. 

On a National Level:

Kapitus’ $250K Building Resilient Businesses Contest – Deadline is Looming!

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000; one second-place winner will receive $50,000 and five third-place winners will each receive $20,000. To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the last two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, click here.

Antares REACH Grant Program

Small business consulting firm Hello Alice will award $20,000 in grants to women- and minority-owned

The Antares REACH Grant program is giving away $20,000 to women- and minority-owned small businesses nationwide.

businesses to help them prepare for the next stages of growth. The grants are being funded by Chicago-based private equity firm Antares Capital. Applicants must have less than $5 million in annual revenue, have a demonstrated need for support and a strong business plan for growth. Grant winners will be eligible for an additional $5,000 in funding after completion of a post-grant support. The deadline for applications is July 15, 2020. To apply, you are required to become a member of Hello Alice’s community of small businesses. For more information, click here.

WomensNet Amber Grant

WomensNet gives away one $10,000 grant and four $1000 grants to women-owned businesses in distinct categories every month such as skilled trades (January), hair care and beauty products (August) and Creative Arts (October). The site also gives grants of $25,000 to two businesses each at the end of each year, with both of them being previous $10,000 monthly grant winners. Applications are due on the last day of every month. To apply, click here. 

American Express and Main Street America’s Inclusive Backing Grants

AmEx and Main Street America are providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LGBTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

Skip Monthly Business Grant

Skip is a California-based social media company that helps both people and businesses get access to government-related services and information and is part of YoGov.org. Every month since March 2020, Skip uses revenues from its YouTube channel which awards $1,000 grants to small business owners as well as free services and information. The winner is announced on its YouTube channel on the third Wednesday of every month. For more information and to apply, click here.  

State Level: Open to Illinois Small Businesses Only

The Land of Lincoln also has several grant and contest opportunities, especially in Chicago, that are still open:

Neighborhood Opportunity Fund Grants 

Chicago’s Neighborhood Opportunity Fund is giving away grants three times in 2022 to small businesses in Chicago’s West, Southwest, and South sides to make improvements to their physical locations. These improvements can include land acquisition for expansion, roofing replacement or repairs and money to cover financing fees for a loan or lines of credit. The awards are up to $250,000 for small improvement projects and over $250,000 to $2.5 million for large projects. Deadlines for the second and third rounds of applications have not yet been established, but you can still apply. To learn more, click here.

City of Chicago’s Annual Business Plan Competition

The city of Chicago is giving away several grants to keep its small businesses afloat.

Chicago’s Office of the Treasurer Stephanie Neely is administering a contest to startups and young businesses in Chicago. The first-place winner, to be announced sometime in October, will take home $5,000. To enter, a small business must be a startup or no more than three-years-old with annual revenues of no more than $2 million. Applicants must submit their business plans as well as templates for their executive summaries. Applications are due on July 6, 2022. To learn more, click here. 

Restaurant Employee Relief Fund

The Illinois Restaurant Association Education Relief Foundation is awarding grants to restaurant employees who have faced personal and financial hardships within the past 90 days to encourage food service workers in the state to remain at their jobs. Those hardships include unexpected illness or injury, death of a family member or a natural disaster. The grants range from $250 to $1,500. While not paid directly to business owners, this grant can help owners make things a little easier on staff that is sticking it out through the hard times. Deadline to apply is August 31, 2022. To apply, click here.

Small Business Improvement Fund (SBIF) Remodeling Grants

The SBIF Remodeling grants are aimed at larger small businesses in Chicago with physical locations that are seeking to remodel or visually improve their business locations. To be eligible, the applicant must employ up to 200 workers, and have an average of $9 million in annual sales over the previous three years. Or commercial property owners with a net worth of up to $9 million and liquid assets of up to $500,000. The grant will cover 30% to 90% of a business’ remodeling work up to $150,000. The first deadline for applications is June 30, 2022, while the second and third deadlines are on August 1st and August 31st, respectively. To learn more, click here. 

Don’t Give Up Free Money!

With most federal pandemic aid programs dried up and current economic challenges such as inflation and rising interest rates putting a further squeeze on small businesses, it is more important than ever to apply for a chance to get free money for your business, be it through local or national grants or contests. 

Related Articles:

Small Business Grants and Contests Still Available in New Jersey

Small Business Grants and Contests Still Available in Florida

Small Business Grants Still Available in California

Small Business Grants Still Available in New York

New Jersey serves as the headquarters for some of the largest pharmaceutical companies in the world and is known for its sprawling suburbs, manufacturing capabilities, pristine shorelines and its 861,000 small businesses. However, high taxes, bloated state budgets and little support from the state government has always made it a tough place for small businesses to thrive in. 

Those difficulties were compounded by the COVID-19 pandemic, which hit the Garden State’s small business community harder than 2013’s Superstorm Sandy. From restaurants along one of the state’s many boardwalks to retailers in one of the state’s 52 cities, roughly one-third of small businesses temporarily or permanently closed between 2020 and 2021. Many continue to struggle to stay afloat to this day, especially with spiking inflation, interest rate hikes and another recession looming.

Fortunately, there are several grant programs and contests available on both a national and state level that can help those small businesses survive and grow. 

On a national level, there are grants and contests that are still open that can land you a large pool of money and are worth applying for:

Kapitus’ $250K Building Resilient Businesses Contest – Deadline is Looming!

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000; one second-place winner will receive $50,000 and five third-place winners will each receive $20,000. 

To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the last two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, click here.

WomensNet Amber Grant

WomensNet gives away one $10,000 grant and four $1000 grants to women-owned businesses in distinct categories every month such as skilled trades (January), hair care and beauty products (August) and Creative Arts (October). The site also gives grants of $25,000 to two businesses each at the end of each year, with both of them being previous $10,000 monthly grant winners. Applications are due on the last day of every month. To apply, click here. 

American Express and Main Street America’s Inclusive Backing Grants

AmEx and Main Street America are providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LGBTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. 

Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

Skip Monthly Business Grant

Skip is a California-based social media company that helps both people and businesses get access to government-related services and information and is part of YoGov.org. Every month since March 2020, Skip uses revenues from its YouTube channel to award $1,000 grants to small business owners as well as free services and information. The winner is announced on its YouTube channel on the third Wednesday of every month. For more information and to apply, click here.  

State Level: Open to New Jersey Small Businesses Only

Despite the fact that most of the pandemic-related federal aid to small businesses has dried up, the state is still offering several grants and inexpensive financing opportunities to assist small- and micro-businesses:

The Small Business Lease Grant

Small Businesses in the Garden State should always keep an eye on The NJ Economic Development Corp. for new grant and tax relief opportunities.

The NJ Economic Development Authority (NJEDA) is administering grants to help small businesses and nonprofits with physical locations pay their rents. The $10 million program was funded by the NJ Economic Recovery Act passed in 2021 and is being funded by the state’s Main Street Recovery Finance Program. 

The idea behind the program is to assist in filling vacant lots across the state and assist in the growth of small businesses. Applicants must have a new or newly amended lease that is at least 250 sq. ft. larger than their previous space, and the lease must be for a minimum of five years. Deadline is ongoing, and funding amount depends on the business. To learn more, click here. 

New Jersey State Trade Expansion Program (STEP)

New Jersey has always been a major hub for international trade due to its many marine ports, such as the Port Newark Container Terminal, the Port Jersey container terminal in Jersey City and South Jersey Port Corp. in Camden. 

As such, the NJ State Trade Expansion Program (STEP), in conjunction with the US Small Business Administration, are offering year-round grants to small businesses in the state that are new to overseas trade or sell their products and services overseas. Applicants must have been in business for at least one year at the time of application and manufacture goods or produce services that are at least 51% US content. To learn more, click here.

NJEDA Small Business Improvement Grant Program

NJEDA is awarding grants of up to $50,000 to assist small businesses with physical locations in making improvements and upgrades to their buildings, as well as with purchasing new furniture, office equipment and fixtures. The project costs must be at least $5,000 and must have been at most two years prior to the date of application. 

Total project costs that exceed $50,000 will be subject to Green Building Standards, and applicants that use at least four workers may be subject to affirmative action requirements. Applicants will be awarded on a first come, first served basis. There is no set deadline for application To learn more about the grant program and apply, click here.

Main Street Micro Business Loan Program

NJEDA also oversees the Main Street Micro Business Loan Program. While this is not a grant program, it is popular among very small businesses in the state because it provides long-term, low interest loans to businesses in the state with 10 or fewer employees and annual revenues of no more than $1.5 million. The maximum term for these loans is 10 years and carry an annualized interest rate of 2%. The applicants must have been in business for at least six months. No collateral is required for the loan. To learn more and apply, click here.

Free Money is Better than Attitude!

Best selling author Janet Evanovitch once described New Jersey as a place “where dignity always runs a poor second to getting in someone’s face.” While the state’s small business owners may be tough and have attitude, they’re still going to need help, especially in the economically volatile times we’re living in. If you do own a small business in the Garden State, keep the door open to any new opportunities for free money.

With major economic hubs such as Miami, Orlando, Fort Lauderdale and Tampa Bay, Florida ranks number three in terms of states with the highest number of small businesses. The state’s 2.5 million small businesses rank it behind only California and Texas. 

With a high number of such businesses, however, comes a high amount of pain: the Sunshine State saw over 32% of its small businesses permanently or temporarily close during the height of the pandemic, one of the highest figures in the country. 

With yet another national recession looming on the horizon, getting free money has never been more important to the survival of the state’s small businesses. Fortunately, there are several small business grants and contests still available to small businesses in Florida on both a state and national level. On a national level, there are grants and contests that are still open that can land you a large pool of money and are worth applying for:

Kapitus’ $250K Building Resilient Businesses Contest – Deadline is Looming!

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000; one second-place winner will receive $50,000 and five third-place winners will each receive $20,000. To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the last two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, click here.

WomensNet Amber Grant

Florida is home to 1.1 million women-owned small businesses, making it the state with the third-highest

Previous winners of the Amber Grant for women-owned small businesses.

total of those businesses, so the WomensNet Amber Grants are very applicable to the state. WomensNet gives away one $10,000 grant and four $1000 grants to women-owned businesses in distinct categories every month such as skilled trades (January), hair care and beauty products (August) and Creative Arts (October). The site also gives grants of $25,000 to two businesses each at the end of each year, with both of them being previous $10,000 monthly grant winners. Applications are due on the last day of every month. To apply, click here. 

American Express and Main Street America’s Inclusive Backing Grants

AmEx and Main Street America are providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LGBTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

State-Level: Open to Florida Small Businesses Only

Currently, there are several grant programs that are still available for small businesses operating in Florida to apply to. 

Florida High Tech Research Grants

The Florida High Tech Research Corridor is a public-private partnership between successful high-tech startups in the 23-county region of southern and central Florida and the Universities of Central and South Florida. 

The Corridor provides up to $150,000 in funds for applied research projects between private startups and small high-tech firms and university researchers. Funding is provided directly to the university research team and is used to expand the project’s scope of work and allow our students to participate in cutting-edge, applied research. Industry partners must execute a sponsored research agreement with the university to formalize the project plan and terms. To learn more, click here.

Axis Helps Miami Small Business Grants

Axis Helps Miami, a resource company for small businesses in the Miami-Dade area of the state, is offering several grant opportunities to various small businesses. One is a $50,000 grant to women- and minority-owned small businesses in the area and will include consulting services as well as free advertising at Miami Heat games and partnership endorsements for your business. 

The deadline to apply is July 11, 2022. Another grant will provide $20,000 to small businesses in the area that are looking to scale up but don’t have the funds to do so. The deadline for that grant is July 15, 2022. To explore each grant program Axis Helps Miami is offering, click here. 

Seminole County’s Small Business Assistance Program

Since 2021, Seminole County has been giving grants to small businesses in the county of up to $15,000 to support expenses such as payroll, office utilities and remote access equipment. Applicants must be a for-profit business within Seminole County since at least the beginning of 2020 and must be a member of Sunbiz, a website maintained by Florida state government’s Division of Corporations. Applicants must provide their taxpayer identification number. Commercially zoned businesses with 26-50 employees will receive $15,000 if chosen, while businesses with 2-25 employees will receive $10,000 if chosen. Home- or mobile-based businesses with no more than one employee in addition to the owner can receive $5,000.

CareerSource Florida’s Incumbent Worker Training Grant – Apply Soon!

CareerSource Florida is awarding up to $100,000 to any small business owner in the Sunshine state who is seeking to train existing employees with new skills. The employee must work at least 37.5 hours per week and must have been employed with the applicant for a minimum of six months. Those interested must register with CareerSource Florida’s website. Deadline for applications is June 30, 2022. To apply, click here.

Enterprise Florida International’s (EFI) Virtual Business Matchmaking Grants

Enterprise Florida is offering grants of up to $2,500 for small businesses in the state interested in expanding overseas, but do not want to have to travel to set up an export program. The program includes virtual introductions with pre-screened overseas partners and distributors via teleconference or videoconference. The program also includes a grant that covers the full cost of matchmaker service, whether it is provided by EFI or the federal government’s US Commercial International Trade organization. Companies can apply year-round. Grants must be approved before the first day of virtual matchmaking appointments. For more information, click here.

Orlando Business Assistance Program

The city of Orlando isn’t just known for Disney World and Universal Studios, it’s also home to over 37,000 small businesses. The city’s Business Assistance Program provides grants throughout the year to assist businesses in relocating or expanding in Orlando, which include funds for development fees, permitting and other costs associated with relocating and expanding. Small businesses must pay half the related costs, and the grant amounts can be up to $20,000. To learn more about this program, click here.

Apply Soon!

If you’re a small business in Florida, any chance to gain access to funds would probably be welcome, as after-effects of the COVID-19 pandemic and current tough economic conditions such as high inflation, rising interest rates and an employee shortage are still rocking the economy. Act quickly, as many deadlines for small business grants and contests are coming up quickly.

With major urban hubs such as San Francisco, Los Angeles, San Diego and San Jose, California is indeed a golden place for small businesses. With 4.1 million small businesses scattered throughout the state, California boasts the largest population of small businesses in the US, eclipsing even New York and Texas. 

With the most small businesses, however, came the most suffering during the COVID-19 pandemic out of any other state. By 2021, over 40,000 small businesses were forced to close, including one-third of the state’s independently owned restaurants. Also, more PPP loans were taken out by California small businesses than in any other state. 

Congress has made it clear that they are not going to allocate any more COVID relief money for small businesses. Programs such as PPP and the Restaurant Revitalization fund most likely will not be given any renewed funding, so small businesses in the Golden State are going to have to turn to grants for relief.

There are still some state and national grants and contests that California small businesses can apply to.

Kapitus’ $250K Building Reliant Businesses Contest

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000, one second-place winning will receive $50,000, and five third-place winners will each receive $20,000. To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the past two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, go here.

The Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer Program (STTR)

These two federal programs serve as a conduit between small businesses engaged in scientific research and development and government agencies seeking to provide them with grants, and especially pertains to California’s Silicon Valley, the world’s largest hub for technology startups. Grants come in all sizes from various agencies. For example, the US Dept, of Energy provides grants to small businesses innovating in energy production. The STTR program requires that applying small businesses have a partnership with a nonprofit scientific research organization. To qualify for either program, click here.

American Express and Main Street America’s Inclusive Backing Grants

California has one of the largest Hispanic and LGBTQ populations in the country, so the American Express and Mainstreet America’s Inclusive Backing Grants national program very much so pertains to the Golden state. AmEx and Main Street America is providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LBGTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

The California Dream Fund

The California Dream Fund is a $35 million small business grant program by the state’s Office of the Small Business Advocate through select centers of the state’s Technical Assistance Expansion Program (TAEP) . New entrepreneurs and small business owners must complete an intensive training program through select participating centers of their local TAEP office. Following successful completion of the training and consulting program, new businesses will be eligible to apply for a microgrant of up to $10,000. Those interested can apply here. 

The Job Creators Quest Grants

Southern California business owners who identify as people of color, military veteran or with the LGBTQ+ community with two to 20 employees can still apply for a $100,000 grant program from Founders First, which will choose 30 winners by the end of the year. As a business owner, you need to demonstrate that the grant money would be used as growth capital or to provide premium wage jobs, as well as fix or enhance vital equipment in order to scale up your business. The deadline to apply is Nov. 30, 2022, and the small business applicants must be located in the Los Angeles, Orange County, Riverside, San Bernardino and San Diego regions. Those interested can apply here. 

The San Francisco Storefront Grant Program

The city of San Francisco is providing $1,000 to $3,000 grants to assist small businesses in low-income districts become compliant with the city’s Accessible Business Entrance program that ensures that businesses are accommodating to those with disabilities. To qualify, your business must have been sued for not being accessible to disabled peoples and be a nonprofit. The deadline for the grant program is June 30, 2022. Interested applicants can learn more about the program here.

Don’t Lose Free Money

Small businesses across the country are being hit with the trifecta of bad economic conditions: skyrocketing inflation, staff shortages and supply chain disruptions, and that condition is being especially felt in the most economically diverse state in the country, California. Small business owners should seek to obtain grants any way they can in these uncertain times.

Federal pandemic-related assistance for small businesses has all but dried up, as money for programs such as the Paycheck Protection Program, the Restaurant Revitalization Fund and the Economic Injury Disaster Loan (EIDL) programs have been used and Congress is pushing back hard on renewing them. As small businesses are still reeling from the current, difficult economic conditions, they can still turn to their state governments and other corporations for grants and relief packages. 

Various states have different programs that are set up and still funded, and if you still need help as a small business, you should look into whether you qualify for any of these grants. 

The Empire State

If you’re seeking state aid for small businesses, New York is a great place to start. There are more than 623,000 small businesses in New York State (including New York City) that account for 53% of the jobs in the state, making New York one of the biggest hubs for small businesses in the US. The state is offering several small business grants, and there are even some national grants (and one contest!) that small businesses in New York can apply for.

Kapitus’ $250K Building Resilient Businesses Contest

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000, one second-place winner will receive $50,000, and five third-place winners will receive $20,000. To enter, simply send a homemade, 2-3 minute video of yourself briefly describing your business, how it was able to persevere over the past two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022 For an official list of rules, click here.

The State Farm LISC Grant Partnership

State Farm, through its partnership with Local Initiatives Support Corporation (LISC) is providing new grants totaling $2 million to support small businesses in underserved communities. Some funding will go towards helping small businesses operate in low income communities, and some will go towards community development. The latest round of funding will go towards 12 communities: New York City, Atlanta, Houston, Chicago, Central Illinois, Milwaukee, Minneapolis, Philadelphia, Phoenix and the Puget Sound region in Washington State. 

Olean Marketing and Rent Grants

The city of Olean, NY is giving out grants to assist small businesses with rent.

The city of Olean in upstate New York is offering local small businesses with $200,000 in small business grants. Small businesses can apply for money to cover marketing costs, including advertising and eCommerce set up costs, and to help with rent as we come out of the COVID-19 pandemic. Eligible small businesses can have 25% of their rent covered for up to two years. Businesses can apply for up to $5,000 under each program. There are multiple rounds in this grant program, and the first deadline is June 10, followed by July 15, 2022 and August 12, 2022. 

New York State COVID-19 Pandemic Small Business Recovery Grant Program

New York’s state government is still providing grant assistance to small businesses that suffered through the pandemic. These small businesses can be micro-businesses or arts and cultural organizations, and the amount they can apply for ranges between $5,000 to $50,000. Businesses can apply by phone, and there is no set deadline.

Tourism Return-to-Work Program

 New York’s Empire State Development program is offering grants to small businesses in the tourism, transportation and accommodations industries throughout the state to encourage employment. Eligible businesses must have hired or plan to hire at least two full-time employees in the first half of 2022 and show that their business suffered through the pandemic. Grants may provide up to $5,000 for each employee. There is no stated deadline for these grants. 

Meet in New York Grant Program

New York’s Empire State Development Program is also offering grants to small businesses that host  conferences, meetings and trade shows throughout the state in order to invigorate  tourism and boost economic activity that had slowed due to coronavirus. Grants will cover a portion of the costs of events and offer discounts through tourism businesses. For example, the grant may  offer to cover the costs of blocks of hotel rooms so event planners can offer discounts to event attendees. Venues with capacities of at least 250 people are eligible. There is no hard deadline for these grants.

New York Restaurant Resiliency Program

If you own a restaurant in New York and are worried that the federal Restaurant Resiliency Program has

New York State’s Restaurant Resiliency program is still granting money to food service businesses and food banks.

been shut down, then worry no more: New York State’s Dept. of Agriculture and Markets’ Restaurant Resiliency program is still open for business and is providing $25 million in funding to restaurants and food banks through the state. The funding goes to food banks, which can then be used by restaurants to cover meals. Food businesses can apply online, and food banks can apply for direct assistance.

The Biodefense Commercialization Fund

If you’re a small business in New York state that specializes in certain aspects of healthcare such as infectious diseases, vaccines, therapeutics and diagnostic tools, you’re in luck. The state is offering up to $40 million in grants to startups and academic centers that specialize in this field to encourage the expansion of availability of various treatments and vaccines for infectious diseases. Grants range between $1 million to $4 million, while academic institutions can apply for amounts between $250,000 and $500,000. Eligible companies must have received or are in the process of receiving series A or B funding and intend to stay in business for at least three years after receiving their grants. Small business can apply online.

New York Arts Grants 

The New York State Council on the Arts is providing over $3 million in grants to entrepreneurs or individuals seeking to pursue a career in various artistic fields, including emergency grants for those experiencing health issues and receiving awards, as well as fellowship opportunities for new artists. Deadlines to apply are throughout the year and next year, and this includes artists and studios throughout the state, including New York City. 

