Like college basketball teams competing for the top spot in the NCAA Basketball Tournament, when your company needs money, you have lots of small business loan alternatives competing for your business. How do you winnow them down to a “Final Four” and then to the winning option for you?
With so many small business loan alternatives out there, choosing the right one for you can easily be overwhelming. However, if you apply a systematic approach to the task, it’s really quite easy.
Assessing Your Small Business Loan Alternatives
Start by eliminating the financing methods that are obviously unsuited for your business and the way you plan to use the money. This approach will help you narrow your options as quickly as the NCAA basketball teams go from 64 to 32.
How much money do you need?
If you only need to borrow $20,000, a traditional bank loan (which generally focuses on lending amounts of $500,000 to $5 million or more) isn’t going to work. Nor will you be able to interest venture capitalists in providing such a small amount of money.
How quickly do you need it?
In addition to the amount of capital you need, consider the time-frame in which you need it. Do you have the opportunity to take advantage of a great deal from a supplier, but it’s only available for two weeks? If so, you’ll need a fast form of financing.
How much time do you want to pay it back?
If you’re borrowing a large amount of money, you may need a year or more to pay it back. However, if you’re looking for a small amount of capital, you may prefer to get the debt off your books fast. In this case, you’ll want a small business loan alternative that allows you to repay the loan quickly.
What track record does your business have?
Some small business loan alternatives require a lengthy track record, a certain level of sales or a very high credit rating to get capital. If you haven’t been in business very long, you may not meet these criteria, and you’ll need to look for a different type of financing source.
Choosing the Champion
Taking the steps above will likely give you a smaller field of small business loan alternatives to investigate. Now, dig deeper into the pros and cons of each method and make some one-on-one comparisons.
Business Cash Flow Loans
Even if your small business is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of small businesses throughout all industries. In a perfect world, you’d walk into your local bank and walk out with a business loan long before you wound up in a cash crunch. Well, those days are long gone! If you haven’t been in business at least two years, or lack good credit and collateral, chances are a traditional bank loan is never going to happen.
In order to deal with this shortfall, a cash flow loan may be your best option. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
Small Business Line of Credit
A small business line of credit (LOC) allows a borrower to draw against a lender-specified amount of financing on an as-needed basis. The advantage of a business credit line is that you only pay interest on the funds you actually draw, so you’re not stuck paying interest on capital you don’t have an immediate use for. Here are a few small business line of credit options to consider:
- Traditional Line of Credit
The traditional line of credit is typically meant for experienced business owners with proven business models. Which makes sense since the credit maximums are sizable, the rates are lower, and the requirements demand higher credit scores and annual revenue reporting. If you’re a business owner taking out a line of credit, you’ll be spending that flexible cash on seasonal business expenses, payroll and other operational costs, insurance against emergencies and for sudden opportunities. In other words, as a capital cushion. It’s there for you when you need it.
- Short-term Line of Credit
The difference between a short-term line of credit and a traditional line of credit is more or less the same as the difference between your typical short-term loan and conventional bank or longer-term online loan Therefore, a short-term line of credit has a higher interest rate, lower credit maximum, faster turnaround time and looser application requirements. Unlike the traditional line of credit, the short-term line of credit is generally offered by alternative lenders rather than by banks. The point isn’t that one is better or worse, they appeal to different groups of business owners. Those with lower credit scores, smaller annual revenues, or newer businesses might only qualify for a short-term line of credit. And although the short-term line of credit tends to be more expensive, its value lies in giving younger small businesses the opportunity to maintain a flexible pool of capital. A small business line of credit provides flexibility that a regular business loan doesn’t. With a small business line of credit, you can borrow up to $100,000 and pay interest only on the money borrowed. You then draw and repay funds as you wish, as long as you don’t exceed your credit limit. Need to manage cash flow? Buy inventory? Pay for a surprise expense? Then a business line of credit makes sense.
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Merchant Cash Advance (MCA)
An MCA can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, or weekly basis until the obligation has been met. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.
There are typically no restrictions on how you choose to use any of the small business cash flow financing options above, however some of the more typical uses include:
- Buying equipment – Could a new computer, desk, telephone, cash register or software come in handy? Money to pay for the purchase of necessary business equipment could help boost your profits.
- Paying employees – Instead of running your business like a one-man show, a few extra hands could really help. Spending borrowed money on employee’s salaries can be the answer rather than disrupting your cash flow to cover this expense.
- Purchasing inventory – One of the most common uses for cash flow financing is buying inventory. It takes products in stock to make business profitable, so it only makes sense to invest in enough inventory to make sure you always have enough to sell to clients.
- Expanding the business – If your business is experiencing some success, you might want to start thinking about taking things to the next level. A lump sum of cash might be just what you need to get business booming.
Our expert funding advisors are ready to learn about your business needs to determine if cash flow financing is right for you. Call us toll free for more info! (855) 998-5874