A Practical Guide to Small Business Financing
There are so many financing options for small businesses these days, it can sometimes be difficult to understand which ones are best for your situation. Do you need a traditional loan? Is a revolving line-of-credit better for your business needs? Should you be considering some sort of merchant cash advance?
It helps to understand what each one is and how they work.
There is more than one type of loan within this category. The most common types are secured and unsecured. The difference is the use of collateral. Secured loans require collateral of some sort as security for the funds. If you default on the loan, the lender takes the security
This option has a lower interest rate and better terms, but it doesn’t work so well if you don’t really have any collateral. An unsecured loan does not require collateral, but they are more difficult to obtain, and the interest rates are generally much higher.
A traditional term loan is the best option for start-up capital and expansion needs. SBA loans are very popular, but require more paperwork and typically take longer to process.
This includes credit cards as well as business lines-of-credit. While credit cards are typically easy to obtain, readily available, and offer rewards such as cash back and travel miles, they also have a very high interest rate in most cases.
A line-of-credit will usually have a much lower and stable interest rate. It is accessible through checks or sometimes a bank issued card, and can be used just like a credit card most of the time. In some cases, the lender may enforce stipulations on fund usage.
This is a great option to have in place for use as needed. There are many types of situations in which cash on hand may not suffice to fill the need. If you have a cash gap due to slow collections, or find a great deal on inventory that you need to take advantage of, but do not have cash available, a revolving credit line is a great deal.
If you have a large amount of money tied up in accounts receivable and you need cash fast, this may be an option. You can sell the receivables to a factoring company for a percentage of what they are worth. The percentage you receive decreases with the age of the account.
A version of this, the merchant cash advance, gives you cash based on average credit card sales. You then pay them back with the sales based on agreed upon terms.
These options are usually costly, but they offer the advantage of quick funding cash. While the best option is to be prepared so that you are not in the situation to need to use them, sometimes things happen.