Don’t Give up Free Money!

While the US Congress has apparently shut its doors to new pandemic relief spending, your should always look to your state government or national grant programs that your small business may be eligible for. There is financial relief for your business, and with a little research, you will be able to find it.

Related Articles:

Small Business Grants and Contests Still Available in New Jersey

Small Business Grants and Contests Still Available in Florida

Small Business Grants Still Available in California

Small Business Grants and Contests Still Available in Illinois

Any small business owner stuck between buying or renting essential equipment knows that the query is not a simple binary. Making a choice you are firmly satisfied with requires both a full understanding of your current financial standings as well as a clear picture of where you anticipate your business to stand in the future. And making the wrong decision can have lasting consequences of their own.  Let’s discuss practical use cases to determine where buying, renting, or leasing may be right for your business.

When to Buy…

Potential Benefits to Buying Equipment

Buying property or equipment – whether through cash on-hand or equipment financing – has the obvious incentive of true ownership. Having absolute ownership over your property or expensive equipment has the chance to be a cost-saver in the case of equipment you use frequently or in property that appreciates in value. Consider this example: a farmer with 75 acres of tillable land outright purchases a combine harvester. Since the combine harvester is necessary to reap crops annually, the purchase may very well be a financial gain after several years. Consider as well the IRS Section 179 allowance; businesses were allowed to deduct up to $1,080,000 as a first year write off in equivalence to equipment or software purchased during that tax year in 2022.

Potential Detriments When Buying Equipment

This example, however, plays equally well into the downsides of purchasing: combine harvesters are exceedingly expensive outright (like many industry-specific machines) and can be equally expensive to repair if you don’t already employ sufficient technicians. Imagine, as well, the potential that a certain crop doesn’t properly germinate or labor shortages lead your team to miss proper times for reaping; in the case of leasing or renting, the tangible financial hit of that reduced harvest would likely not be as dire.

Buying is a Bet for the Best

Buying expensive equipment outright requires sage-like industry knowledge as well as an exit strategy in order to be fully insulated, or as much so as is possible. Business owners on their first venture or entering a new industry may find that buying equipment more than double-digit percentages of their total capital is markedly unwise. Small businesses have the most to gain from owning their equipment… but only if that equipment meaningfully returns on its investment. Purchased equipment that fails to see regular use or drastically impacts your capital or overhead has the risk of becoming a monument to rash decisions rather than a useful business tool.

When to Rent…

Potential Benefits to Renting Equipment

Not every industry allows for easy renting of equipment. Renting generally is most beneficial to industries that are wholly seasonal or have tracked busy seasons. If you run a year-round business with consistent revenue, customers, and products, it is unlikely the monthly price and lack of ownership could in any way benefit your business.

Since renting requires the least capital upfront, it is often the most attractive option for freshly minted businesses that are still finding their stride. A worst-case scenario for a small business is preemptively paying for assets that don’t turn around to help your business. Let us consider the example of a farmer and a combine harvester again: in 2022, new or even lightly used combine harvesters can cost stupefying amounts of money upfront, often close to $750,000. In our example of a 75-acre farm, that cost is likely too much capital for a farm of this size which is not the subsidiary of a larger corporate structure. Renting a combine may simply be the only way for smaller farms (or small seasonal businesses) to turn a profit annually. The hope for farms and small businesses with similar structures, of course, is to save enough capital or meaningfully study trends enough to which purchasing expensive equipment amounts to a no-brainer good decision.

Potential Detriments When Renting Equipment

Rented equipment isn’t yours. Flatly, this almost explains any major downside that comes with renting. In the case of damage to any machinery you rent, there is a very good chance you will also have to pay for repairs on top of your existing rate for the rental. And let’s go back to our farmer one more time: Our farmer simply does not have the capital to outright buy a combine harvester (as is the case for many harvest-based farmers) and annually rents a combine from a regional host. Here’s the trouble: seasonal harvests happen all at once for farmers in the same region. This means that every farmer in that region that doesn’t own their own combine is going to rush to rent. In that rush, there is a more than possible chance that certain farmers may not secure a combine and then suffer the loss of an entire harvest. Leaving essential equipment in the hands of a third party introduces unpredictable variables for business owners. And for small business owners with smaller safety nets, suddenly being left without a suitable rental can spell disaster.

Rent From Trusted Sources and Only When You Have To

Unpredictability can quickly shutter seasonal businesses for good; of course, seasonal businesses are also those who are most likely to rent expensive machinery. Renting isn’t bad by nature; many industries like construction and, of course, agriculture wholly depend on rentals in order to remain profitable. This simply means that every choice to rent or buy ought to be informed by genuine industry trend data. Whether this means understanding the potential loss from not renting a certain piece of equipment or funding a safety net in the event of a missed rental or other unexpected hits.

Third Choice… Leasing

For those industries where rentals are rare or simply implausible, leasing can likely be a worthy third choice to consider when dealing with any major, expensive machinery. Leasing is a great option for businesses that use equipment that is constantly changing. With a lease, you’re only committed to equipment for the length of the lease, so you’re not stuck with equipment that can quickly become obsolete. While vehicles, specifically, are most peoples’ first thought for lease potential (our farmer and combine are back!), it’s worth knowing that several major industries lease a wide variety of machines. Offices can lease expensive copy machines, charter schools can lease student laptops, and several more practical examples are out there and likely relevant to just about every industry.

Leave No Stone Unturned and No Path Untested

No small business owner can be fully certain that buying, renting, or leasing expensive equipment is the right choice. What small business owners can do, however, is consider, as we have here, the potential benefits and detriments to each choice parallel to their own business. Those businesses who make informed decisions with safety nets and back up plans have the least to lose when making a major financial decision.

Small businesses, slammed by inflation, supply chain disruptions, and staffing shortages,  are expected to rely on debt financing heavily this year, as pandemic relief programs such as the SBA’s Economic Injury Disaster Loan and the Paycheck Protection programs have long since dried up. If you believe your small business needs to take on debt to survive this rough patch, however, you also need to evaluate which of the many financing tools available are right for you.

The good news is that there are several types of loans to fit your specific needs – whether you’re seeking money to keep your operations afloat; purchase vital equipment; keep your business running during off-season months; you’re seeking to expand, or you need cash for an emergency – there is an option for you.  Some loans carry more requirements and may be more expensive than others, so it’s crucial that you learn which is the most practical and cost-effective for your business.

Here are some of the most common types of small business financing to choose from, depending on your business’s specific needs:

SBA Loan

While pandemic-related assistance has dried up, the US Small Business Administration still offers plenty of financing options for small businesses.

An SBA loan is backed by US Small Business Administration and is sold through registered agents, be it a traditional bank or an alternative lender. One of the most sought-after loans by small businesses is the SBA 7(a) loan, as it often offers a comparatively low interest rate and terms of between 10 to 25 years and has a maximum borrowing limit of $5 million. This money can be used to grow your business, purchase new equipment, or simply as operating cash.

However, just because you want a 7(a) loan, doesn’t mean you’re going to get one. The borrowing requirements are typically more stringent than what a bank or alternative lender would require for a term loan. These include a FICO score near 700, a required number of years in business, and a strong, consistent history of cash flow. Other drawbacks of a SBA 7(a) loan include the fact that the turnaround time for the loan can be weeks, and collateral is often required for loans exceeding $350,000. In addition, SBA loans have a unique requirement which indicates that you must use “alternative financial resources, including personal assets, before seeking financial assistance.” 

If you believe your business qualifies for such a loan and you can wait several weeks to get approved and get the money, you should speak to a lending professional regarding what terms you can get.

Term Loans

Term loans, or business loans, are offered by both banks and alternative lenders and are viable financing options if you’ve been turned down for a 7(a) loan or if you need money quickly. The requirements of a term loan usually aren’t as strict as that of a 7(a) loan – for example, your FICO score probably doesn’t need to be as high as it would for a 7(a) loan.

The terms of the loan, such as interest rate and maturity date, are negotiated between the borrower and lender, and in some cases, especially with alternative lenders, you may get approval and funding within 24 hours. Similar to the 7(a) loan, you can use the proceeds for virtually anything related to your small business.

The cons of a term loan are that they are going to carry a higher interest rate than a 7(a) loan – depending on how much risk you represent to the lender – and typically offer terms of five- to 10 years, though they can be much shorter than this depending on the lender. While the requirements of a term loan may be less stringent than a 7(a) loan, you’re still going to need a strong FICO score, at least two years in business and a strong cash flow. Traditional lenders may also require you to put up collateral. 

SBA Microloan Program

The SBA also guarantees microloans – small loans of up to $50,000 – through intermediary lenders. These lenders often operate in underserved communities and work with minority- and women-owned businesses and their purpose is to provide financial help to new businesses. According to the SBA, the average microloan is $13,000. These loans have a maximum term of six years, and interest rates are going to be significantly higher than a term or 7(a) loan, and often require the borrower to put up personal assets as collateral. 

Invoice Factoring

Invoice factoring is typically offered by alternative lenders and can help you with your cash flow if your customers are slow to pay. In this type of financing, a lender will provide you with cash for your outstanding invoices in exchange for a percentage of the money that is owed to you. You can choose which invoices to factor, and this type of financing won’t add debt to your balance sheet since the money that you’re “borrowing” is backed by money that is already owed to you. 

Invoice factoring is best if you need money quickly to keep your operations going while you’re waiting for your customers to pay, and if you don’t mind not getting all the money that is owed to you by customers. The turnaround time for this type of financing is usually very fast, sometimes happening in 5- to 10 business days.

Equipment Financing 

Equipment financing is a great tool to make sure you have the best, most modern machinery to keep your business running.

Whether you’re a small agricultural company that relies on row crop tractors; a contractor that needs bulldozers or backhoes for construction projects, or a doctor or dentist who needs the latest X-ray machine to treat patients, having high-quality, modern equipment is the lifeblood of your business. Machines, however, can cost a fortune, and your small business may not have the cash to pay for that machinery upfront. This is where equipment financing can serve you best.

Your FICO score generally must be in the high 600s and in most cases, you have to have been in business for at least a year. The advantage of equipment financing is that the equipment itself often serves as the collateral – not your personal assets. Ideally, the revenue that your company generates from the equipment you’ve purchased should more than cover the interest and principal payments you’re going to have to make. 

Purchase Order Financing

Obviously, your business needs inventory to sell in order to make money. However, you may not have the cash up front to pay for the inventory you need to meet a customer’s order. This is where purchase order financing comes in. PO financing pays your vendors upfront so you can keep your customers happy, grow your business and maintain your cash flow. 

In some cases, the lender may even take on the responsibility of payment collections from your customers’ orders, freeing you to run your business smoothly. To qualify, you generally should be a profitable business, and it’s your suppliers and customers – not you – that must have good credit. This type of financing typically requires a low factor rate as the cost of capital.

Business Line of Credit

A business line of credit, similar to a personal or business credit card, is typically an unsecured line of credit extended to you by a lender for an annual percentage fee. The limit on the business line of credit is negotiated beforehand and typically, the line of credit must be paid off at various, pre-agreed upon intervals. The benefits of this type of financing are tremendous. 

The APR is typically significantly lower than a business credit card (although you won’t get any rewards points that you might get with a credit card), and the credit can be used for just about any type of business need, such as keeping your business operating during non-seasonal times of the year or through a recession, cash emergencies and the need for sudden, unexpected purchases. 

The caveat is that a business line of credit may not be as convenient as a business credit card for smaller needs, such as a business meal or the purchase of a small piece of office equipment, so carefully consider which one is best for you. 

Revenue-Based Financing

Revenue-based financing is an expensive financing tool in which you essentially borrow against your future sales. If your company is about to launch a new product that you believe will be highly profitable and you need cash to support the initial promotion of it, or if the roof of your office collapses and you need emergency cash to get it fixed to continue your operations, for example, then RBF may be a useful financing tool. 

Before you consider this type of financing, however, consider that the cost of capital is higher than most forms of financing, as your company will be required to make pre-agreed upon payments equal to the percentage of your overall future sales plus a multiple of the borrowed amount. This type of financing requires your business to have a strong sales history, so it should only be considered for specific, short-term cash needs. 

Consider Your Options Carefully

If you decide that your business needs financing, carefully consider which type of product you choose, your needs and what you are willing to pay in terms of cost of capital. Seek counsel from your accountant or financial advisor. Keep in mind that lenders want to do business with you and don’t wish to have you use a financing product that you may not be able to afford, so they will be willing to work with and advise you as well. 

If your small business is ready to obtain financing, that means you should be in a great position – your sales are flowing, your earnings are consistent, and you’re ready to expand your business’ footprint. Before you do take out a business loan, however, it’s crucial that you decide first whether taking on debt is truly advantageous to your business, and which lending product is best to meet your goals.

Should You Take Out a Loan?

One of the most pressing questions you need to answer before taking on any new financing is: how well-equipped is your business to take on new debt? To answer this question, you should complete a comprehensive checklist regarding your business:

#1 Do I Even Qualify for a Loan?

Different types of loans require different qualifications, but you should first make sure that your business meets certain requirements from lenders. Your minimum FICO score should probably be in the 680 to 700 range for certain financing products such as a term loan, although alternative lenders such as Kapitus may require slightly lower scores, depending on which financing vehicle you are applying for.

Lenders will also want to see how strong your company’s business plan is; how long you’ve been in business; what your plans for growth are, and the consistency of your cash flow in order to gauge whether you have the ability to pay back the loan.

If you’re not sure whether you qualify, you should speak to a lending officer at the institution you are seeking to borrow from, who can walk you through the steps in which your business needs to take in order to qualify for a loan.

#2 Why Do You Need a Loan?

Ideally, you are seeking to borrow money to expand your business and increase revenue, and hopefully, that increased revenue will offset the cost of capital for your loan as well as enable you to make monthly loan payments.

As we all know, however, we’re currently not living in an ideal economic environment, as small businesses are still struggling to make ends meet in a turbulent economy. Fortunately, there are a variety of financing products to choose from that can provide much-needed cash for all sorts of reasons. Some of these are:

• The development of a new product or service which you foresee increasing sales.
• Opening a new office or facility.
• An emergency such as a collapsed roof or crucial machinery breaking down in which you need emergency cash to keep your business in operation.
• Getting immediate cash for invoices.
• Increasing your inventory to meet high demand.
• Meeting off-season expenses.
• Purchasing new equipment.

Once you’ve decided the reason you need financing, you can examine several distinctly different financing products that can meet your needs.

#3 How Strong is Your Cash Flow?

After credit score and business longevity, lenders will want to see your business’ cash flow – the net balance of cash that’s moving in and out of your business on a regular basis. If you’re borrowing to finance the development of a new product, for example, and sales of that product don’t end up being as strong as you thought they would be, a lender will want to know if you’ll still be able to make monthly installment payments on the loan you took out. This is what a strong cash flow will indicate to them.

There are several ways to improve your cash flow if necessary – you may want to examine ways to cut unnecessary spending, optimize inventory management, hound customers to pay their invoices and improve your cash flow forecasting. Your loan approval could very well depend upon the strength of your cash flow.

#4 Is the Price Right?

Anytime you borrow money, be it through a business credit card, a mortgage or a term loan, you are going to have to pay a cost of capital. This can be the interest rate associated with a term loan, the APR on a business credit card or line of credit, or the costs associated with invoice factoring or revenue-based financing. Whatever financing instrument you choose, it’s crucial that you ask the lender the total amount you will be paying back over time.

It’s also just as crucial to shop around for lenders and consider which ones may be offering the best terms, and which ones can offer you a quick turnaround.

Traditional banks often have more stringent borrowing requirements, while alternative lenders often are  more expensive but will typically offer a quicker turnaround time on your loan with fewer requirements.

Something else you should consider – the Fed has just hiked the overnight rate by a half percentage point – that’s after a quarter-point hike last month – so some loans are going to be even more expensive than they were at the beginning of the year.

#5 Are you Willing to put up Collateral?

Depending on your credit score and other factors, some lenders may require you to put up collateral or even a personal guarantee. Collateral would include the liquid assets of your business such as your equipment, business savings and/or investments and future invoices.

Some may even want you to give a personal guarantee that you’ll pay back the loan by putting up some of your own assets as collateral, such as your house or your personal investments, in case you default on the loan.

Putting up collateral may increase your risk in taking out a loan, but keep in mind that lenders really aren’t interested in seizing your assets – they would much rather see your business succeed and for you to pay back the loan in a financially healthy manner. Therefore, when you’re taking a loan, it’s imperative that you sit down with your lender and carefully go over the terms of collateral and the exact steps that will be taken should you default.

Carefully Weigh Your Options

Before you take out a business loan, it’s always a good idea to consider other ways to raise money besides going into debt. Crowdfunding, asking for outside investments, borrowing money from family are other options. If you do decide to take out a loan, carefully consider the above questions and decide which loan will help your business the most and which would be most cost-efficient.

KEY TAKEAWAYS

• Short-term financing options like short-term loans and merchant cash advances can offer small business owners fast remedies for addressing cash flow challenges, all while providing flexible repayment terms.
• Accounts receivable financing and business lines of credit offer access to capital based on invoices or credit limits, allowing businesses to manage working capital effectively.
• Trade credit, inventory financing, business credit cards, and peer-to-peer financing can be good alternative sources of short-term finance that cater to specific needs, from delaying supplier payments to securing inventory and accessing peer-based loans.

Every small business owner deals with capital and cash flow management, which can include capital shortages. Whatever the reason for a shortage may be, it’s the owner’s job to find ways to infuse additional capital into their business when one occurs. Short-term financing can be a viable solution in such instances.

The good news is, there are many forms of short-term funding available for consideration. In this article, we’ll highlight some of the best sources of short term financing available to help you grow your business.  So, if you need short-term business financing to improve cash flow or for another reason, consider these options.

Short-Term Loans

As its name suggests, this type of business loan matures after a short term, usually within a few months.  While these loans typically come with fixed interest rates, there are some lenders that offer variable interest as well.

Short term loans are best used to address immediate cash flow needs. For example, you lack the cash to pay your employees’ salaries because your business is dealing with the tail-end of your slow season. These short term business loans can fill the gap until business picks back up.

Because of their short maturity periods, a short term loan is typically granted with lower borrowing caps than you would see with financing that has a longer maturity period.  Still, the overall cost of financing is often lower than a long term loan.

Merchant Cash Advance

If your business has not built a credit history yet, you may still qualify for a merchant cash advance, This financing option is not a loan with traditional rates and terms.  Instead, a financing company purchases a business’ future sales as a discounted rate.  Payback occurs as you make sales or your accounts receivables are paid during your normal course of business, with a percentage of that incoming revenue.

There are a number of perks to taking out a merchant cash advance. One is the fact that you, the borrower, can negotiate the rates. You also don’t typically need collateral to secure the loan, but personal guarantees are required, and approval times are generally faster than a traditional term loan.

On the flip side, merchant cash advances subject borrowers to higher interest rates than traditional loans due to the uncertainty involved with sales.

Accounts Receivable Financing

Accounts receivable financing, also known as invoice factoring, allows borrowers to leverage their outstanding invoices for immediate capital. Lenders can give you up to 90% of the total invoice value upfront, and you’ll receive the rest (minus a factor fee) once your customers pay their dues. You can receive the money within a matter of days, and stellar credit isn’t required On your end. Instead, terms are based on your customer’s creditworthiness.   As such, invoice Factoring is an ideal financial product if your business has several outstanding invoices with well-established businesses.

Accounts receivable loans can be repaid in two ways. The first is structured where you pay back the amount borrowed after you’ve collected payment for your invoices, plus the interest you and the lender agreed upon when you were approved for the loan.

The second option is to sell your invoices to the lender at a pre-determined rate. Instead of repaying the loan, you’re actually shifting the burden of collecting and settling the amounts due from your customers to the loan company.

Be sure that you understand the terms of your agreement and consider the factor fees and other rates. This way, you know how much this short-term funding will cost your business in the long run.

Business Line of Credit

A business credit line grants you access to a set amount of credit that you can borrow from as needed. Instead of providing you with a lump-sum loan, a business credit line allows you to select however much cash you need, within your limit, at any given time. The rest of your credit remains available, for the term of your agreement, for you to borrow when the need arises again.

This alternative to traditional business loans is advantageous because you’re not limited by preset loan amounts. For example, if you only need $5,000 and have a credit line worth $10,000, you can borrow what you need and still have $5,000 to draw from when cash flow requires it again. The only downside is that lines of credit generally run-on variable rates. Therefore, interest on the loan can fluctuate.  However, a credit line gives you the flexibility to take money as needed; it also gives you more freedom in using that money vs. a business credit card which limits your.

Trade Credit

Trade credit is essentially a “buy now, pay later” agreement between a vendor and their supplier. Through this type of short-term financing, you can buy much-needed inventory from your supplier that you can pay for at a later date. This eliminates the need to have cash on hand to pay the supplier upon delivery.

While it does not provide you with cash, the trade credit arrangement still helps to improve cash flow by providing you with inventory that you can sell off and earn revenues from. If you have a good working relationship with your vendors, you can expect very low or even no interest at all!

Trade credits are beneficial if you’re expecting huge sales of a specific product or product line. For example, if you need inventory for a Black Friday sale and don’t have the cash, you can arrange for credits with your suppliers instead.

Another perk to using trade credit for short-term financing is that these transactions can improve your business credit.

Inventory Financing

Inventory financing is another ideal short-term financing avenue that product-based small businesses might consider. This type of financing offers working capital to purchase inventory. The inventory serves as collateral for the loan. It is a secured loan, but you don’t need to pledge any business assets to the lender. Instead, the inventory that you’ll be purchasing serves as collateral.

Just like trade credits, inventory financing is a great option when you’re expecting a huge inventory movement like seasonal sales, but your supplies have already run low and you have no capital available. Just make sure you pay off the loan once you’ve sold off the inventory you pledged for it, or else the lender will seize your supplies upon default.

Business Credit Cards

Like their consumer counterparts, business credit cards can provide purchasing power even when your cash flow is tied up. You use credits assigned to your card to make purchases and then pay them off when the due date arrives. Paying off the credits makes them available once again for use.

Business credit cards are generally more advantageous because they provide you with flexibility in repaying the credit. Depending on the type of card you apply for, you can also earn various rewards that can be put towards your business needs. Plus, it’s easier to apply for a business credit card than for a business loan.

Peer to Peer Financing

Peer-to-peer financing generally involves individual investors that act as lenders. Instead of a financial institution, these people are found on P2P platforms where they offer businesses or individuals the opportunity to apply for loans from them.

Just like traditional loans, the borrower and the lenders agree to a loan with fixed interest rates. The transaction is made between the two parties directly. The only “middleman” involved is the platform.

The more personal nature of the negotiations also improves the borrower’s chances of being approved instead of trying to borrow from a financial institution. The interest rates may also be more favorable.

While it gives borrowers direct access to funds, peer-to-peer financing also complicates the process. This is because not all lenders will want to finance the amount needed. For example, if you’re seeking a loan of $20,000, one lender may agree to let you borrow $1,000, another will extend you $5,000, and so on and so forth. This means multiple negotiations and, as a result, multiple loan agreements with varying dates and interest rates.

It’s good to know what options for short-term financing are available for your business when you’re in a pinch. This knowledge saves you from a lot of stress and headaches from wondering where you can get quick financial aid.

Business lines of credit are incredibly valuable tools that offer flexible financing to help small business owners meet expenses and grow. Lines of credit, much like your personal credit card, have borrowing limits and make funds available to you when you need them. They also give you the option to pay down some or all the debt at various, pre-agreed upon intervals. You only pay interest on the amount that you’ve used, and most lines of credit will require you to bring your balance to zero at certain times. 

The benefits of having a line of credit are tremendous, and in some cases, businesses may not be able to survive without one. For example, seasonal businesses may use a line of credit to meet payroll during the off-season or to order inventory in advance of their busy seasons. Credit is also used in case your small business quickly needs emergency cash.

Before you apply for one, however, you should consider that a line of credit is not a one-size-fits-all product. There are different types of lines of credit that you should consider before deciding on which one is best for your business.  Some credit lines may offer higher lines of credit while others may require collateral..

Deciding on the right one for your business can be tricky, and it’s important to know the different types that are available to you, as well as the risks associated with each one:

#1 Secured Line of Credit

A secured business line of credit is one in which you, the borrower, take on a significant amount of risk. In these types of credit lines, you will have to put up collateral, such as your business assets, personal savings, or surplus business cash; or, if your business is a pass-through business, your personal assets such as your home. In the event you can’t pay off your balance, the lender reserves the right to seize those assets. 

That said, there are distinct advantages to a secured line of credit over an unsecured line. First, since you’ve put up collateral, there is a good chance that your line of credit will be bigger than it would be with an unsecured line of credit. Second, since you’re the one taking on much of the risk with a secured line, you most likely will pay less interest. Third, you don’t typically need as high of a credit score as you would with an unsecured line of credit.

#2 Unsecured Line of Credit

An unsecured business line of credit is the more popular option for small businesses since this option requires no collateral, and the lender takes on most of the risk. Applying for an unsecured line of credit is often simpler than a secured line, and approval may be quicker. 

An unsecured line of credit typically carries the same payment requirements as a secured line of credit, but in exchange for taking on much of the risk, the lender will usually require a strong credit score to obtain one. Since it is unsecured, the spending limit may not be as high as a secured line of credit, and the interest rate may be higher than a secured line of credit.

#3 Business Credit Card

If you need to pick up the tab for a business meal or must purchase new office equipment such as a laptop computer or printer at a moment’s notice, a business line of credit would not be convenient for you since it could take days to transfer money from your line of credit to your account. A business credit card, however, is a very handy tool to fulfill immediate cash needs for your business. 

A business credit card works pretty much the same as a personal credit card – it could offer perks such as travel miles and cashback rewards and will be there when you need it. Business credit cards usually have fewer requirements to obtain than a line of credit, and they won’t tie up your personal assets as they don’t require collateral. 

The drawbacks compared to a line of credit, however, is that business cards usually carry a higher interest rate than a line of credit, and many of them charge an annual fee.

#4 Real Estate Line of Credit

If you’re in the business of buying and selling properties, such as a home flipper, for example, then you should consider a real estate line of credit. A real estate line of credit is similar to a home equity line of credit, which is credit based on how much equity you have invested in a piece of real estate. 

Real estate lines of credit work in a similar way to any other lines of credit. They can be either secured or unsecured, depending on your FICO score, and they allow you to buy a piece of property before you sell your existing property.

Choose Carefully

Before you decide to take out a business line of credit over another form of financing, you should carefully consider the reason you need to borrow money in the first place. Lines of credit are probably not good for long-term business needs such as the purchase of expensive but crucial equipment or an office lease, and typically carry higher interest rates than other short term financing products. 

If you have immediate cash needs or want cash available in case there’s an emergency, such as your air conditioner breaking down or a leaky roof in your office, then a line of credit is probably the best solution for you.

Any small business owner who spends time searching for small business loans–both through banks and online–has likely come across the SBA 7(a) loan program. It’s one of the more popular small business lending options out there. With that, many small business owners look to the Small Business Administration (SBA) to help with financing.

One way the SBA helps small business owners is through their Loan Guarantee Program. Here, you’ll learn what you need to know about the SBA 7(a) loan program and the requirements for approval.

What is the SBA loan program?

SBA loans don’t actually go through the government. Instead, the SBA offers guarantees to participating lenders, including traditional banks, credit unions, online lenders and private lenders.

The goal is to make small business loans less risky for these lenders. This means that more business owners can secure funding to help grow their businesses.

Guarantees typically cover anywhere from 50 to 85 percent of the total loan amount, depending on the loan. The SBA has a variety of loan options, including the 7(a) program, the 504 program, microloans and disaster loans.

However, the SBA 7(a) program is the focus here.

What is a 7a loan?

SBA 7(a) loans are some of the most popular options available for small business owners. In the 2019 fiscal year, over $23 billion in loans saw approval. An average loan was for just under $450,000.

The flexibility of the 7(a) loan program makes it popular among small business owners. 7(a) loans are guaranteed up to $5 million. For loans up to $150,000, the SBA guarantees 85 percent. The SBA guarantees 75 percent for loans over $150,000, up to $3.75 million on the $5 million maximum loan amount.

If you default, the SBA will pay out the guaranteed amount. It’s one way the administration removes some of the default risks from lenders. This allows them to offer more attractive repayment terms.

Many small business owners would likely struggle to secure financing from traditional financial institutions without the SBA Loan Guarantee Program.

What are the SBA 7a loan terms and interest rates?

SBA loan terms are set with the long-term goals of small business owners in mind. Repayment terms are often based on your particular financial situation. However, most of these are paid back via monthly installments.

The set terms are as follows:

• Real estate: up to 25 years
• Equipment: up to 10 years
• Working capital and inventory: up to 10 years

Another benefit of an SBA loan is that it sets a maximum with lenders on interest rates. Base rates are tied to Prime Rates, benchmark interest rates and additional spread rates.

The spread rate varies depending on the loan amount and the term. Typically, higher loan amounts with shorter terms have slightly lower spread rates.

The SBA has specific spread rates they use. But, the rates can change as the market rates do over time.

Are there fees involved with the SBA 7(a) loan program?

While you typically won’t find origination, application and processing fees with SBA loans, there still are fees to consider.

These fees can include:

• SBA loan guarantee fees (which vary depending on the size of the loan; but they only apply to the guaranteed amount)
• Credit authorization fees
• Packaging fees and closing costs
• Appraisal fees for real estate related loans
• Late payment penalties
• Prepayment penalties which apply to loans longer than 15 years that are prepaid within the first three years

The guarantee fee is the highest of all associated SBA loan fees. Keep these fees in mind as you figure your total payment amount.

The basics of qualifying for SBA 7(a) loans

The SBA has several eligibility requirements you must meet to qualify for any of their loans, including the 7(a). Since these are popular loans, you should understand the different requirements before you apply.

First, your business must be for-profit and based within the United States or its territories. Also, the SBA has size standards they use to ensure that the definition of small business gets met–since it varies across industries. This standard is generally a combination of employee size and annual average receipts.

Second, the SBA wants you, as the small business owner, to have a stake too. So, they require that you invest your own time and money into your small business. Also, eligibility rules state that you need to have been in business for a sufficient amount of time, typically a few years.

Finally, your business must be eligible for a loan. Some are not including real estate investment firms, rare coin dealers, companies involved in speculative activities, and companies where gambling is the primary activity, among others.

What are the SBA 7(a) loan program requirements?

Your job isn’t over yet, even once your business is eligible for a loan application. You need to meet the loan requirements, too. The SBA requires you to submit information on your “personal background and character”. This includes criminal history (if any), your citizenship status, work history in the form of a resume, past addresses, and other items as well.

You also need to provide a business plan. A solidified business plan goes a long way towards showcasing the strength of your business and your plans for the future. Don’t forget to include detailed information on how you’ll use your loan.

Other documents required are your business financial statements. You need to show your revenue and profitability. The SBA typically approves businesses with at least $100,000 in revenue each year. You should also provide a listing of any debts and your debt schedule, which can help highlight your expected cash flow.

Your personal credit score is important. The SBA and lenders will typically look for a FICO credit score above 650.

Finally, there is some personal risk involved with 7(a) loans too. The SBA requires anyone who owns over 20 percent of the business signs a personal guarantee on the loan.

While each lender is different and requirements vary depending on your situation, keep these requirements in mind as you move through the process.

Types of loans in the 7(a) program

Within the 7(a) loan program, there are different loan options beyond the 7(a) standard loan you can explore.

The 7(a) Small Loan program has all the requirements of the standard 7(a) loan with one significant difference: it offers a maximum loan amount of $350,000.

SBA Express loans are designed with quick turnarounds in mind. They have a maximum loan limit of $350,000. Note that the SBA guarantees 50 percent of the loan amount.

SBA Export Express loans are directed at exporters for lines of credit up to $500,000. The SBA guarantees 90 percent for loans up to $350,000 and 75 percent for amounts beyond that. It’s yet another option with quick turnaround times.

An Export Working Capital loan is for a revolving line of credit up to $5 million with a 90 percent SBA guarantee. This loan often has short terms of up to 12 months.

International Trade loans are set to meet the long-term financing needs of export businesses. The maximum amount is for $5 million, with the SBA guaranteeing 90 percent of the loan.

How can you use a 7(a) loan?

The SBA sets guidelines for both the general loan terms and how funds get used.

These include:

• Expansion and or renovation needs
• New construction
• Purchasing land or buildings
• Purchasing equipment, fixtures, or lease-hold improvements
• Working capital
• Refinancing debt (the SBA cites it must be for “compelling reasons”)
• Seasonal lines of credit
• Inventory costs
• Business startup costs

Understandably so, it’s essential to know this information before you apply. Otherwise, you could lose your funding if you’re using it for unapproved reasons.

The Bottom Line

It’s easy to see why SBA 7(a) loans are so popular with small business owners. They provide funding with flexibility and attractive terms. If you meet the qualifications and requirements for an SBA loan, it just could be what you and your small business need to achieve your long-term goals. To learn more about SBA loans, click here.

For small business owners that have ongoing business expenses and uneven cash flows, a business line of credit may be the most convenient and useful financing method in your toolbox. 

Too often, however, small business owners confuse a business line of credit and a business credit card and end up paying a higher interest rate on revolving debt as a result.

What is a Business Line of Credit?

A business line of credit is typically an unsecured line of credit that can be granted to a small business by either a bank or an alternative lender. The line of credit has a predetermined limit set by the lender (and it’s typically higher than a business credit card) based on the risk you present as a borrower, and like a business credit card, can be used to address any expense that arises for your business. 

Unlike other types of typical small business loans, with a business line of credit, there is no lump-sum disbursement of funds that requires a subsequent monthly payment, and you don’t have to specify to the lender exactly what you intend to use the funds for. 

Also, similar to a credit card, your debt will be revolving, and interest will be accrued only on the amount that you have borrowed. The line of credit typically is subject to a periodic review and renewal, often annually..

Business Line of Credit vs. Business Credit Card 

While both a business line of credit and a business credit card are forms of revolving debt that are typically used for short-term funding needs, the main differences between them are the interest rate and what they generally are used for. 

A business credit card can charge more than 20% APR for purchases, and an even higher rate for cash advances. The rate for a business line of credit usually ranges between 10% to 15%, and the rate will still be the same when you use the line of credit for cash. 

What are Each Used for?

A business line of credit and a credit card may also be used for different reasons. Lines of credit are sometimes used by seasonal small businesses that need funds to cover operating expenses during slow periods of the year, such as payroll; or when it has an unexpected expense. Small businesses can also use their lines of credit to gain access to funds without having the hassle or expense of applying for a loan, and the repayment terms are often more flexible than with business credit cards. 

On the other hand, a small business credit card will come in handy for smaller purchases that you typically wouldn’t use your line of credit for, such as when you have to pick up the tab for a business meal or need to buy a new inkjet printer for the office and don’t wish to make a trip to the bank to withdraw the funds. A credit card also often offers perks such as cash back offers or travel miles that a line of credit would not.

Once again, be warned that business credit cards typically offer a lower credit limit than a business line of credit and are more expensive.

What is a Secured vs. Unsecured Line of Credit?

An unsecured line of credit is not guaranteed by collateral. Typically, it will carry a higher interest rate than a secured line of credit because the lender is taking on greater risk than with a secured line of credit. It is usually granted to businesses that have been in operation for several years and have consistently strong annual revenues. 

With a secured line of credit, you will usually be granted a large business line of credit with a higher spending limit because it is guaranteed by physical assets, which lenders prefer. Some banks, however, may ask that your personal assets be used to secure your line of credit, while alternative lenders typically just ask for your business assets. A lender may also require that you secure your line of credit if you require a limit of more than $100,000.

How Do You Qualify for a Line of Credit?

Business lines of credit are generally more difficult to obtain than business credit cards. Typically, small business owners that have a FICO score of at least 650 and have been in business for at least two years with annual revenue of at least $180,000 will qualify for a business line of credit, but those terms will vary depending on which lender you are doing business with. Alternative lenders often will have less stringent requirements.

Small businesses that don’t qualify for a business line of credit because they don’t have a long history in business or a profit margin that’s too low may find a business credit card to be useful, and there are plenty of them out there that offer perks and cashback rewards. 

In general, however, a business line of credit can be a great reward for small business owners that have worked hard to establish their businesses over time.

KEY TAKEAWAYS

• There are multiple types of SBA Loans, including 7(a), SBA Express Loans and EIDL Loans. SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
• SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
• SBA EIDL loans, designed for disaster relief, may require collateral for loans over $25,000 based on individual circumstances.

Those seeking an SBA loan are likely familiar with the association’s sometimes confusing collateral requirements. Small business owners are required to name some amount of collateral when applying for an SBA loan, but it can be difficult to determine ahead of time how much collateral may be expected to finalize a loan or what necessarily constitutes collateral.

While there are several kinds of SBA loans, most common are 7(a) loans. Another kind of SBA loan currently in high demand is EIDL (Economic Injury Disaster Loans).  While 7(a) loans can be requested for any reason, EIDL are specifically disaster loans which have recently gained prominence as a form of pandemic relief. EIDL and 7(a) loans both have different collateral requirements. This article will explore exactly what each of these loan types require from borrowers in the form of collateral as well as other requirements of note. 

What Constitutes Collateral?

Before discussing collateral requirements, it is important to understand exactly what collateral is and what lenders and the SBA generally consider acceptable forms of collateral. Collateral, in its simplest forms, is an asset that a lender accepts as a form of security on a loan in the event of non-payment or a default. 

Examples of Generally Approved SBA Loan Collateral include:

• Commercial or personal real estate
• Accounts receivable
• Standing inventory
• Business vehicles
• Equipment, and machinery

SBA 7(a) Loan Collateral and Requirements

SBA 7(a) loans are one of the most frequently sought loans by American small business owners and fall under three categories: Standard (7a), 7(a) Small Loans, and SBA Express. All collateral policies for 7(a) Small Loans and Express Loans are also true for Standard 7(a) loans up to $350,000.

7(a) Collateral Requirements

• Loans up to $25,000 are unsecured and require no collateral.
• Loans between $25,000 and $350,000 must follow collateral policies for similarly-sized non-SBA-guaranteed commercial loans.
• Loans larger than $350,000 require the maximum amount of collateral possible from the borrower to fully secure a loan. The borrower must meaningfully demonstrate they have put forward all available collateral.
• If a lender believes fixed assets do not fully secure a loan, they may also consider trading assets at 10% current book value.

Notable Variations

Both 7(a) Small Loans and SBA Express loans offer up to $350,000, but the SBA will only guarantee up to 50% of the loan amount for Express Loans. Guarantees for Small Loans are either 85% for loans up to $150,000 and 75% for loans greater than that.

7(a) Loan Additional Information

Applicants for SBA 7(a) loans must agree to an ABA (All Business Assets) lien. This means that all of an applicant’s business assets will be put as collateral for the SBA 7(a) loan. 7(a) applicants may also be subject to a UCC-1 (Universal Commercial Code) lien which gives a lender the legal right to access a business’s assets in the event a business defaults on their loan.

In addition to collateral, every person who owns at least 20% of an applying business must also sign a personal guarantee when seeking SBA 7(a) financing. A personal guarantee is an acknowledgement that the party signing is personally responsible for paying back a loan. Personal guarantees are essentially extensions of collateral. Instead of naming specific assets, however, an applicant agrees to use any assets necessary to pay back the loan.

When applying for an SBA 7(a) loan the lender will have the applicant fill out the “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” Which allows a lender to individually assess if an applicant has sufficient holdings to secure collateral.

SBA EIDL Loan Collateral Requirements

Unlike 7(a) loans, the SBA EIDL (Economic Injury Disaster Loan) program is exclusively distributed to small businesses that are suffering from a temporary loss of revenue due to a declared disaster. The EIDL program is currently accepting applications from businesses affected by the COVID-19 pandemic. The EIDL program has different collateral requirements than a 7(a) loan, notably because EIDL is a form of aid. Loans made through the EIDL program under $25,000 are still unsecured. Loans over $25,000, however, will require some form of collateral. Because the program often deals with disaster relief, the EIDL program will not turn away an applicant because they do not have a certain collateral value. If an applicant pledges the collateral available to them, a lender will often consider that collateral sufficient.

EIDL program applicants seeking loan amounts greater than $25,000 must also consent to a UCC-1 lien being placed on their business. Businesses applying to the EIDL program requesting more than $200,000 also require a personal guarantee from each person with a 20% or more stake in the business.

Collateral Overview

The SBA intentionally leaves collateral requirements vague in all loan programs. Necessary collateral is determined on an individual level between a lender and an applicant. More important than a dollar amount, however, is a business owner’s ability to demonstrate that they are committed to repaying a loan. Collateral in combination with personal guarantees and UCC-1 liens are mechanisms to assure loan programs are not taken advantage of or used unnecessarily.

Laying out strict financing requirements and cutoffs ignore the nuance of small business and may needlessly dissuade applicants. The most important step for a small business seeking a loan is discussion with a trusted financing expert. If your small business is interested in learning more about SBA loans and funding opportunities, get in touch with a Kapitus financing expert who can assess your options based on your unique situation.

An effective means to expedite a business’s growth is tactical commercial financing. A factor that may dissuade businesses from finalizing a loan agreement, however, is fear of default and the subsequent recourse from lenders. There are actually several types of loans where lenders will agree to not seek recourse after borrower default, which are known as non-recourse commercial loans. 

A non-recourse commercial loan is an agreement between a lender and a borrowing business where the borrower is not personally liable if they default on the loan. In the case a borrower defaults, lenders may not repossess any of the borrower’s property that was not originally put up for collateral. Lenders may seize profits from the business, but the business owner’s personal assets may not be taken.

What is The Difference Between Recourse Commercial Loan Versus Non-Recourse Commercial Loan

Traditional recourse loans require borrowers to make a personal guarantee that they default on their business loan, the lender may seize bank accounts and other assets until the original debt is covered. In the case of a non-recourse loan, lenders may only seize agreed upon collateral in the event of borrower default. Even if the collateral does not sufficiently cover the full value of the loan, the lender cannot seize the borrower’s personal assets to recover losses from the original loan.

Carve-Outs and the “Bad Boy Guaranty”

Most non-recourse financing agreements have exceptions where the lender may collect beyond collateral in the case of borrower default. Exceptions to non-recourse agreements are called “carve outs,” or “Bad Boy Guarantees.” Most carve outs protect lenders in the case a borrower either misrepresented their intentions or committed a crime. Several common carve outs in non-recourse financing agreements allow the lender to seek recourse outside of collateral, including:

• Borrower files for bankruptcy
• Borrower commits fraud or other criminal activity
• Borrower fails to pay property taxes
• Borrower fails to maintain required insurance

If a borrower commits any of the acts specified in an agreement’s carveout clause, the non-recourse protections of the original agreement are nullified.

Qualifying for Non-Recourse Financing

Since non-recourse commercial loans are much riskier for lenders, conditions for approval are generally much more strict. Among traditional qualifications of positive balance sheets, a good business credit score and sufficient collateral, applicants must also meet the terms of a non-recourse guarantee. Similar to carve outs, the non-recourse guarantee specifies that the borrower, or the guarantor, must maintain certain obligations to retain non-recourse status. A non-recourse lender may require that the borrower sign a guarantee of performance, meaning that certain goals remain on schedule, or a guarantee of payment. Guarantees of payment stipulate that any profits made from the project financed by the original loan must be routed back to pay the accrued debt.

Since lenders face significantly more risk when making a non-recourse loan, non-recourse agreements are generally reserved for exceedingly low risk-of-default borrowers taking on long-term projects.

Types of Non-Recourse Commercial Loans

Real Estate

The most common type of non-recourse financing is non-recourse real estate loans. In the case of real estate loans, non-recourse deals commonly stipulate that the borrower must pay back the loans with profits made after selling the real estate – which is a guarantee of payment. If the property is developed, but does not sell or does not make a profit, the real estate itself is often considered sufficient collateral.

SBA

Non-recourse loans secured by the SBA are traditionally used to help small businesses secure financing for fixed assets such as real estate, office facilities and sometimes equipment. To decrease the direct risk for lenders, the SBA assumes a portion of the risk  for the loan and guarantees to cover a percentage of a loan’s full amount in the case of borrower default. If a borrower defaults on a SBA-secured non-recourse commercial loan, the government, not the lender, is liable for the guaranteed portion of the loan.

Development

Another common type of non-recourse commercial loan are non-recourse development loans. Development loans are specifically for developing commercial property and often finance a project through its entire process. Development loan agreements usually state that the borrower must begin repayment once they have started earning a profit. If a project is not profitable or does not complete development, then the loan will often be considered defaulted. When a non-recourse development loan defaults, the property which was financed will then be seized as collateral.

Non-Recourse Factoring

Similar to  non-recourse loans, non-recourse factoring agreements stipulate that in the event an invoice cannot be paid, the factor is liable for the losses, not the customer. Non-recourse factoring agreements, however, tend to have higher fees and/or more restrictive terms because the risk is much higher for the factor. Factors are more likely to offer non-recourse invoice factoring services to customers who handle a large and constant flow of invoices and whose clients have good credit. Depending on a company’s size and invoice capacity, recourse and non-recourse factoring are both viable options. Lenders also may consider the size and volume of a customer’s invoices before offering non-recourse factoring options.

Non-Recourse Overview and Considerations

Non-recourse financing may be a misleading name for this kind of financing, as almost every type of non-recourse deal still allows lenders to seek recourse of some kind. Non-recourse agreements are almost always reserved for deals where lenders can recoup their losses without additional recourse. However, semantics aside, if you’re able to qualify for non-recourse financing it can be a great way to keep your business on the growth track. 

If you are interested in learning more about non-recourse commercial loans, speak to a Kapitus financing specialist who can address your unique situation.

Corporate loans are one of the most effective financing options for companies seeking to fund a new project or simply improve their cash flow. A corporate loan accounts for any kind of financing offered to a business, not an individual. There, however, are several kinds of corporate loans, all with their own terms and requirements. Exploring the various types of corporate loans offered to businesses can be massively advantageous to those looking to make the most of their financing.

 Commercial Loans

Commercial loans stipulate that funds distributed by a lender may only be used for business purposes. Commercial loans act as an umbrella term for several purchase-specific business loans including commercial real estate loans. Commercial real estate loans can apply when financing any real estate purchase that will be used solely for business purposes; this can include general office spaces, retail locations and even apartment complexes. Commercial loans generally require considerable collateral from the business, almost always including the real estate or item being financed.

Commercial loans are generally reserved for larger companies since they are often used to fund large operations and have larger upfront costs.

Acquisition Loans

Acquisition loans are loans given specifically for financing a business’s purchase of a large asset from another business, or another business outright. Among the several types of corporate loans, acquisition loans often have the shortest window for both distribution and repayment. Acquisition loans, like commercial real estate loans, may only be used when purchasing an agreed upon asset, in this case another business or another business’s asset. Acquisition loans are often only given to businesses that do not have the liquidity for an acquisition but can meaningfully demonstrate to a lender that they have the capacity to take on the acquisition often through extensive collateral.

Term Loans

Corporate term loans are agreements between a lender and a business where a lender gives a specific amount of money with a fixed repayment schedule. Term loans are most often used for financing one-time purchases like equipment or vehicles, but they are also used as basic working capital. Term loans can have either a fixed or floating interest rate; floating interest rates will change depending on if an underlying index rises or lowers. Depending on the agreement, term loans can either be taken out in a single payment or in several smaller increments.

Revolving Credit

Similar to term loans, corporate revolving credit gives businesses access to a specific amount until the terms of the agreement end. Unlike term loans which pay out in capital, revolving credit allows businesses to draw and pay in the credit amount as many times as they like. Revolving credit is essentially a maximum loan balance that businesses can treat very similar to a line of credit, but revolving credit agreements are open-ended and do not have a specified end-date.

Self-Liquidating Loans

Self-liquidating loans refer to loans that finance projects, the revenue of which is then used to repay the loan. Self-liquidating loans are most often used by seasonal businesses or businesses with trackable busy periods. Self-liquidating loans can be used to buy inventory or machinery in preparation for a busier season. Once seasonal customers decrease and the need for working capital decreases, the business can use the increased profits made available by the loan to pay back their lender. To qualify for a self-liquidation loan, businesses often need to demonstrate through accounts-receivables records that their business has a cyclical busy season or many seasonal customers that would justify self-liquidation.

Asset-Conversion Loans

Asset-conversion loans act almost identically to a self-liquidating loan but are repaid by liquidating a business asset like accounts receivables, equipment, or inventory. Asset-conversion loans expect that whatever asset that would be liquidated to repay a loan is also put up as collateral. Asset-conversion loans, then, are traditionally in the amount equal to the value of the business assets put up as collateral.

Cash Flow Loans

Cash flow loans are used to fund daily operations like inventory, payroll and even rent. Cash flow loans are traditionally paid back with incoming funds. Before being approved for a cash flow loan, lenders traditionally consider a business’s accounts receivables and existing cash flow and then propose the terms of the loan to the business owner. Cash flow loans typically have more lenient credit requirements and require little collateral. Because of the loan’s higher risk, cash flow loans have comparably high interest rates and sometimes require blanket liens as part of the loan agreement.

Cash flow loans also have comparably high originations fees. The several increases in rate seen in traditional cash flow loan agreements come in exchange of the target business’s lack of assets or credit history.

Working Capital Loans

Working capital loans cover the same day-to-day expenses as a cash flow loan but are generally much longer agreements and used by larger businesses who may have cyclical clients or trackable busy and slow seasons. Working capital loans can last upward of 25 years especially when secured with a bank. Banks generally offer the most generous rates, but applying businesses must have a long-standing history of profitability, good credit, and a detailed history of positive balance sheets. To maintain liquidity during slow times, a working capital loan agreement may increase cash flow during and ease the burden of slower seasons. Working capital loans, then, are often reserved for businesses that can meaningfully prove to banks or private lenders that their existing assets, good credit, and long history of operation justify long-term financing.

Bridge Loans

Bridge loans, also called interim loans, are given to businesses often as a short-term loan before they secure long-term financing. Bridge loans essentially bridge a gap in capital so a business can reach a certain goal or new financing terms. Since bridge loans are created with a short-term goal in mind, the loan’s interest rates reflect traditional short-term financing; they have generally high interest rates and are often backed by collateral. An example of when a bridge loan could specifically benefit a business when acquiring new office space. A bridge loan could free up liquidity to purchase a new office space while the business owners wait to sell their old space. The most common corporate use of bridge loans, however, is when waiting on finalizing long-term financing. Bridge loans have comparably fast application-to-approval time in exchange for their higher interest rates and shorter terms.

Corporate Financing Options

With  several options for  corporate financing, businesses should do their research and determine which type of financing is best suited for their needs. For example: While commercial loans can be used for a wide variety of financing possibilities, more pinpointed, short-term financing like bridge loans or cash flow loans may better suit specific circumstances.

The most effective way to learn what corporate financing option is best for your business is to get in contact with a financing expert. If you would like to learn more about your options when seeking a corporate loan, get in touch with a Kapitus specialist who can address your unique situation.

Not every small business owner is going to succeed on their first try, as roughly 20% of small businesses, on average, fail in their first year of operation according to the Bureau of Labor Statistics. This past year has seen even worse with approximately 140,000 small businesses failing due to  the COVID-19 pandemic. 

It is important to learn from your business failure and move on. After all, as author Sinclair Lewis once wrote, “Failures are finger posts on the road to achievement.” So, if your small business failed to take off the way you hoped and you have an outstanding SBA loan, there is some good news: there are steps you can take to have at least some–if not all–of the loan forgiven. 

No matter what type of SBA loan you took on for your business, be it a 7(a) loan or an SBA Micro Loan, if you have defaulted on a payment, you should talk to an attorney who specializes in dealing with the SBA, and consider applying for the SBA loan forgiveness program.

But, before you begin the process, there are several factors to consider when dealing with a delinquent, non-PPP SBA loan:

#1 Renegotiating With Your Lender

If you miss an SBA loan payment but are still holding out hope for your business, you’re going to get charged a late fee, so it is important that you keep a record of your payments as some lenders might not even alert you when you’ve missed a payment. Lenders generally don’t like to lose customers or money, so they most likely will seek to collect from you before they contact the SBA.

Some lenders may attempt to renegotiate the terms of the loan by offering a new loan repayment plan. If your business has been struggling due to the pandemic but is ready to get back on its feet soon, this may be a viable option for you as some lenders may offer interest-only payments until a new loan restructuring is complete. 

#2 How Does it Work?

If your business is no longer viable and/or you cannot renegotiate with the direct lender and apply for loan forgiveness, the first thing you need to understand is that applying for it will not guarantee that the entire loan amount will be forgiven by the SBA.

Once you apply, the SBA will evaluate your case and step in only after the direct lender has made every effort to collect on the defaulted loan. Afterwards, the SBA may purchase back 50% to 85% of the loan, and then turn directly to you, the borrower, to pay back the remaining balance. If you cannot pay back the remaining assets in full, you can submit to the SBA an “offer in compromise,” wherein you agree to pay back some or none of the loan, depending on your circumstances. 

This is the area in which you need to consult with a finance specialist or attorney who specializes in SBA loans, because the attorney can argue on your behalf that your loan should be fully forgiven. If you cannot pay back the remaining portion of the loan that the SBA states that you owe, it may actually seize your assets, which obviously is not a pleasant option. 

#3 Drawbacks of SBA Loan Forgiveness

Applying for SBA loan forgiveness requires some unpleasant steps. 

• First, you must dissolve your business entirely and liquidate all business property. This means selling everything related to your business, including equipment, computers, office furniture, etc. 
• Second, be aware that asking for SBA loan forgiveness will make it difficult for you to obtain an SBA loan when you move on to your next venture.
• Third, asking for SBA loan forgiveness will negatively impact your business credit score and, potentially, your personal credit score if you were the guarantor of your business. This will make it more difficult to raise financing from both traditional and alternative business lenders in the future.

#4 Would it be Better to File for Bankruptcy?

Every business situation is unique, but if there is truly no hope for your small business, chapter 7 bankruptcy may be an option to explore. This type of bankruptcy would allow you to keep your assets and stop collection on any outstanding debt from business credit cards and loans. 

It is also very complex and costly, however. Chapter 7 would require court filings, as well as follow any legal procedures required under the Small Business Reorganization Act of 2019, which was enhanced under the CARES Act passed in March 2020. Legal fees and court appearances will add up and a court may still decide that you have to liquidate some of your assets to pay off a portion of debt still owed to your creditors. 

Again, this is an option you should discuss at length with a bankruptcy attorney or finance specialist. 

Keep Moving Forward

Once your SBA loan has been forgiven or wiped clean, do not be discouraged. The day will come when you can try running your own business once again. Learn from your mistakes and come up with another great idea for a new business! Remember, financing options will still be available to you even if you need loan forgiveness or declared bankruptcy.

KEY TAKEAWAYS

• Banks generally offer are a good long-term capital loan options, but they have strict requirements, lengthy approval times, and possible prepayment penalties, making them suitable for established businesses with strong financial histories.
• Private lenders provide competitive rates and flexibility on repayment schedules and term length. They rarely enforce prepayment penalties, typically offer quicker funding and are a good choice for businesses seeking more flexibility.
• SBA loans offer terms similar to banks and typically come with lower interest rates. However, they come with strict requirements and a complex application process. They can be a viable option for businesses who do not have an immediate need for financing.

Maintaining a steady flow of working capital, otherwise known as operating capital, is the basis of a successful business. Many businesses, however, may have trouble keeping a steady flow of working capital even though they are profitable . Companies with seasonal highs, cyclical customers, or only a few clients accounting for large percentages of income may find their working capital is uneven. An effective means to securing an even flow of operation liquidity, then, is seeking long-term working capital financing, which businesses can use to  cover daily operational needs including payroll, ordering, and even rent.

As businesses look for ways to secure annual operational costs, it is important to understand what long-term options are available and which is best suited for the unique situation of the business. Starting a relationship with a financial institution can also be lucrative for businesses seeking other financing services like invoice factoring or specific equipment financing, as those services are likely to be offered by banks as well as private lenders.

Types of Long-Term Working Capital Loans

Bank Loans

While banks generally offer the longest-term capital loans at comparatively low rates, these loans often have exceedingly strict requirements for applying businesses. Before approval, banks will typically want  to see that the applying business has a long-standing history of profitability, good credit, and a detailed history of positive balance sheets. Bank loans for securing long-term working capital often have terms from as short as 3 years to as long as 25. Banks, however, often take the longest in distributing approved funds, sometimes as long as 60 days . In addition, they will sometimes enforce a prepayment penalty so be sure to thoroughly read and understand your contract before signing on the dotted line.

Private Lender Loans

Seeking a private lender to secure a long-term working capital loan is often a great alternative to banks since private lenders can offer competitive rates and more flexible requirements in exchange for shorter terms. Private lending working capital is often underwritten by a private investment bank, or individual, and tends to have more flexible repayment structures. Unlike traditional banks, private lenders very rarely implement prepayment penalties if a business repays a loan in full after 6 months. Private lender loans often have competitive rates, and terms up to 2 years. Private loans have some of the quickest funding time, even as little as hours after approval.

SBA Working Capital Loans

SBA loans are provided by traditional lenders like banks or even private lenders, but they are secured by the Small Business Association, meaning that if a borrower fails to pay back a loan, the SBA will cover a portion of the losses. SBA-guaranteed loans often have terms as long as banks, 3 to 25 years. But, because these loans are guaranteed by the government, they have very strict requirements and an intensive application process. Depending on a chosen lender, funds can become available anywhere from the day of approval to multiple months.

Asset Based Working Capital Loans

While asset-based financing is usually associated with short-term funding solutions, a company can still seek long-term working capital financing with their existing assets. Instead of using invoices as collateral, larger assets like real estate paired with equipment can lead to agreements that secure long-term capital. When dealing with an asset-based lender, there is no universal rule to determine how much asset collateral a business may need to secure a loan, but long-term capital often requires long-term commitment of assets like commercial real estate, vehicles, equipment, or even intellectual properties. Most asset-based, long-term working capital loans have terms from 1 to even 30 years. Asset-based financing agreements tend to take slightly longer to reach a borrower, often 1 to 2 weeks after approval.

FinTech & Online Loans

FinTech, or financial technology lenders, are likely the best way for start-ups or businesses with a less than stellar credit and revenue profile to find long-term working capital financing options. Fintech loans typically have very easy application processes and businesses can often get same day approval on one of several FinTech financing options. After finalizing an agreement, a business owner can have gone from application to capital in as little as a day. FinTech loans vary significantly by lender. And the sheer density of marketplaces and options means that rates are regularly subject to change. Terms often can range from 6 months to 5 years and as explained, FinTech loans are often the fastest way to secure capital with the least up-front revenue.

Cash Advance  

While not the best option for every business and every situation, Merchant cash advances are an unexpected, but viable, option for long-term working capital. Cash advance lenders can sometimes increase terms to levels that compete with traditional long-term working capital loans. Cash advances, however, are not loans. By agreeing to a long-term working capital deal with a cash advance lender, a business owner is selling a piece of their own future revenue at a discounted rate. By extending a payback period by 12 or 24 months, a cash advance can act quite similar to other long-term working capital options. Unlike short-term cash advances, long-term agreements generally demand that borrowers have good credit and balance sheets. 

 Choosing a long-term financial strategy is often daunting. Depending on your business’s size and field of operation, certain financing options may prove more helpful than others. If you would like to learn more about your long-term working capital options, feel free to speak to a Kapitus specialist who can address your unique situation.

Non-notification factoring is a type of invoice factoring arrangement between a business and their factor that limits the interaction between the factor and the customer as much as possible. There are a variety of reasons why a business may pursue a non-notification factoring deal, but the results for the business, factor and client are often the same as traditional factoring deals.

Invoice Factoring

Before we delve into how non-notification factoring differs from more traditional factoring, it is important to understand exactly what Invoice Factoring is. 

Invoice factoring, sometimes referred to as receivables financing, is the process in which a financial company buys a business’s unpaid invoices for a percentage fee. Factoring massively expedites cashflow for participating businesses, as invoices from accounts receivables that would regularly take 30, 60, or even 120 days to become usable capital can be sold to a factor and quickly turned into cash. When a factor buys an unpaid invoice, they will pay up to 95% up front. The factor will then pay out the remaining percent, minus fees, to the business when the customer pays the invoice. Typically, once a business is approved for factoring, the factor is responsible for collecting on the original invoice meaning the factor, not the business, will then reach out to the customer to redirect collection. This final step functions differently in a non-notification factoring deal.

Normal Invoice Factoring Versus Non-Notification Factoring

Traditional invoice factoring agreements function near-identically for the business, but changes happen in the dealings between the factor and customer. Once a business and factor agree to a non-notification deal, all notifications sent from the factor to the customer are done through white-label forms or forms on the business’s branded stationary or email signature instead of the factor’s. This means that even though the customer is still corresponding with the factor when paying their invoice, it appears they are dealing with the original business.

To further conceal the factor’s identity, payments sent from the customer via postage will often be sent to a PO box instead of directly to the factor. Electronic deposits from a customer will also pay directly to the factor, but because all notifications are sent either with the business’s email signature or branded stationery, it will appear as though they are paying the business directly. Non-notification factoring is a service that attempts to make the invoice process appear more seamless to the customer. By paying invoices that appear to be directly from the business instead of a factor, customers are simply given a more streamlined version of their part of an invoice factoring deal.

Qualifying for Non-Notification Factoring

Traditional invoice factoring qualifications are less stringent compared to other financing options like loans and can be a good choice for businesses like subcontractors. When applying for factoring, a business’s credit score is not nearly as important as the credit scores of the customers who will eventually pay out the invoice. Non-notification factoring, however, will likely have several more requirements. Factors will often look for you to meet several criteria when choosing to make a non-notification deal with a business including:

•  2 years or more in business
• Low risk of bankruptcy
• Minimum invoicing rate of $250,000 per month
• 1 year or more of accounts receivables data
• Credit-worthy clients
•  Your business must fall within services or manufacturing includings

Exact requirements will often vary depending on the factor a business chooses to partner with. When making a non-notification factoring deal, expect that a factor will consider at least some of the requirements listed above, and may have additional requirements not listed. 

When to Consider Non-Notification Factoring

Non-notification factoring is a service specifically for the benefit of your customers, particularly when you don’t want them to know you are using a factoring company. Non-notification factoring can also improve a business’s relationship with a customer, as the business’s name and branding will be present for every step of the invoice process. Non-notification factoring may also help in the event a business and customer’s contract restricts the use of a factor. Such contracts usually bar a factor from sending notifications to the customer, so non-notification factoring often means a business can take advantage of the cash flow benefits of factoring and stay within the grounds of their contract. Businesses seeking a non-notification factoring deal because of contractual obligations will often need to share the contract with their factor.

Any time where a third-party contribution may hurt the relationship between a business and their customer, non-notification factoring may be an effective compromise. Non-notification deals, however, require a strong relationship between a business and their factor, as the factor must essentially act as the business when collecting for the invoice.

Weigh your Options and Speak to a Professional

Every financial situation is different. The most effective way to learn if you would benefit from a non-notification factoring deal or invoice factoring in general, is to speak to a lender or a financing professional. Invoice factoring is a massively helpful tool in increasing a business’s cash flow without the potential of debt brought on by a loan. If your arrangements with a customer could benefit from increased discretion or if you are interested in learning more about how a non-notification factoring deal may help you business, get in contact with a Kapitus specialist who can address your situation.

KEY TAKEAWAYS

• In general, PO financing allows businesses to fulfill orders and cover supplier costs without impacting their ability to cover operation costs.
• With PO financing you do not have to rely on personal credit to get a loan, rather, lenders rely on the credit of the government, when using this financing to to land federal contracts.
• This financial product can offers up to 100% funding and provides flexibility for businesses with customizable payment plans and loan sizes.

The money set aside for federal government contracts is set to grow even larger in the second half of 2021, and as business owners prepare to try and get their pieces of the pie, one of the financing vehicles that can help them is government purchase order financing.

What is Purchase Order Financing?

Purchase order financing, (PO financing) is a form of short term business financing that enables your business to pay suppliers to get paid for goods and services avoiding the risk of late delivery and losing government contracts. It is offered by both traditional and alternative lenders.

The advantages of using this type of financing are endless. Through PO financing:

• The lender will take on invoice collection responsibility with your customer;
• You can maintain your existing cash flow without having to take on new debt;
• You can fulfill orders and cover supplier costs without impacting your ability to cover operation costs, and 
• PO financing will allow you to grow your business by showing potential customers your ability to quickly supply goods and services.

By using alternative lenders such as Kapitus, the application will be simple; depending on the creditworthiness of the customer, your PO Financing rates can be as low as 1.25%, and you often can get approval within a day. 

Government Contracts Are a Gold Mine

The federal government offered $682 billion worth of contracts to private businesses in 2020, a 14% increase from 2019, and is set to offer an even higher amount in the next fiscal year, making it a gold mine for both small and big businesses alike. Contracts for health care providers and medical equipment suppliers jumped 50% in 2020, due in large part to the COVID-19 pandemic. Contracts for IT services – a field in which many small businesses operate – have grown by an average of $6.8 billion year-over-year since 2015, while contracts for miscellaneous services such as small construction and architectural projects and legal services are also expected to increase this fiscal year. 

Small businesses are expected to continue to benefit from government contracts this upcoming fiscal year, as the federal government’s contracting program will continue to ensure that a “fair proportion” of federal contract and subcontract dollars is awarded to small businesses. 

The government, under its Small Business Goaling Report, reserves contracts that have an anticipated value greater than the $10,000 micro-purchase threshold, but not greater than the $250,000 simplified acquisition threshold exclusively for small businesses. It also authorizes federal agencies to set aside contracts that have an anticipated value greater than the simplified acquisition threshold exclusively for small businesses and authorizes federal agencies to make sole-source awards to small businesses when the award could not otherwise be made.

Simply put, whether you’re a small medical research or supply company; a construction firm; an IT company; a law firm or even a small car dealership, there are all sorts of government contracts out there waiting for your business to bid on. 

PO Financing for Government Contracts 

If you do decide to try and take a slice of the government pie by bidding on a contract, you’re most likely going to need PO financing, since most government contracts require a large amount of materials. No matter what type of government contract you are bidding on, be it a Work-in-Progress or a Finished Goods contract, PO financing will enable your business to fill orders and avoid the risk of late delivery that could cause you to lose a government contract altogether. 

PO financing for government contracts allows your company to:

• Bid on large government contracts by providing 100% funding for the transaction;
• Have greater availability to funds than standard business orders;
• Not have to rely on personal credit to get a loan, rather, lenders rely on the credit of the end-customer (and who has better credit than the federal government?), and 
• Have access to flexible payment plans and loan sizes, depending on the business cycles and opportunities.

In all, while government contracts are highly competitive–especially for small businesses–your company needs to be ready with the supplies when you bid on them. PO financing will give you the funds and the flexibility to grow your business when you are ready to grab a piece of the government pie. 

Staffing factoring is a subset of invoice factoring, a type of business financing commonly used by several industries to maximize cash flow and more effectively fund day-to-day operations by allowing businesses access to expedited cash without taking on debt.  A company performing invoice factoring services – commonly known as a factor –  purchases invoices at a discount from business-to-business (B2B) and business-to-government (B2G) companies. The factor pays out a portion of the receivable upfront. This means that the capital from an invoice that would usually payout in 30, 60 or 90 days is immediately usable. Factors will take anywhere from 1% to 3% of an invoice as a fee and pay out the remaining amount of the invoice to the company when the invoice is actually paid. Staffing factoring, which is also sometimes referred to as payroll factoring, specifically applies to staffing companies which organize and assign temporary employees. Staffing agencies regularly partner with factors because invoices from temporary workers traditionally take several weeks to pay out.

How Staffing Factoring Works      

Similar to traditional invoice factoring, staffing factoring offers cash for unpaid invoices.  Because the factor is purchasing your invoices, you won’t be making monthly payments like in the case of a business loan. Instead, the factor pays you a percentage of the invoice upfront, then once the invoice has been paid by your client, the factor will pay you the rest of the invoice amount minus fees. 

Because invoice factoring involves three parties – a staffing agency, a staffing agency’s customer, and a factor company – there are more steps to the process than you would find with more traditional forms of financing.  Here’s how staffing factoring works, step by step:

1.     You invoice your customer.
2.     You sell the invoice to the factor.
3.     The factor pays you an advance on the invoice
4.     Your customer makes payment on the invoice to the factor
5.     The factor forwards you the remaining amount, minus any fees

Recourse or Non-Recourse?

Companies may have to decide whether to use non-recourse loans or recourse factoring when partnering with a factor. Recourse factoring means that in the unlikely event an invoice is not paid, you – the staffing agency – are essentially responsible. Non-recourse factoring, however, means that the factor will take the bulk of the risk in the event of an unpaid invoice. Many factors offer non-recourse agreements that apply only when an invoice is unpaid because an agency’s customer company is declaring bankruptcy.

Depending on a staffing agency’s size and cash flow, either recourse or non-recourse factoring may be a viable choice. A factoring company may offer better terms to a staffing company if they allow for recourse factoring. If a staffing agency and their customers have exceedingly good credit, a factoring company may pursue non-recourse. Every agency’s situation is unique, so consult relevant parties before deciding whether to pursue recourse or non-recourse factoring.

Is Staffing Factoring Right for Your Business

Staffing agencies frequently turn to invoice factoring to improve cash flow. Staffing companies are especially vulnerable to gaps in capital since agencies are typically paid anywhere from two weeks to up to three months after staff are assigned in either permanent or temporary staffing roles. Staffing factoring most directly benefits companies that have a consistent flow of invoices or a large staff of temporary employees. Staffing agencies looking to increase their number of temporary employees, then, could greatly benefit from working together with a factor. Instead of paying temporary employees with the previous week’s paid-out invoices, a staffing factoring company allows an agency to pay their temporary employees more directly and efficiently.

Qualifying for Staffing Factoring

 While staffing factoring is not a loan, agencies may need to consider certain qualifications to partner with a staffing factoring or payroll funding company. Like any other financing company, staffing factoring companies may want to see that an agency’s invoices are consistent and meet the minimum threshold for invoice factoring. When seeking staffing factoring, an agency’s own credit is considerably less important than the credit of the agency’s customers. Staffing agencies with less than perfect credit are still very likely able to qualify for invoice factoring if the credit of their invoiced customer is strong. Factoring companies may also prefer agencies that have been in business for more than two years. Staffing agency invoices from temporary employees are especially attractive to factoring companies because the outstanding invoices will almost certainly be paid since the temporary employee already completed their hours. Staffing invoices are traditionally submitted with timecards as well which act as a secondary guarantee that services were rendered.

Benefits of Staffing Factoring

Cash flow:  The most direct benefit to staffing factoring is a quick increase in cash flow. This quick increase in on-hand capital can alleviate cash gaps that could impact day-to-day operations. 

No Associated Debt: Rather than taking out a loan, staffing factoring lets a staffing agency hold more capital without the traditional expectation of repayment. Once a factor purchases a staffing agency’s invoices, the factor will take on the collection of the invoice. Both loans and factoring are strategies to expand an agency’s amount of liquid capital. While a loan offers capital in exchange for the guarantee it will be repaid, factoring simply expedites money already guaranteed to an agency from their own invoices.

Better Customer & Employee Experiences: Companies offering invoice factoring services are not borrowers. Working with a factor is a partnership. Factors are financial companies and will often be more than happy to meet and consult with an agency to determine the best financial moves for their unique business. Factors may also be able to help agencies make better informed choices about which customer companies to partner with in the future.

Cons and Potential Problems with Staffing Factoring

 Staffing factoring has one key downside that may turn away staffing agencies. Transactions with staffing factoring companies typically charge a 1% to 4% fee. Depending on the cash value of an invoice, agencies may decide that the fee paid to the invoice factoring company may not be worth the cost. Larger staffing agencies may then forgo staffing factoring in exchange for other kinds of capital guarantees.

Recourse factoring may also push some businesses away from staffing factoring. In the case of a recourse factoring agreement, if a customer merchant cannot pay an invoice, the staffing agency is fully responsible for the amount drawn. An agency, then, may consider the factoring agreement superfluous since they are still accountable for the bad invoice. When partnering with a staffing factoring company, agencies should weigh whether to pursue non-recourse or recourse factoring based on the credit and trustworthiness of their own customers.

Bottomline on Staffing Factoring

Cash flow is king in the staffing industry. If an agency has more capital on hand it can maintain higher liquidity after payroll, and widen its prospects. Depending on the size of a staffing agency, invoice factoring can expedite growth as efficiently as a loan, but without the worry of taking on debt. 

Invoice factoring agencies are an invaluable partner to staffing agencies. Working together with a factor allows an agency to take better-calculated risks when partnering with new clients and can benefit an agency’s credit. As an agency expands and builds a relationship with its factor, an invoice factoring company can quickly become a resource for making more informed business decisions.

 When deciding to partner with a factor, staffing agencies must consider how valuable on-hand capital is at their current capacity. For example: if an agency can use expedited capital to keep its business sustainable, staffing factoring can be a great resource. If a company has a density of unpaid invoices that leaves most of their capital on a weeks-long countdown, staffing factoring can speed up opportunities for growth that would regularly take much longer.  

Invoice factoring offers agencies the financial flexibility to potentially take on larger accounts and expedite their own growth. Especially in the staffing industry, having more on-hand capital makes your agency more competitive, well-positioned and poised to grow.

If your agency is interested in learning more about invoice factoring and staffing factoring, get in touch with a Kapitus financing specialist who can walk you through the options available to you based on your unique situation.

Are you exploring business loans for franchise purposes? You’re likely bringing some of your own money to the table to finance your dream. However, that doesn’t mean that you won’t need help with other startup costs, future expansion or ongoing funds. You might be surprised at how many options there are in the marketplace. This guide will help get you up to speed on the most popular franchise financing options according to two main objectives: buying a first/additional/multiple franchises and funding existing franchise operations.

Get ready to feel better about your financing options for the next chapter in your entrepreneurial careers. Your franchise ownership goals are within reach.

Buying Your First/Additional/Multiple Franchise Locations

Whether you’ve got your eye on owning your part of a franchise or ready to expand your franchise footprint, you’ll need one of the many flexible-use business loans for franchises.

The three most popular types of franchise financing are:

• Traditional loans
• Small Administration (SBA) loans
• Franchisor financing

Look at how each of these financing options can fit the needs specific to someone purchasing an initial franchise.

Traditional loans

When considering the different business loans for franchises, traditional business loans top the list. Proceeds can help purchase or expand franchise holdings.

Traditional loans are smart financing options for small business owners confident that they have the financials and good credit to qualify. With generous loan limits, highly competitive interest rates, and flexible terms, these loans will likely offer some of the best rates in the market. You’ll need to come to the table equipped with solid financials. The rigorous underwriting process is one of the reasons these loans typically offer the most competitive terms. Traditional loans might be an attractive option. Show three years of tax returns, a strong personal financial history and a good credit score. The lender will verify fund source you’re using for your down payment.

With traditional loans, your franchise choice could play a significant role in the approvals process. Lenders like to see big brand names with proven track records in the market. Franchises with few locations might hurt your application. These franchises haven’t worked in multiple markets and various economies. Yet, if you’re a new franchise owner, a traditional loan can use your personal credit and financial history to launch your new venture.

SBA 7(a) loans

The SBA 7(a) loan program is hands-down the most popular loan program. It’s a reliable option for financing franchise startup and expansion costs. When you use these types of business loans for franchises, you’ll find competitive rates and virtually unlimited use of funds. Loan Limits are generous, and flexible terms are perfect for a franchise on the rise.

The first step to qualify for an SBA (7a) loan is to make sure your franchise is listed in the SBA Franchise Directory. If they don’t list your franchise type, you can apply for participation in the directory (note: the SBA will require additional documentation).

Loan limits are up to $5 million and terms range from 10 to 25 years. Interest rates are generally in the single digits (7% to 9.5% is a good range to consider). Prospective borrowers will usually have to be in business for at least two years. This makes the SBA 7(a) loan a better match for existing franchise owners, or those purchasing a franchise in an industry where they have a proven careers track record. Lenders will use your credit score and business financials for qualification. While the approvals process isn’t speedy, you’re rewarded with some of the best rates and terms, aside from traditional loans.

The only limit to an SBA 7(a) loan is borrowers can’t use the funds to finance franchise or royalty fees. If you choose to go the SBA 7(a) route, make sure you earmark other funds for these startup costs.

Franchisor financing

Many of the nation’s leading franchises offer direct financing to entrepreneurs. Of course, they want to make it simple for owners to get up and running. This one-stop-shop approach is potentially perfect for those looking to open their first location, adding a location, or purchasing multiple locations at once.

While the rates might not be as competitive as traditional loans or the SBA 7(a) loan, there’s something to be said for a streamlined process. As you consider all the options for business loans for franchises, it’s worth it to speak to the franchise and see what options are available. Be sure to have your attorney or accountant review any financing options offered by the franchise. Then you can compare the terms between a traditional loan, SBA 7(a) loan and the franchise’s direct financing side-by-side.

Funding Ongoing Franchise Operations

You may find times where you need a cash infusion to help fuel operations and growth. The best business loans for franchise needs in these cases is the one that matches:

• The reason you need the funds
• How long you need to repay the funds
• How much you need to borrow

Here are three financing options franchises can use to keep operations running smoothly and make specific improvements.

Traditional business loans

If you know you need a fixed amount of cash for an upcoming franchise improvement or expansion expense, a traditional business loan can help. With fixed terms and rates, small business owners can fund franchise expenses with a predictable impact on their monthly budget.

Repayment terms are often flexible, including payment frequencies based on your current cash flow. Traditional loans have stringent qualification guidelines, and not all businesses can qualify with ease. You’ll need to have existing operations with a proven balance sheet, a plan, and your financials in order.

Lines of credit

If you’re looking for a more flexible way to access the cash your franchise needs, a line of credit might be the ideal tool.

Lines of credit can be used for nearly every purpose imaginable. You can draw as much or as little as needed–and only pay interest on the funds drawn. Once you pay it back, your credit line is once again fully available for use. There’s no need to go through the qualification process again.

For businesses that may not qualify for a traditional loan, lines of credit can fill that financing gap. Credit scores aren’t weighed as heavily in the approval process for most lines of credit, either. These features combined make lines of credit ideal to fund everything from cash flow gaps to seasonal inventory ramp-ups. The sky’s the limit.

SBA 504/CDC loans

While the SBA 7(a) loan is an ideal fit for initial or additional franchise purchases, you’ll need a different SBA loan type for funding ongoing business concerns.

The SBA 504/CDC loan has a narrow scope of use. Funds must be used for acquiring, renovating, or improving real estate or equipment. A borrower’s franchise location must also be U.S.-based. This type of loan can help fund making improvements to franchise real estate, buying real estate, or even upgrading heavy equipment to speed operations.

As with the SBA 7(a) loan, your franchise needs to be listed in the SBA Franchise Directory to be eligible. While these loans are slower to fund than traditional bank loans and lines of credit, you’ll likely be rewarded with some of the best interest rates. With all of the options for business loans for franchises, there’s one out there that makes perfect sense for your financials, credit and goals. And, if you’re still trying to determine the next steps in your franchise financing plans, you can always reach out to a loan officer to discuss.

Rejection always hurts, and when it’s from the bank on a small business loan, it can sting a little bit more than it did in high school. Loans are the lifeblood of most small businesses, and without them, the company could crash and burn. In fact, according to the Small Business Administration, 27% of the small businesses surveyed stated they weren’t able to receive the funding they needed to expand their businesses.

However, there is hope. Many businesses have been rejected only to recover and secure the financing they need on the next application. Here are our tips to help you recover from a rejection.

Why Would A Small Business Loan Be Denied?

First thing’s first, you need to be able to pinpoint your misstep to correct it in the future. Most lenders will give you the reason that your application was denied and it is usually one of two issues:

• Low FICO Score
• Not enough revenue

Before lending to a small business, just like any loan, they want to ensure that you have a solid history of repaying your debts on time and in full. If your business and personal credit scores are less-than-stellar, lenders will perceive you as a risky investment.

Additionally, lenders want to know that borrowers can make the minimum monthly payments on the small business loan. This is where your business’ cash flow comes into effect – they’ll calculate your debt to income ratio to see how you would be able to handle the monthly payments.

Correct the Problem

There are both short-term and long-term solutions. You can’t fix your credit score in a week, but if you make it a priority, over time, you’ll be able to improve it. In the short-term, you can, first of all, ensure that your credit report is error-free. It happens more often than you would think as 23.17% of all complaints to the Consumer Financial Protection Bureau in 2016 were about credit report inaccuracies.

Also, to improve your credit rating, you can take steps to pay off your debts to improve your debt to income ratio which will make you look more favorable to lenders.

To improve your revenue streams and to show the lender that your business is bringing in enough money to cover expenses and the loan payments, you should do your best to reduce expenses while increasing your profit margins. Improving cash flow can be a challenge for some small businesses. However, many are finding success after putting all of their attention and efforts into the process.

Other Things to Consider

There are a few things you can do to improve your odds of securing a small business loan, and are intended to make you appear more trustworthy as a borrower.

You can make a sizeable down payment on the loan to show that you’re serious about repaying the loan. You can also get a cosigner with an excellent credit score to make you appear more trustworthy. However, the cosigner would be on the hook for the loan as well, so ensure that you can confidently make the payments.

If you have a low FICO Score, you should also look into alternative financiers that could provide you with financial options. Big banks aren’t the only lenders out there. Additionally, a low credit score won’t necessarily take you out of consideration with alternative lenders.

What to Do Before Re-Applying

Before potentially going through the frustration and wasted time of a loan rejection again, you need to take a look at yourself and your businesses from the lender’s point of view; are there any red flags?

We recommend taking a hard look at your credit report. Even asking a lender’s advice about any problems they see. It may seem scary to ask them to point out problems, but the issues might arise when you re-apply for the loan anyway. So, it’s better to know beforehand.

Building and running a small business is hard. It takes conviction, leadership, sound management and, every so often, a much-needed injection of financing. In both good and lean times businesses are often faced with the decision to pursue some type of financing. However, applying for and acquiring small business loans and alternate financing can often be daunting – even if you’ve done it before. And traditional lenders do not make that experience easy.

The good news is that getting financing doesn’t have to be this hard. We help thousands of small businesses everyday and want to share secrets of getting good financing options quickly. So, we have compiled a simple checklist of actions you can take to make the process fast, simple and easy.

However, as you get ready to apply for a small business loan, you should consider the following questions carefully to be sure you are not surprised by any unforeseen requests or adverse decisions from lenders.

Six questions every business must ask in 2020 before applying for a small business loan | Download PDF

1. Should you apply for a small business loan?

While a small business loan is a great way to reduce the pressure on cash flows, you could have viable alternatives for relieving cash flow crunch like selling debt owed to your business and renegotiating contracts to allow for longer payment terms. Also, make sure you have considered all alternate sources of financing including friends and family.

2. Is a small business loan good for your business?

Understand the effect of repayment of small business loan on your cash flow. A loan does not change the fundamental working of the business. It strengthens a fundamentally sound business and quickly breaks a business that is fundamentally unsound.

3. Can you qualify for a business grant?

Unlike loans, you don’t have to pay back grants. Before applying for a small business loan, see if you qualify for a federal or private small business grant. However, grants can be highly competitive and may not fit your financial time horizon.

 4. What types of small business loans are there?

There are over a dozen types of small business loans and alternative financing options for small business. The most popular options are government-backed SBA loans, revenue-based financing and factoring. Download this eGuide to learn more about different types of small business financing.

5. When should you apply for a small business loan?

Apply only once you have determined that a business loan will help strengthen your business, and you understand the different types of financing options like Small Business Loans, Revenue Based Financing, Factoring, and Equipment Financing. Each of these options have unique requirements so make sure you understand them well before speaking with a lender.

6. Should you work with a small business loan broker?

Brokers are a great resource to get offers from multiple lenders. However, many online marketplaces like Kapitus, will get you offers from multiple lenders without the additional broker fee which is borne by the borrower.

Small Business Loan Application Checklist| Download PDF

1. Run a quick cash flow analysis on your business account

Cash flows are one of the primary indicators that lenders use to understand the health of your business. Showing 3 to 6 months of positive cash flow can get you approved faster. It can even get you better financing terms for your small business loan. You can learn more about cash flows and ways to improve them in “How to Prepare Your Small Business for Cash Flow Needs.”

2. Collect at least 3 months of bank statements

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements. Remember, a well managed cash flow will directly improve your bank accounts.

3. Identify unusually large deposits to your bank accounts and gather supporting documents to help explain them

While presence of unusually large deposits can delay finalization of loans, they are not necessarily bad. Many businesses, like construction companies, can easily explain their presence on the bank statements. Some businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process and get really good terms on your small business loan by providing a copy of your account receivables and future contracts.

4. Get a copy of your free credit report and make sure there are no red flags

A strong personal credit goes a long way to assure any lender about the fiscal responsibility of the person running the business. You can get a free copy of your credit report from annualcreditreport.com. If you find any incorrect information on your credit report, contact each credit reporting agency (Experian, Transunion and Equifax) immediately to correct the issue. Keep in mind that while small delinquencies are understandable, lenders are uncomfortable with statements that show delinquencies on child support or recently dismissed (not discharged) bankruptcies.

5. Reduce the number of lenders to whom you owe money

Too many lenders pulling money from the business can create severe strain on its cash flow. Lenders want to know that the money they provide will help grow your business and not put additional strain on its daily operations. You may want to wait to finish your current loan obligations before going back to the market to raise more capital.

6. Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan on any open tax lien. A payment plan on a tax lien is far better than an open unresolved tax lien.

7. Get three business references

Trade references help to establish authenticity and credibility of your business. If you rent commercial space for your business, make sure that the landlord is one of your references.

8. Have tax statements handy when applying for a large sum

Lastly, businesses contemplating borrowing large sums over $75,000 should get a copy of their last year tax statement and business financial statements.

Obtaining small business loans doesn’t have to be a daunting process. Use this checklist before applying for a business loan or alternate financing and get the funds your business deserves.

Fast-growing businesses may face a problem financing an expansion. But asset based financing may offer advantages over more traditional methods of borrowing money. Here’s what you need to know.

How Asset Based Financing Works.

Imagine that you are running a retail apparel company and need cash to grow your business. Instead of applying for a loan based on the company’s credit history, you might instead ask for financing secured by the inventory you hold. Clothing retailers usually hold significant levels of inventory (dresses, jeans, etc.) which may be used as loan collateral.

Many retailers also operate as wholesalers to smaller firms and so usually have unpaid invoices outstanding. Companies may also be able to use those invoices to help finance their own operations by contracting with an intermediary known as a factor. The factor buys the invoices at a discount in exchange for providing immediate cash.

Here are seven reasons consider asset-based financing.

What are the benefits of asset based financing?

When compared to traditional forms of lending, asset based financing can can offer a wide array of benefits – from fewer restriction, to cost savings, to less paper work. While it is not the best fit for every business, it does make sense to include it as part of your due diligence when selecting the best financing product for your business.

Here are seven reasons to consider asset-based financing.

1. Potentially lower costs

Asset based loans are secured loans. And, therefore, may be far cheaper than traditional loans which are usually based on the company’s financial history. If a loan is based solely on the credit history of a firm, it is considered an unsecured loan. As such, the borrower will get charged a higher interest rate. That’s because the bank may be assuming more risk when they make an unsecured loan.

The secured versus unsecured loan structures are similar to consumer loans, in that home loans may be cheaper than credit card debts. With a home loan, if you don’t pay your mortgage the bank may repossess your home; however, with credit card debt there’s typically no security deposit backing up the loan.

2. Asset Based Financing Requires Less Paperwork Than a Traditional Term Loan

While obtaining a traditional business loan might require you to document the financial history of your company’s operations, an asset-based loan likely would not. In other words, borrowing against the value of your inventory might be an easier way for a newer company to get financing than trying to get a traditional loan.

3. Fewer restrictions than traditional loans

Many loans have restrictions on how the money from the loan gets used. For instance, a bank may ask why you need a conventional loan (also known as a term-loan because it is given for a specified period) and how you intend to repay it. If you take out a term-loan and tell the bank you want to use it to remodel your retail stores, then that is how the bank expects you to use the proceeds. The good news is that asset based loans typically may have fewer use restrictions.

4. More flexible repayment terms

You must eventually pay back any business loan to the lender. However, not all loans are created equally. Asset based loans often don’t require the entire loan amount to be paid off according to a fixed timetable, often known as an amortization schedule. Term loan payments (including a pay-down of the principal balance) must be paid each month. Asset-based loans often have more flexible payment terms, allowing businesses to pay off the debt at a time that is most suitable given their cash flow. The result is potentially more flexibility for companies using asset based financing.

5. Streamlined balance sheets

If you take out a traditional loan, then the balance due appears on your balance sheet. Some asset based financing does not get recorded that way. For instance, if you sold your outstanding invoices to a factor in exchange for immediate cash, there would be no balance to show on your firm’s balance sheet. All you’d need to do is to note how you managed this financial transaction in a footnote on the financial statements. This is known as off-balance sheet financing.

6. A good way to finance working capital.

Companies experiencing fast growth may find it hard to get additional working capital via revolving lines of credit. On the same end, as the need for working capital increases your firm may have higher levels of inventory and larger invoices due from customers. You may use inventory and larger invoices as collateral to finance increased working capital needs.

Feeling more confident about your business to go shopping for a loan? Before you start looking you should understand what factors impact terms of your loans.

Suppose you need expensive equipment to run or grow your business. If you pay cash for it, your employees’ paychecks would bounce. Equipment leasing might be the rescuing you need.

What is Equipment Leasing?

Equipment leasing is a payment strategy accounting for around one-third of all equipment in use, from desktop computers to jumbo jets. “Evidence suggests,” according to the Commerce Finance Institute (CFI), “that an origin of leasing may have started… in the ancient Sumerian civilization.” Leasing has since evolved into an accessible financial resource.

The CFI defines an equipment lease as “a contract for the use of a piece of equipment over a specified period of time where the user of the equipment becomes the lessee and agrees to make periodic payments to the lessor of the equipment with specific end of term options.” In other words: you’re renting the equipment. Unlike renting a home, for example, the opportunity to buy the equipment outright when you enter the lease, is typically an option.

The accompanying illustration provides a breakdown of the categories of equipment leased today, and their share of the leasing universe. In the following pages we will explain when, why and how it is done.

When Should Your Business Lease Equipment?

Before you begin to think of different ways you can bring in new equipment, whether by leasing, borrowing or even paying cash, give the idea a reality check. Ask yourself the same questions that a leasing company or a lender will probably ask you:

• Will the equipment meet an important business need that’s currently unmet?
• Does the cost of continuing to use the equipment I already have, in repairs and/or inefficiency, justify the price of acquiring new equipment?
• Is now a good time to get new equipment due to special “deals” in the market?
• How does the new equipment fit into my overall business plan?
• If I wait a little longer before bringing in new equipment, might more advanced models become available that will give my business more bang for my buck?
• What is my expected return on investment?
• Do I have adequate free cash flow to enter a lease agreement without needing to sacrifice more urgent spending priorities today or down the road?

Another important consideration pertains to your company’s tax situation. With an “operating lease,” you are unable to take advantage of an important tax code provision known as Section 179. That benefit is available to companies using a different kind of lease known as a “capital lease.” It’s also available to companies that buy equipment through borrowing.

If you haven’t payed a lot of business taxes lately and don’t expect to soon, you won’t get the full benefit of Sec. 179. It could make sense to use an operating lease. That way, the lessor—the company you lease the equipment from—gets that tax benefit. This helps you because the lessor takes into account the tax benefits factors when deciding how much to charge.

What’s The Difference Between Leasing Equipment And Financing Equipment?

When you lease equipment, you’re essentially renting it. Equipment “financing” means you buy equipment with money borrowed from a lender. You own the equipment. There are advantages and disadvantages to both approaches.

A third way to obtain business equipment is buying it outright without borrowing or leasing.

What Are The Pros And Cons of Equipment Financing?

Equipment financing pros:

• If you have a strong balance sheet and profitability, you might be able to obtain a very competitively priced loan to purchase the equipment at a lower total cost than leasing. Having the purchased equipment as collateral for the loan already makes the loan less risky for the lender than an unsecured loan. A strong balance sheet makes you more attractive to lenders.
• Depending on your financial strength, you might be able to borrow all of the money you need to buy the equipment without a down payment.
• As the owner of the financed equipment, you may be able to claim tax benefits such as Sec. 179 and deductions for loan interest.
• With a loan, you have the option to pay the principal balance off if you want to–without penalty. This allows you to reduce the total interest you pay, and ultimately, the cost of getting the equipment.
• If you own the equipment and can pay off the loan, you can dispose of the equipment at your discretion leveraging equipment financing.

Equipment financing cons:

• Borrowing to purchase equipment could limit your ability to borrow for other purposes, if lenders believe you’re assuming too much debt.
• An equipment loan appears as a liability on your balance sheet.
• Depending on the size of your down payment for the equipment, the lender might need more assets to secure the loan than just the equipment being financed, possibly including personal assets. The equipment might depreciate faster than the amortization schedule for paying off the loan.
• The equipment could be obsolete before you pay the loan off.

What Are The Pros and Cons of Equipment Leasing?

Equipment leasing pros:

• For companies of average or even sub-par financial standing, equipment leases are generally easier to obtain than loans.
• It is often easier to obtain equipment via leasing without having to put any money down, than with a loan.
• The only “security” you need to pledge is the equipment itself—which technically isn’t yours anyway since you’re borrowing it from a lessor.
• Leasing equipment is known as “off balance sheet financing.” At least with an “operating lease,” the liability associated with your lease obligation isn’t reported as a liability on your balance sheet. Also, lease payments are treated as operating expenses–and tax deductible.
• At the end of the lease term, which should coincide with the time you want to replace old equipment with newer models, selling or otherwise disposing of it isn’t your problem. You just return it to the leasing company. This is helpful with high-tech equipment which becomes obsolete more quickly than other equipment, and thus more difficult to sell.
• Flexibility is a hallmark of leasing. There are many ways to structure a lease agreement.

Equipment leasing cons:

• Because the leasing company is typically assuming greater credit and technology obsolescence risk rather than a lender making a loan to a financially strong company, lease payments often have a higher built-in cost structure than loans.
• You are obligated to make all of the payments prescribed by the lease contract. You typically cannot pay it off ahead of the original schedule. Or if you can and want to, you would incur a large financial penalty.
• Many lease agreements place the burden on you to pay for certain repairs and maintenance services.

What’s Involved In Entering An Equipment Lease Agreement?

The first decision you’ll face, after you decide on the equipment, is what kind of a lease agreement suits your needs. You’ll probably have several options, you just need to figure out which is best for you.

What can you really afford? While a leasing company makes its own judgments about that, you might want to be more conservative in the appraisal of your financial capacity. This will give your company plenty of breathing room for future financial needs.

Another task associated with entering an equipment lease agreement is which leasing company to work with (see Section 10). Some equipment manufacturers have their own “built-in” leasing companies. But, you owe it to yourself to be sure you’ve found the best deal before signing on the dotted line.

The final step in the process is persuading a lessor that you’re the kind of company with which it wants to do business. That may involve turning over reams of financial documents, along with good explanations of why you need the equipment and what it’ll do for your business. The process is like applying for a bank loan. However, it will probably be less rigorous since you aren’t borrowing money. You’re simply paying rent on property that you don’t own.

What Are The Main Categories of Equipment Leases?

There are two basic kinds of equipment leases: capital and operating. With a capital lease, you’re treated (for tax purposes) as the owner of the leased equipment. That means you can take depreciation deductions or, if you’re eligible, a Section 179 deduction. With an operating lease, you are treated more as a renter than an owner, and not eligible for that tax benefit. The only tax benefit is that lease payments are tax deductible.

Under Section 179 of the Internal Revenue Code, you are able–in 2019–to take a deduction for up to $1 million in equipment acquisition by purchase or through capital leasing. There are strings attached, however. You’re only eligible if a) you don’t acquire more than $2.5 million of equipment in that year (although you might still be eligible for a partial deduction) and b) the equipment is used at least 50% of the time for your business.

The Section 179 deduction is phased out dollar for dollar, for every dollar your equipment acquisitions exceed $2.5 million. For example, if you acquire $2.7 million in equipment, your maximum Section 179 deduction would be $800,000. The kinds of equipment eligible for deductions are restricted.

Any of the following criteria must be met in order for a lease to be treated as a capital lease.

• You automatically become the owner of the leased property at the end of the lease term.
• You have the option to purchase leased property at a subsidized price.
• The lease term is long enough to cover at least 75 percent of the “useful life” of the equipment.

What Are Some Subcategories Of Leases?

Under a capital lease, there are several subcategories. The most expensive (in terms of monthly payments) is the $1 buyout lease. You have the option to buy the leased equipment for $1 at the end of the lease term. In effect, you’re buying the equipment over the lease term, since the lessor is prepared to turn it over to you at that time for the price of $1.

This type of lease may be the easiest to qualify for as the lessor is getting more money from you. You might not want to use a $1 buyout lease unless you plan to buy the equipment, and expect to use it for years to come.

Another common capital lease is the 10 percent option lease. As the name suggests, it gives you the option to buy leased equipment for 10 percent of the original value when the lease is up. Your monthly payments might be lower than the $1 buyout lease since you’re only paying for 90 percent of the equipment. Yet, the interest rate the lessor uses to calculate the payment might be higher, because it’s assuming the risk that you’ll decide not to buy the equipment at the end of the term.

A variation on the 10 percent option lease is the 10 percent “purchase upon termination” (PUT) lease. You’re obligated to purchase the equipment for 10 percent of the original equipment cost when the lease is up. This is more of a financial risk to you, thus giving you lower monthly lease payments. Of course, you have to come up with the cash simultaneously.

What are the terms?

Terms for a standard operating lease, in which there are no special tax benefits (beyond writing off lease payments), is the FMV lease. It gives you the option of purchasing leased equipment for its fair market value (as set by the lessor) at the end of the lease term, return the equipment or renew the lease. It’s an operating lease because it’s more like a simple rental arrangement. Lessors set approval standards highest for FMV leases.

A fifth lease category, known as a TRAC (Terminal Rental Adjustment Clause) is a hybrid contract. Depending on specifications, it can be a finance or an operating lease. They’re used primarily for commercial vehicle leases and are a good loan option for the trucking industry.

How Much Does Equipment Leasing Cost?

The cost of leasing equipment varies. These are the factors determining the cost:

• The value of the equipment
• The competitive state in the market of lessors that specialize in companies like yours
• The interest rate environment
• The way credit and obsolescence risk are allocated between you and the lessor
• The assigment of which party gets the tax benefits

Also critical is your credit history. In a perfect world, the stronger your credit score is, the lower your lease payments will be. You can find lease payment calculators online to give you ballpark numbers for your own leasing situation.

How Do I Decide Which Equipment Leasing Company Is Right For Me?

When you start looking for an equipment lessor, you’ll find four kinds:

1. A company that just puts together equipment leases.
2. A “captive”: a subsidiary of a company making costly equipment.
3. A financial institution offering equipment leasing among a variety of other financial services.
4. A lease broker, who helps you find a suitable lessor.

Considering the long-term financial commitment involved, shop around. Your best bet might be a leasing company that specializes in working with companies like yours, and / or specializes in the kind of equipment you want to lease. Getting competitive terms is important, but so is the strength and integrity of the leasing company.

Small businesses (SMBs) are at the core of the US economy. They are the largest employer in almost every sector.  Despite this, it has been proven to be extremely difficult for business owners to find favorable financing to sustain and grow their business.  In fact, many have found that it is far more difficult to finance their operation than it is to run it.

How to choose the right funding option

Recently, a business owner asked me about which type of financing was best for him.  The obvious answer is: the type of financing for which you will qualify.  This will set the tone for your capital search. Obviously, the primary goal is to find the type of financing that offers you the most money for the lowest cost and the longest repayment terms – with the fewest downsides. The reality is that this set of terms will vary wildly depending upon the credit quality of the applicant.  A problem for many SMB owners is that they develop a preconceived notion of what their financing SHOULD look like as opposed to what it will REALLY look like based on the credit quality of the borrower.

The first thing you should do when embarking on your search for financing is ask yourself one question – Am I bankable? This is a broad term that indicates if you can go to your bank and obtain a loan or equipment financing under traditional terms or with the benefit of an SBA Guarantee.  In my years of experience in business finance and as a SMB owner, I can say that the vast majority of SMBs are NOT bankable, even when they have heard their banker say that they could obtain a loan.  Terms for traditional financing are rarely presented realistically during the application process and most applications are rejected because the borrower cannot meet the requirements of the lending institution.

Be objective

The second thing you need to do is to remember to be objective and determine exactly where your chances lie for approval on various products and with the different types of lenders. You must accept that there is a risk pricing differential with different types of financing and with different lenders. The easier the credit terms and the quicker the origination usually spell out more expensive financing. In many cases, it is worth the cost – as other lenders wouldn’t fund you at any cost.

The third thing you need to do is obtain as many offers as possible –  don’t be insulted by an offer to finance even if it is onerous and seems outrageous.  You can always pass.  In evaluating the offers, you must remember the Golden Rule of lending applies – “He who has the gold – rules!”

Obtaining small business funding that’s best for you

The basic understanding for this guide is that you are already an operating business. Start-ups are an entirely different discussion. So, if you have been in business for at least 1 year, read on!

SMB financing options cover a wide spectrum – from traditional banks, credit unions and non-bank institutional lenders to non-traditional lenders, alternative finance companies, crowdfunding platforms and friends and family.

Banks, Credit Unions and the SBA may offer lower rates and longer terms, but the obstacles to obtaining one of these loans are considerable. On the other end of the spectrum are alternative finance companies, equipment leasing firms and even your personal credit cards, which all share the same features.  They are far more expensive than traditional bank financing – but they are readily available and far easier to get approvals.  The true value of money is in its availability.  What good is a 6% loan from your bank if you can’t get approved for it? On the other hand, if you are a high credit quality business – why should you short cut yourself for high cost financing?

Let’s see if we can help you manage your expectations and give you some insight into the lenders perspective.

What do the banks and the SBA want, so I can get funding?

I have spent many years around bankers and have asked a number of them what qualifications are needed for them to consider lending to an SMB owner.  They always offer the obvious response: everyone has their own unique circumstances underwritten at application. But almost every banker I have spoken with talks about the “Five C’s of Credit”.  This is a basic set of criteria that they all use when evaluating a company for a loan:

Capital

Lenders want to see that you have skin in the game. How much hard capital have you put into the business? They don’t care about sweat equity – they want to see the cash.  Most lenders want to see between 10 – 40% of the total capital in the business coming from the owners. They want to see that there are hard and soft assets from machinery, equipment, real estate and some will even consider proprietary IT technology. They want to share the risk with you, and your investment insures you will suffer too if the business fails.

Collateral 

These lenders are “risk averse”. They want to know that if, for some reason, your business fails to pay back the loan that they can attach assets and liquidate them to offset the debt. This is one of the reasons that they want to see meaningful assets in your company before lending to you. Not all loans require collateral, but if you want favorable terms, you should expect it.  In the case of SBA Guarantees, you will be required to pledge not only the business assets, but all owners holding 20% or more of the business must pledge their personal assets as well.  Homes, cars, cash, jewelry – everything. If you can’t pay back the loan, you could lose everything.

Capacity 

A lender must have a realistic expectation that the borrower does indeed have the capability to repay. Lenders rely on numerous metrics and factors in determining your “capacity”. First among these is your personal credit score. Even though this would be a business loan, the main driver of an SMBs success is the owner. If you don’t pay your creditors for personal debt, it is a reasonable conclusion that you won’t pay your business debt. To get to the next step with a bank you will need a strong FICO of over 700 with no liens or judgments. The bank will also look to your current vendors for your payment history. Most lenders look for 1.25x or higher, which relates to the big driver of cash flow of the business. If you have cash, then they know you can pay back.

Conditions 

This looks at the reason for the loan and if the bank feels that you will be successful in reaching your goals. The bankers will look at everything from the economic conditions in general to those in your local area. The industry you are in is also a strong indicator of success. The “SIC code” of your business provides risk assessments for your business – and it can work with you or against you. Most importantly, the bank wants to understand the purpose of the loan and if the proceeds will help you grow the business as opposed to adding to your debt load. You will need to provide an explanation for the amount you need, why you needed it, details on how you plan to spend it and the benefits you expect to gain from the loan.

Character 

This is a difficult factor to evaluate, but the bank is basically trying to determine if you are of good character and can be trusted to perform. This can be very subjective and often determined by the bankers that you speak with in preparing your application.  They want to know as much as possible about the person behind the business. Are you a novice or a seasoned professional in your field? What is your background? Did you have prior achievements they should know about? Do you have strong professional references from vendors, customers or credit providers? Do you have any blemishes that would influence the decision-making process like arrests, DWI or old tax problems?

What types of lenders do I have to choose from for funding?

Large Commercial Banks

These are the big guys. You know them – JP Morgan Chase, Citibank, Wells Fargo, Bank of America. These banks all have assets greater than $10 Billion and are large bureaucratic machines. While the largest banks account for about 40% of SMB loans, they do very little lending to Mom and Pop businesses or those that fall within the agriculture industry. Community banks are far more active in those sectors. Large banks are better for bigger, more established companies who seek over $250k in loans. This is their true minimum lending floor – it’s simply not worth their time processing smaller loans.

Mid-Tier Regional Banks

These multi-branch banks have a great deal of local power and are more receptive to the needs of their SMB customers. They have strong asset bases but practice the same strict underwriting practices as the larger banks. Their local knowledge makes it much easier to communicate with them and many are strong SBA partners which can be immensely helpful.

Small Community Banks and Credit Unions 

These are the grassroots institutions for true SMBs to work with. They still believe in the value of knowing their customers and their community, and work hard to build strength in all. This is where most of the US agriculture loans are originated. However,, smaller community banks are finding it hard to compete and are closing at a regular pace. This requires them to be more conservative, which can influence the outcome of your loan request. Only 40-45% of their loan applications are approved.

Non-Bank Financial Institutions

Access to these lenders is usually limited to higher growth specialty finance. These groups rarely, if ever, consider Main Street businesses. Large firms like CIT or Apollo will provide multi-unit franchise financing for restaurant or hotel chains, but not loans to single unit operators. These groups include private equity firms, hedge funds, family offices and high net worth individuals. You must be well prepared with strong documentation and the ability to pitch your deal and defend your representations with facts. This is not for financial amateurs or novices.

Alternative Funding Companies 

Over the past 15 years, this has been the fastest growing sector for SMBs to access capital. Factoring companies, merchant cash advance, FinTech online lenders and equipment leasing firms all fall into this category. Most of these companies lend from banks and take on the credit risk for the performance of their clients in return for higher fees.  The main attractions are speed, less documentation and higher approval rates. They will often look for a blanket UCC security agreement over the assets of the company, but do not require the hard-collateral pledges that banks and SBA require to provide loans. Their cost of capital is high because they take considerably more risk to provide financing than banks do.

Crowdfunding 

Crowdfunding appears to have key advantages of being quick and easy to raise funding, but it really isn’t as easy as it appears. First, you need to determine the type of crowdfunding you wish to pursue. Rewards based platforms solicit donations for worthy projects or companies in return for “rewards” that you provide. Debt and equity crowdfunding involves high levels of transparency and reporting as well as time consumption and expense. Many Crowdfunding platforms have specific rules governing time limits and funding goals. If you don’t reach your goal after a specified time, you lose. Or you may encounter an “all or nothing” funding policy, precluding you from accessing capital raised beneath your goal. Some users have been disappointed to realize that often the success of the campaign revolves around their social network. This means that you are really doing a “friends and family” round – but incurring fees.

Independent Brokers 

There has been a dramatic explosion in the number of independent brokers/“finance advisors” who are marketing loans, lines of credit, invoice factoring, receivables financing, cash advances, equipment leasing and other funding products to the SMB community. Some brokers are reputable and can be extremely beneficial in expediting the process of finding financing. They can look at the overall parameters and know where to place the application for fastest approval. On the other hand, there are bad players who are only interested in their own enrichment. Some ask for retainers up front and fail to deliver. Buyer beware. Know who you are dealing with. Look for complaints and ask a lot of questions before trusting your financial information to an unknown outsider.

Friends and Family 

This is one of the most common places where SMB owners seek seed money or general working capital. While this can offer few obstacles to funding since this is a supportive and familiar lender, failure to perform can negatively impact your relationship with these people for the rest of your life.

Personal Savings, Home Equity and Credit Cards 

Before draining your savings, your business plan should reflect cash reserves for funding to carry both you and your business through hard times. Most businesses have ups and downs. The failure to plan for this can be catastrophic. The use of funds from a Home Equity loan or Line of Credit can be a very useful tool. Interest rates are relatively low and the money is not being lent on the qualifications of your business. It is being given to you against the equity value of your home. The downside is that if your business fails, you could lose your home as well. Also, some SMB owners feel it is reasonable to finance their business with their personal credit cards. This can cost upwards of 29% compounded, which is a formula for disaster.

Landlords and Real Estate Developers 

If you have a brick and mortar business and you need to make improvements to the space you are occupying, landlords and developers often provide “tenant improvement allowances” or TIAs for businesses to enhance the overall building. This is usually paid back in the form of additional rent or larger escalations in annual increases. This can be a good way to access capital for betterment and improvements. But sometimes, the escalations exceed the business’s ability to pay.

Wholesalers, Suppliers, Purveyors 

Every time a Wholesaler/Supplier extends you terms to pay for your supplies, you are receiving a de facto loan. This allows you to pay for goods after you have had the opportunity to sell them at a marked-up rate. There have also been instances where primary suppliers have made direct loans or investments in SMBs that are material to their business.

Government Business Development Agencies 

Many state and local economic development agencies offer loan programs and grants. These opportunities are often very specific in their requirements, including formal financial statements and reporting. Most have extremely favorable rates.

Running the Process

The search for financing should be run as an organized process. Your first decision should be to target the groups to which you should be submitting applications for financing.  In this process of elimination, the lenders will decide to approve or decline your application. You then must decide to accept an approved offer or continue to shop – or if declined, where to apply next.

Reasons for funding rejection

While each lender or equity investor assesses applications differently, there are numerous reasons why an application for funding is rejected. Below are a few key reasons:

• Poor Credit Quality of the Owners and/or Business
• Poorly Prepared or Inaccurate Financial Statements
• Industry is a Poor Credit Risk
• Geography / Region has Economic Challenges
• Insufficient or Inconsistent Documentation
• Negative Cash Flow / Insufficient Sales
• Tax Liens and Judgments
• Undisclosed Negative Information about the Business or the Principals
• Seasonality of Business / Sales Instability

 It can best to aim high and hope for approval, then work your way down the waterfall. It may be labor intensive, but could provide you with lower cost, longer term and more favorable options. Your goal is to find the best deal you can, but be realistic and objective

Combining a number of approved options into a blended structure can give you a better cost structure. Smaller but lower cost personal or commercial loans can be supplemented with higher cost cash advances and equipment leases. This can give a blended rate that is much lower than the more expensive products.

Do your homework and be realistic in your expectations. Take the application process seriously and be as meticulous as you can, so you can get the best funding for your small business.

Business Loan vs. business credit card how do you decide which is best for you?

When it comes to financing, entrepreneurs and small business owners continuously debate business loans vs. business credit cards. In many cases, the final decision comes down to the state of the business, relevant market conditions and what makes the most sense for the company’s long-term strategic objectives.

Before weighing in on the debate, here’s a brief description of each financing option:

Business loans

Business loans can boost your cash flow on both a short- and long-term basis. Short-term loans are good to cover unexpected expenses. A traditional term loan enables you to take on larger projects, without harming cash flow.

For business owners with great credit, stable revenue, and a solid business plan, a business loan can be a great option.

Credit card

A business credit card gives a small business owner instant access to cash. It doesn’t come in a lump sum as with a loan, but rather as a set amount of funds available when and as needed.

Interest rates with a credit card are generally higher than with a business loan, but by paying each month’s bill in its entirety, this isn’t a concern. Often, the appeal of business credit cards is enhanced by various perks, purchase protections and rewards.

Business loan pros and cons

With business loans, a borrower often has a voice in determining the frequency and flexibility of payment deadlines. Payment frequency may be based on existing cash flow, or you can pay back larger amounts without prepayment penalties.

In general, a business loan works best for companies in need of working capital for investment to in large-scale expansion opportunities, such as equipment purchase, hiring more employees or launching a new location, etc. It’s also useful in refinancing an existing business debt.

On the other hand, with traditional lenders, business loans “can be more difficult to qualify for, and the lending process can take weeks or months,” according to The Ascent at Motley Fool.

Credit card pros and cons

With a business credit card, a sole proprietor or ambitious entrepreneur enjoys rapid availability to money needed to finance operations. It’s also a viable option if you wish to make ongoing purchases or regularly incur significant expenses (though, as noted, it’s best to repay in full each month).

There’s a great deal of psychological comfort in knowing you have access to funds if and when your business needs them.

At the same time, the APR (annual percentage rate) for a credit card can sometimes be as steep as 20%, which adds up. Also, if your business experiences an unforeseen dip in cash flow, you may find yourself facing considerable (and growing) business debts, due to high interest rates. And in some cases, there’s an annual fee to keep a card account open.

Finally, a business that borrows money up to the pre-assigned credit limit and still needs funds can find itself in a tight spot.

Loan options to consider

The good news about business loans is it’s no longer mandatory to go to a bank for a traditional loan. Funding options includes:

• Online loans. Requirements are less strict for these stand-alone cash flow loans. But, revenue stability and a strong business plan are essential for approval.
• SBA loans. In fact, the SBA (Small Business Administration) doesn’t loan money itself, but the government-backed agency does agree to back a certain percent of the loan, which makes it easier to obtain loan approval elsewhere.
• Purchase order financing. This is a short-term loan covering up to 100% of supplier costs. The key factor is whether a big order is just about to close. Following the sale, the lender’s fees are deducted from the proceeds.

Still more alternative types of loans include equipment financing, invoice factoring, revenue-based financing, and business lines of credit. A fuller description of these options can be found here.

Taking time to debate a business loan vs. business credit card is important. No business can afford to delay making a final decision. The good news for small businesses is that there’s a wealth of financing opportunities available that help keep the dream of business growth a genuine reality.

The SBA Microloan program can provide small business owners with small-scale, low-interest loans with very good repayment terms to either launch or expand a business. Here is what prospective borrowers need to know.

What Is a Microloan?

The SBA Microloan program offers loans up to $50,000. They help women, low income, veteran and minority entrepreneurs, certain not-for-profit childcare centers and other small businesses startup and expand. The average microloan is approximately $13,000, according to the U.S. Small Business Administration (SBA).

Microloan lending is different from other SBA loan products from traditional financial channels. The SBA microloan program provides funds through nonprofit community-based organizations. These nonprofit organizations act as intermediaries and have knowledge in lending, management and technical assistance. They are also responsible for administering the microloan program for eligible borrowers.

Uses for Microloans

Microloans are applicable for working capital purposes or for purchasing supplies, inventory, furniture, fixtures, machinery and equipment. Ineligible uses include real estate, leasehold improvements and anything not listed as eligible by the SBA.

Microloans are a great option for businesses with smaller capital requirements. If you need additional financial assistance with purchasing real estate or help with refinancing debt, other SBA Loan Programs are available, such as the 7(a) loan or 504 loan.

Microloan Stipulations

According to SBA, microloans have certain stipulations. For instance, any borrower receiving more than $20,000 must pass a credit elsewhere test. The analysis from the credit elsewhere test determines whether the borrower is able to obtain some or all of the requested loan funds from alternative sources without causing undue hardship. No business or single borrower may owe more than $50,000 at any one time. Furthermore, proceeds cannot contribute to real estate purchases or pay for existing debts.

Microloan Qualification Requirements

Each microloan intermediary has their own credit and lending requirements. In general, intermediaries require some type of collateral in addition to the personal guarantee of the business owner.

Eligible microloan businesses must certify before closing their loan from the intermediary that their business is a legal, for-profit business. Not-for-profit child care centers are the exception and are eligible to receive SBA microloans. Qualified businesses are in the intermediary’s set area of operations and meet SBA small business size standards. Another requirement is that neither the business nor the owner are prohibited from receiving funds from any Federal department or agency. Furthermore, no owner of more than 50 percent of the business is more than 60 days delinquent in child support payments, according to SBA.

Prospective microborrowers must also complete SBA Form 1624.

Microloan Repayment Terms, Interest Rates and Fees

Microloan loan repayment terms, interest rates and fees will vary depending on your loan amount, planned use of funds, the intermediary lender’s requirements and your needs.

The maximum repayment term allowed for an SBA microloan is six years or 72 months. Loans are fixed-term, fixed-rate with scheduled payments. Interest rates will depend on the intermediary lender and costs to the intermediary from the U.S. Treasury. The maximum interest rates permitted are based on the intermediary’s cost of funds. Normally, these rates will be between 8 and 13 percent.

Microloans aren’t structured as a line of credit nor have a balloon payment. Microloans are malleable if the loan term does not exceed 72 months, but not exclusively for the purpose of delaying off a charge. They allow refinancing. However, any microloan that is more than 120 days delinquent, or in default, must be charged off, according to SBA.

There are certain microloan fees and charges. You might have to pay out-of-pocket for the direct cost for closing your loan. Examples of these costs include Uniform Commercial Code (UCC) filing fees and credit report costs. You may also have to pay an annual contribution of up to $100. This contribution isn’t a fee and can’t be part of the loan. Late fees on microloans are generally not more than 5 percent of the payment due.

How to Apply for a Microloan

To begin the application process, you will need to find an SBA approved intermediary in your area. Approved intermediaries make all credit decisions on SBA microloans. Prospective applicants can also use the SBA’s Lender Match referral tool to connect them with participating SBA-approved lenders. Document requirements and processing times will vary by lender.

You may need to participate in training or planning requirements before the SBA considers your loan. This business training helps individuals launch or expand their business.

For more information, you can contact your local SBA District Office or get in touch with a financing specialist at Kapitus.

How do you find financing for business expansion, when the time is right? No matter how successful a business might be, the decision to proceed with expansion inevitably comes with more spending, not less, and therefore a need to identify funding sources early in the process.

Often, the single best solution is to obtain a small business expansion loan. Traditional lenders (such as a bank) will naturally want to know what you plan to spend the money on, in order to finance your growth plans.

Reasons for financing growth

Typical areas where business leaders focus their expansion efforts include the following:

Opening a new location.

A retail business with a bricks-and-mortar presence may wish to expand to a second or third location. For this and other related goals, it’s important to gauge the anticipated costs.

As Inc. notes, “you’ll need to acquire estimates for leasing space, building out your location, hiring staff and procuring additional inventory.” To make sure the numbers work, conduct a “break-even analysis to determine how long you’ll need to support your new venture before it becomes profitable.

Hire additional staff.

Your current workforce might not match the needs of expansion. You’ll have to find time, money and other resources to recruit new team members (to pay them, once they’re hired). This is an important area to focus on, so that you and your workforce aren’t stretched too thin by your company’s “growing pains.”

Purchase new equipment.

Technology or other business-related equipment represents another area impacted by expansion. Whether it’s needed to facilitate greater employee productivity, respond to increased fulfillment and delivery demands or other needs, funding for equipment might be a key part of your expansion plans.

Other expansion-related areas include large-scale product upgrades or a new product launch and/or breaking into a new market. All of these objectives require new sources of financing.

Options for financing for business expansion

If attempting to secure a traditional bank loan isn’t your ideal financing strategy, consider these alternative funding options:

Online loans.

These stand-alone cash flow loans are fairly easy to qualify for, because requirements are less strict than for a bank loan. Also, it’s not necessary to secure the loan with future business revenue or other collateral. But stable revenue and a solid business plan are essential factors for approval.

SBA loans.

The Small Business Administration doesn’t actually loan money, but they agree to back a certain percentage of the loan. They guarantee repayment to the lender, which in term facilitates loan approval. Many small businesses opt for this approach.

Purchase order financing.

These short-term loans cover up to 100% of supplier costs, as long as it’s determined a big order is just about to close. After the sale, the lender deducts their fees from the proceeds.

Invoice factoring.

With this approach, you transfer over an unpaid invoice to a financing company (the “factor”), and receive an advance on payment. The factor takes over collecting payment from the clients. After deducting their fee (which can be as low as 1.5% of the invoice amount), you receive the rest of the invoice amount. Under this arrangement, you’re not obliged to wait 30-90 days for payment on your products or services.

Revenue based financing.

This type of loan involves a quick, simplified application process. Lenders approve financing after reviewing historic revenue and use this to forecast future cash flow. You receive a lump sum of cash. The lender collects a specified percentage of future sales, either on a daily or weekly basis.

Crowdfunding.

Financing business expansion through crowdfunding has become more popular in recent years. Online platforms like Kickstarter enable interested micro-investors to put up funding for your expansion plans, with numbers that can significantly boost your chances for successful growth.

Repayment, or debt crowdfunding, follows a similar approach to traditional small business loans. Here, the business owes money back to the individual lenders at a set (agreed-upon) interest rate for these deals.

Angel Investing.

It’s worth exploring ways to secure venture capital financing, or enlisting the services of an angel investor to help grow your business. Some investors seek to play an active role in a business’s next steps. A business owner must relinquish some equity in order to obtain investor funding.

Financing business expansion can be stressful, but knowing you have options can lessen the anxiety involved. Your expansion plans may or may not meet traditional lending requirements, but with the range of lending alternatives available these days, a growing business is likely to find the financing it needs elsewhere.

There may be several financial institutions in your area that offer business bank accounts, but you cannot determine the “best choice” based on the bank’s age, size, or advertising claims. Ultimately, finding the best business bank account for your business starts with identifying specifically what you want to achieve with your banking relationship — now and in the future.

The questions below may help determine which bank can best support both the financial needs of your business, along with your longer term business goals.

Does the bank specialize in businesses like yours?

Not all business bank accounts are the right fit for every type of business. Your business may share commonalities with others in size, region, years in business, and annual revenue, but the challenges and opportunities that come with your business are unique. As you consider different banks, explore what types of businesses they serve. Do they offer solutions geared toward your industry? How familiar are they with your local market? Are they well-versed in SBA loans? The business relationship you have with your bank can influence your ability to reach profitability, maintain adequate cash flow and expand to establish a unique point of differentiation from competitors.

• If your business is small with little-to-no plans to grow, in start-up mode, or is seasonal in nature, you may not know the average monthly balance you’ll be able to maintain, or the payment tools you’ll need to purchase goods from vendors, and accept payments from customers. Narrow your search to banks that offer business checking accounts with a low (or no) monthly minimum balances and fees, debit cards, online banking, fee-free wire transfers and unlimited incoming deposits.
• If your business is well-established, in growth mode or operates internationally, consider banks that have an extensive footprint (around the country or world), offer cash management solutions like lockbox, remote deposit capture and fraud prevention for checks and payments, and/or specialize in high-value or cross-border transactions.

Does the bank offer tools beyond traditional accounts?

Javelin Strategy & Research reports that digital solutions and payments services for small businesses have “…lagged significantly behind consumer and commercial banking.” As a result, many small business owners may be hindered by a lack of access to the technology they need to effectively run their business. A bank that offers additional business tools may provide you turnkey solutions to run your business — including the ability to process card payments, offer gift cards, or manage loyalty programs and inventory. Know that having digital and mobile access to your business bank account is a top priority? Narrow your search for a bank only to those brands who are equipped to deliver all of your needs virtually. If you’ll rely on your bank for more than traditional financial services, limit your search to those that offer value-added tools.

Does the bank offer the ability to build credit?

Building a formal business credit history can document your businesses financial responsibility, and could work to your advantage if you intend to bring in business investors, partners, or want to sell your business. Not all banks offer credit cards or similar products for business clients; those that do may be more willing to issue credit to a business customer who has an established relationship with it.

Does the bank assign a relationship manager?

The best business bank accounts establish relationships, much like a consultative relationship between the client and a bank representative. If a personal touch is important to you, look for a business bank account that provides a relationship manager who is vested in understanding your business, and how the bank can help support it. If you’d prefer to handle most of your businesses’ financials online, however, a relationship-based model may not be necessary.

If you do opt for a bank that assigns a relationship manager to your account, consider the level of authority and expertise the person who will support your business holds, and whether the business bank relationship will suit your need for a minimum of 18 months. Meet with relationship managers at a few banks to gain a sense of how they interact with business clients, and to gauge whether their approach aligns with your expectations.

Is the bank preparing for the future?

Technology is changing business payments at a rapid pace, and banking is increasingly moving to a digital environment, allowing for faster processing times. Not all banks are equally invested in keeping up with the technology changes, particularly when it comes to meeting the demands of small business clients. While many banks now offer digital conveniences like person to person payments for consumers, not all have the capability to offer a similar services to business customers. Smaller banks or credit unions may be more flexible with fees, compared to larger banks, but not all have the resources to support the latest banking technology.

Research the business banking solutions that a variety of banks offer; compare what is available in the broader market, and from each specific bank. The bank you choose should offer the benefits most important to you, support the financial needs of your business, and be investing in technology and infrastructure enabling them to be your business banking provider for the long haul.

There is a great deal of misinformation and erroneous assumptions around purchase order financing. You know what a purchase order is but how do you finance it? This is so-called asset-based lending but a purchase order is not an asset. In short, your question is, “should I use purchase order financing and, if so, when?”

Scenario

You are ecstatic that you just landed a huge order from a corporate customer you have been chasing for months. You and your team celebrate this seminal moment in your company’s history. The next day, however, you feel a pit in your stomach. You realize the money your firm has in the bank and the small credit line you can tap are not enough to fulfill even half of this order. You run through the scenarios. You could cancel the order, but you know you will not get an opportunity like this again. You could divide the order in half and wait on pushing the second half until you get paid for the first. Although this is not as poor an option as cancelling, it is not good. You could request a deposit or require that the order be pre-paid, but you remember that your controller already made this request. The response was that the firm would consider it in the future but not right now. You believe that they want to make sure your firm is viable enough to handle orders of this size.

Since you are hitting a mental wall with your options, you convene with your team to brainstorm. You discard accounts receivable financing because you would have to work out an arrangement with your bank to exclude the A/Rs from this customer. That may be doable, but you will not actually have a receivable until you invoice your customer AFTER the product comes in from the manufacturer. Your vice president exclaims, “I wish we could finance the purchase order itself!” Something in that statement resonates with your controller and she googles “purchase order financing” and voila! You discover it does exist.

What exactly is purchase order financing?

Before we go any further, it is important that you understand both what purchase order financing is and what it is not. Purchase order financing is essentially an advance provided to you on a specific customer’s purchase order to purchase readily available inventory or manufactured goods from a supplier. Hence, this is potentially a viable option if you are a reseller or distributor or if you outsource all of your manufacturing. Typically used for a sizable order, your PO financing firm will either advance funds directly to your supplier / manufacturer or issue a letter of credit or payment guarantee to release funds when the goods are delivered. The PO financing then collects payment directly from your end customer, thus acting as an invoice factoring firm.

Basically, the PO financing firm acts as a substitute for you, ensuring payment to the supplier / manufacturer so that you can fulfill your order. PO financing is not a general inventory financing option for you as it does not allow you to buy and hold inventory to sell later. It requires a specific purchase order for a specific customer. Your PO financing firm will need a copy of both the signed PO from your customer and your signed purchase order to the supplier.

What PO financing provides

The PO financing option allows startups and other rapidly growing or cash-restricted firms to accept large, new orders for their products from credit-worthy customers. According to Entrepreneur magazine, “Purchase-order financing can be beneficial to small businesses because it relies mostly on the company that has placed the order with the startup, and not the startup itself.” Although most PO financing firms require the goods to be shipped directly to the end customer, there are some that will allow shipment to a third party warehouse and even to your facility for light assembly, packaging and distribution. In these cases, according to Entrepreneur, “purchase-order financing often covers a large portion of the requisite supplies (needed to produce those goods), and sometimes even all of them.” Furthermore, the PO financing process is often much easier to navigate – and more straightforward – than traditional bank financing.

How does it work?

• The PO funder obtains a copy of your customer’s purchase order and your purchase order with the supplier / manufacturer. After analysis, the PO funder agrees to finance your customer’s purchase order.
• The PO funder sends payment or issues a letter of credit directly to the supplier or manufacturer.
• The supplier receives the letter of credit or outright payment from the PO .
• The supplier fulfills the order and ships the goods directly to the customer specified in the purchase order.
• The customer receives the order from the supplier and receives the invoice from you.
• The customer pays the invoice directly to the PO funder. If the customer pays immediately, the PO funder accepts the payment, takes out its fees, then remits the remaining gross profits from the sale to you. If the customer has terms (typical for large corporations and government entities), the PO funder factors the invoice – buys the invoice at a discount – and provides you with the funds, less the discount.
• The customer remits full payment in 30 days to the funding company. The funding company releases any reserves to you that had been held.

If your company does light manufacturing such as assembly, printing and/or packaging, additional steps will be necessary as the inventory and supplies will be delivered to you then you will deliver the finished products to your customer. This increases the risk to the PO funder and hence, increases the fees.

Benefits for Your Company

If your customer has a strong credit history and has a record for prompt payment, and if you have a reputable supplier or manufacturer, your lack of business longevity or your weak credit profile will matter little, if at all, to a PO funding company. As outlined above, only the administrative components of the transaction, the purchase order and later, the invoice, rely on you.

When asking yourself, “should I use purchase order financing”, consider this. According to Forbes, “purchase order financing provides “sufficient working capital to cover payroll and start-up costs for a new contract.” This funding can also provide you with negotiating leverage to obtain better terms and pricing from suppliers. “Taking the calculated risk of a working capital loan that enables the small business to accept a job and grow is often critical to succeeding in government contracting” and other arenas.

Risks for the Funding Company and Associated Fees

In purchase order financing, there is no interest rate quoted. Instead, you pay a discount rate and fees. This means that you receive less than 100% of the amount the customer pays on the invoice, typically 1.5% to 6% less or, put another way, 98.5% to 94% of the invoice. This embedded interest rate captures the higher risk that purchase order financing typically has for the financing firm. The risks vary. The supplier / manufacturer may not deliver the product. (This risk is greatly reduced if a letter of credit is used.) Your customer could refuse delivery or refuse to pay because of issues with the product. Furthermore, your credit worthy customer could have financial issues. If you take delivery of the product, the risk is even higher as more could go wrong. Thus, rates for light manufacturers that process and repackage the inventory are generally higher, at least initially until a strong track record is created. The PO funder will not get paid in all these scenarios, which drives up the risk and hence, the rate.

The answer to the question, “should I use purchase order financing” is multi-layered. It depends on what type of firm you have, what your growth stage is, and what your current sources of funds are. Be aware of the risks but fully understand the benefits. According to Medium, if you can monetize your inventory by eliminating or reducing what you actually hold onsite, this will allow you “to sell more goods, grow the company, employ more people and feed more families.” Purchase order financing provides an asset-based form of working capital that, if used wisely, ultimately allows you to invest in your firm and its future.

Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years.  Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit.  A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms.  And, as many know, it could take even longer when customers miss payment deadlines.  Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

Do you use your credit card to make withdrawals for your business? If so, you might be making an expensive mistake.

Whether it’s a business card or a personal credit card, it’s time to think twice about using your credit card as a debit card. Here’s what you need to know.

4 Reasons to Think Twice About Using Your Credit Card for Cash

Withdrawing money via your credit card could be costly for these four reasons.

1. Cash Advance Fee

It costs more to borrow cash from your credit card than to make a purchase using your card because of what’s known as a “cash advance fee.” Depending on the terms in your agreement, credit card issuers could charge you either a flat rate fee or a percentage fee of the withdrawal amount — whichever is greater.

2. No Grace Periods

Like personal credit cards, business credit cards usually offer a grace period. A grace period is the time period between the end date of a billing cycle and your next credit card due date. Cash advance transactions typically do NOT have a grace period. Instead, interest begins accruing immediately upon withdrawal, resulting in a higher total interest charge on cash advances than you’d see on a purchase transaction.

3. Higher Borrowing Rates

Another expense to consider with a credit card cash advance are the potentially higher interest rates. Interest rates on cash advances may be higher than the rate charged for purchases on the card. Refer to the fine print in your credit card agreement or contact your card issuer for more information.

4. Potential Unlimited Personal Liability

Does your business credit card have a personal liability clause?

If you’ve provided a personal guarantee for your business credit card, you’re personally on the hook for paying off that credit card debt if your business fails. That debt could include all the cash advance withdrawals from that credit card. This is the case even if the way you’ve incorporated your business (for example as an LLC) protects your personal assets against business litigation.

How to Calculate Your Credit Card Cash Advance Cost

If you’re wondering just how much a credit card cash withdrawal could cost, here’s how to figure it out

1. Calculate the initial cash advance fee based on the withdrawal amount. For example, the fee on a $3,000 withdrawal from a card with a 3% cash advance fee is $90.00.Next, calculate the interest charges. Divide the annual percentage rate (APR) for cash advances on your card by 365. Then multiply that figure by the number of days you’ll carry the balance and the withdrawal amount. Based on the example above, a $3,000 advance at an APR of 21% for seven days, the calculations look like this: 21/365 = 0.00274 daily interest x 7 days = 0.019178 x $3,000 = $75.53.Add the interest charge to the credit card advance fee for a total cost of $165.53 (90 + 75.53) in charges and interest to take a $3,000 cash advance for seven days.

Alternatives to Business Credit Card Cash Advances

Luckily, there are less expensive ways to borrow money for your business.

• A business line of credit gives access to funds as needed, and you’ll only pay interest when and if your business uses it.
• Equipment Financing and short term loans often have comparatively low rates, especially when they’re secured against collateral such as real estate, equipment, or machinery.
• Other business financing options include borrowing against your accounts receivables and invoices through revenue-based financing or invoice factoring; invoice factoring is a good option for subcontractors,.

Look into the other business financing options available to you before taking a credit card cash advance. Doing so could save your business a bundle.

Hurricanes, wildfires, earthquakes, volcanoes, mudslides — all can be devastating to the health of your small business.

In 2017, 40 percent of small businesses located within a FEMA-designated disaster zone reported natural disaster-related losses, according to the Federal Reserve. Forty-five percent of affected businesses reported asset losses of up to $25,000, while 61 percent reported revenue losses of up to $25,000.

Recovering from a natural disaster can be an uphill climb but the Small Business Administration offers relief in the form of Economic Injury Disaster Loans (EIDL). These loans can help you get your business back on solid ground.

How Economic Injury Disaster Loans Work

The EIDL program provides small businesses with funding to repair and rebuild following a natural disaster. As of 2018, qualifying businesses can borrow up to $2 million, which can be used for:

• Replacing or repairing damaged equipment or machinery
• Buying new inventory or replacing other assets, such as computers, that were damaged or destroyed
• Repairing or rebuilding your physical premises if they were damaged or destroyed
• Making improvements that could help reduce the risk of natural disaster-related damage in the future, such as installing generators or storm windows and doors

The main goal of the program is to help businesses that have been affected by a natural disaster get back to normal operations as quickly as possible. These loans are low-cost, with a maximum interest rate of four percent per year, with terms that can extend up to 30 years.

Who’s Eligible for a Disaster Loan?

In addition to small businesses, the EIDL program is also open to small agricultural cooperatives, small aquaculture operations and most private nonprofits.

It goes without saying that your business needs to be located in a federally declared disaster area to qualify. But, physical property damage to your business isn’t a requirement for eligibility.

There is one caveat, however. The program only offers these loans to small businesses if the SBA determines they’re unable to get credit elsewhere. If you’re able to get approved for an equipment or term loan, for instance, an EIDL wouldn’t be an option.

Covering the Gap When Insurance Falls Short

The SBA has a second program to help businesses that have physical property damages which aren’t covered by insurance. The Business Physical Disaster Loan program also offers up to $2 million to small businesses that need to repair or replace property, equipment, inventory or fixtures following a natural disaster.

The maximum interest rate is four percent if you’re unable to get credit elsewhere. If you have other borrowing options, the max rate tops out at eight percent. Like the EIDL program, repayment terms can stretch up to 30 years.

It’s possible to qualify for both an EIDL and a physical disaster loan — you’re just limited to borrowing $2 million total through both programs. You can submit an application for each loan program online to get the ball rolling on disaster relief for your business.

The last decade has been an era of cheap money for businesses, with interest rates at historical lows. But those days may be ending. How you look at financing — in particular choosing between fixed and adjustable rates — may have to change.

These are the good old days.

Access to capital can often make or break a business. Each year, fifty-three percent of business owners kick in additional funding, according to the Small Business Administration. Almost a quarter add more than $50,000.

The adage that it takes money to make money is fine — if you have the cash on hand. If you don’t, it’s time to look at outside financing. But that may take some unlearning of recent lessons.

The global economic collapse beginning in 2008 was brutal, but it did have one benefit for some businesses: Because the U.S. Federal Reserve and other regulators slashed interest rates to stimulate buying, over the last decade the cost of money has been incredibly low.

Businesses who were approved for traditional forms of financing had enviable choices, including taking adjustable rates over fixed ones to keep borrowing costs down.

The Two Types of Interest Rates

A quick refresher: whether talking consumer or business financing, there are two general types of interest rates: fixed or variable.

A fixed rate is just that; the borrower pays a set interest percentage of the principal. Monthly payments don’t change.

Variable rates start at one rate. After some time, they shift to an amount based on any one of several common benchmark rates.

The Fed’s federal funds rate is one example of a benchmark rate. So is the prime rate, which is based on the federal funds rate, and is often what a bank’s best customers get. Another benchmark is the London Interbank Overnight Rate (Libor) — the rates banks charge one another on short-term borrowing.

The variable financing rate will be some number of percentage points over a benchmark rate. When the benchmark goes up, so will the variable rate. If the benchmark drops, the variable rate does as well.

Most people are familiar with variable rates from mortgages and credit cards. They are common in small business financing as well.

Variable Rates Have Been Low

In the past, business owners chose variable rates that were initially low. The idea was that when the rate increased, either revenues would have grown enough to more than offset it or refinancing at a lower rate would eliminate the extra costs.

For the last decade, however, variable rates have acted strangely. Because benchmarks were so low, you could effectively get a great rate for the life of the financing. There was always the gamble that the rate would climb, but in hindsight, for years you could win the game. Variable became almost the same as fixed.

No longer. By June 2018, the Fed had increased the federal funds rate seven times in three years.

As job growth remains brisk and the economy improves, regulators could keep increasing their rates, making all the benchmarks increase. Variable rates will follow, making the era of super-cheap money over. Opting for a variable rate instead of a fixed rate could now cost you.

Create a Financing Strategy

If you’re looking for financing, you’re best off doing some calculations in advance to see how a variable and a fixed rate might compare. Consider that a variable rate loan might increase a couple of times during the life of the financing:

1. Look at how much the Fed has raised the key interest rate over the previous 12 months and assume for a moment that the increases will continue in the near future, given how low rates have been.
2. Calculate the full principal, the length of the business loan, and the initial rate. Then use an amortization schedule to calculate how much you pay in the first year.
3. For the second year, calculate with an increased interest rate (initial rate plus the last 12-month increased in a benchmark) and the remaining financing time. Use an amortization schedule to calculate how much is paid in the second year.
4. Keep doing this for at least one or two more years with benchmark increases.
5. Finally, calculate the remaining principle, time left on financing, and the “final” interest rate. (Remember that this is an estimate and there might be additional rate increases.)
6. Add the payments over all the years and compare that to what you’d pay with available fixed rates.

You might choose to run estimates for different numbers and amounts of rate increases. This modeling can help you manage risk and choose an option that works for your business.

Next up in the “How It Works” series let’s take a look at how  SBA loans work

Every business is unique.

What works for one may not work for another. With a range of choices, each with its own unique requirements and mechanisms, how do you identify which type of financing is best for your business and your needs at this time? You should start with the basics with a full understanding of your situation.  You need to be clear about what you want/need versus what your business can take on. Whether you want capital immediately, or sometime later in a lump sum, or phased over time, take stock of your situation and needs first and then consider your financing options.

Let’s take a look at one of the most frequently used business financing options available to small businesses:

How SBA Loans Work – Small Business Loans through SBA

Government-backed Small Business Administration (SBA) extends aid to all small businesses via loans that help them to not just start up a business but to also sustain and grow that business. While the agency itself does not provide financing, it makes affordable loans available through SBA approved lenders like banks. These loans are designed to meet very specific business purposes, so it is important to understand each of these options before applying for an SBA loan. Though cheaper, you may find it difficult to qualify for these loans. Many individuals are disqualified due to  insufficient collateral, low credit scores or falling within an unqualified category.

SBA loan programs are designed to meet major financial requirements of varied small businesses. These include microloans, real estate loans, equipment loans, and basic loans under the 7(a) program. You can use the loans provided through the 7(a) program for a variety of purposes – setting up a new business, acquiring a business, purchasing equipment and machinery, or as an influx in working capital, among others

How SBA Loans Work – Eligibility

The general small business loans from the 7(a) program are the most popular among all SBA loans. Since these loans are guaranteed by federal agencies, lenders can offer businesses very lucrative and flexible terms for these loans. It is no secret that the 7(a) loans through the SBA are by far the best way for any small business to get financing if they are able to qualify.

To be eligible for 7(a) loans a business must be for-profit; operate within the United States; show a business need for the funds, and – most importantly – show proof that you’ve exhausted all other avenues and financial resources before applying. This means, you will need to have used your own personal assets, reached out to family and friends, and be able to show that you applied for and had been declined by a traditional lender. It’s no wonder, then, that most small businesses find these loans out of their reach. In fact, a 2016 Forbes report points out that, “The head of the U.S. Small Business Administration has cited industry estimates that 80 percent of small business loan applications are rejected.”

How SBA Loans Work – What you should know 

• Lowest cost option for small businesses looking for financing to start up or grow a business.
• Offered by traditional and alternative lenders and backed by government guarantee.
• Multiple types of loans and grants depending on business type and need.
• Businesses applying for a loan must first use other resources including personal assets.
• Personal guarantee required by business owners or top management of the company.
• Long application and funding process compared to alternate financing options.

SBA loans may be a good option when:

• Working capital is needed to expand the business over the next few years.
• Consolidating loans from multiple lenders.
• Hiring new employees or opening a new location.
• Recovering from declared disasters.
• Your business is impacted by NAFTA.

SBA loans may not be an option when:

• Working capital is needed immediately for a very short term.
• Consolidating loans will require the company to take a loss.
• Business owner cannot provide a personal guarantee.

Besides the general 7(a) loans, the SBA provides 7(a) loans to cover special situations like companies conducting business in underserved communities and companies looking to expand export activities. There are also microloans up to $50,000, and special programs to help businesses recover from declared disasters. To learn more about SBA loans visit their website right here. Many traditional and alternative lenders also help businesses navigate through the process of applying for these loans.

Want to learn more about your options? Here are the pros and cons of the revenue-based financing.

KEY TAKEAWAYS

• Revenue-based financing provides small businesses with quick access to capital. But, it is not a loan. Instead is a purchase of your future sales.
• With quicker approval times and lower credit score requirements, revenue-based financing can be a great financing option. But, it will directly impact daily cash flow as a percentage of your daily or weekly sales are deducted as repayment.
•  This form of financing is ideal for businesses with an immediate need for funding, those without adequate collateral, or those not meeting the criteria for traditional loans.

Are you looking for small business loan and alternative financing options?

This is by far the most frequently used option for small business financing. Revenue-based financing allows small businesses to take financing against their continued business success. The oldest form of revenue-based financing is the popular Merchant Cash Advance (MCA). This option truly aligns the interests of both parties. That’s because the financing partner only gets paid if the small business continues to be viable and successful.

It is no wonder then that merchant cash advances continue to see a healthy increase

A 2016 report on Merchant Cash Advance/Small Business Financing Industry byBryant Park Capitalnotes that, “the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last couple years, projected to reach $15.3 billion in 2017, up from an estimated $8.6 billion in 2014.”

Not surprising, considering quick upfront capital can make a huge difference to any small business. Typically, revenue-based financing provides a lump sum of cash to a small business. This is with the understanding that it will dip into a fixed percentage of the future sales. It’s a great option for any small business owner who is looking at short-term financing (between 6-18 months), cash flow and working capital.

A few years back, merchant cash advances were limited to those businesses that received customer payments via credit or debit cards – like bars, nail salons, restaurants, retailers, and other forms of B2C companies. But now, with advancements in the system, merchant cash advances can work for almost any type of small business.

While merchant cash advances give your business that financial backup, it’s also important to know that it directly impacts your daily/weekly cash flow. Good lenders ensure that the funds they advance to merchants ensure healthy growth in the business even when daily/weekly remittances are being taken from the business’s revenue stream. Uninformed merchants can easily fall prey to unscrupulous lenders who can overburden a business’s cash flow. Therefore, small businesses applying for a merchant cash advance should first make an objective analysis of whether this service is best suited for their business.

What you should know about revenue-based financing

• Quick access and faster approval of the application.
• Much lower credit score requirement compared to a traditional loan.
• Qualification does not require secure assets.
• A fraction of the company’s daily/weekly sales goes toward its outstanding financing amount.
• Supports payments to be processed against both credit card and cash payments (ACH).
• Instead of fixed monthly payments regardless of the business performance, the remittances are tied to the success of the business.
• Flexibility of daily/weekly payments with the ability to true-up payments against the actual performance of your business provides peace of mind and extra cushion when times are lean.
• There is an immediate impact on your business cash flow.

Revenue-based financing may be a good option when:

• The small business will not meet SBA loan requirements.
• There is an immediate need for funding.
• The company does not have enough collateral for traditional long-term loans.

Revenue-based financing may not be an option when:

• The funds will provide only temporary reprieve but cause irreparable harm to cash flow.
• The business already has a number of outstanding loans or advances.
• Your credit score is below 550. In this case, alternate options like Factoring may be more appropriate.

It’s important to remember that unlike other traditional loan options, which are usually backed by a collateral or federal guarantee, this financing type presents a great risk to the alternative lender. That is why it is a more expensive financing option compared to traditional loans. Businesses should therefore thoughtfully consider when this option makes sense for them and carefully vet the alternative lender.

Every small business owner will agree that running a business is very exciting and challenging. From managing an office filled with computers and printers, break rooms and vending machines to purchasing on-the-ground supplies for transportation services or construction businesses, every piece of equipment matters. That is why equipment financing can be exceptionally beneficial in easing some of the burden associated with these tasks.

To keep your business operating seamlessly, everything must be planned. However new opportunities seldom present themselves with a clean plan. Business owners may often find themselves in need of purchasing new equipment to make the most of a new lucrative opportunity.

Equipment financing eases these worries and bolsters your growth by catering to the needs of your business without any down-payment. Equipment financing is ideal for small businesses who have vehicle fleets, towing companies, construction contractors, medical practices, and those that have a large warehouse.

5 THINGS YOU SHOULD KNOW ABOUT EQUIPMENT FINANCING

1. It’s a great way to get a leg up on your competition

With equipment financing, you can have the most advanced equipment in your sector without adversely impacting the financial health of your small business.

2. Do your homework

Ensuring the right quality of equipment financing is a top priority for any small business owner. Carefully consider some basic parameters before entering into an agreement for equipment financing, including the amount of cash required, fees and alternate equipment upgrade options.

3. Questions to consider before pursuing new equipment

How will the new equipment add revenue or reduce costs for your business? How essential is it to supplement the growth of your business, cash flow, and profits? Then choose a lender whose terms suit your requirements.

4. Balance your cost and cash flow

While the approval process for equipment financing is fast and hassle-free, things can get quite tricky if you don’t balance your cost and cash flow. For example, the cash flow is impacted if you repay over a short term. If you select a long-term repayment, then you end up paying a lot of money on the lure of low payments. Therefore, choose a repayment term that is in sync with your cash flow and what you can do easily on a monthly basis.

5. Be aware of associated costs

These costs can include insurance and maintenance. Many businesses forget to factor in these costs when looking for equipment financing. Don’t let yourself be one of them!

Should I Use Equipment Financing for My Next Purchase?

Equipment financing may be a good option when:

• The cost of purchasing the equipment is too high to sustain on current cash flow.
• You want to maintain the option of changing the equipment in some time to keep up with the latest technology.
• The new equipment will give you an edge on the competition.
• The new equipment will open up a new market or new line of business.

Equipment financing may not be an option when:

• The total cost of ownership of the equipment, along with the associated fees, maintenance and insurance costs will introduce too much risk in the business.
• There are cheaper options for used / re-traded equipment that would provide the same benefit to the business.

Planned equipment financing not only saves money but also helps small businesses to pursue other business goals. Used wisely, it is a great way to fuel growth in the business.

Get Your Complete Guide

This guide will cover even more than just equipment financing, but the many other options you may have!

Here’s whats covered:

• Top 5 Fundamentals of Small Business Financing
• The Most Popular Business Financing Options
• Tips for Maintaining Strong Financial Health
• How to Choose the Right Business Loan for You