Three Fast Forms of Small Business Funding
January 10, 2018 | Last Updated on: April 3, 2023
January 10, 2018 | Last Updated on: April 3, 2023
At one point or another, most companies will have the need for a quick infusion of cash. Reasons vary: trucks get into accidents, equipment breaks and must be fixed or replaced, or you have had a few slow weeks after the holidays and you need to make payroll on Friday.
Conversely, in the best-case scenario, a new project comes in that requires an immediate ramp-up — perhaps a large purchase of materials or making a new hire — but payment won’t occur for a few months. Whatever the case is, sometimes a company needs money very quickly in order to survive.
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In all of these situations, businesses need funding quickly, and traditional small business loans and SBA loans, which are the most affordable for those who have good credit, typically take weeks to process.
However, there are forms of financing that can be available in just days.
Working Capital Loans
Working capital loans enable businesses to cover operating expenses or to pounce quickly upon business opportunities that come along. Companies can borrow as little as $2,500 and as much as $250,000. The terms of the loans are relatively short-term, often between three months and 18 months. Interest rates vary; sometimes working capital loans can be at 7 to 8 percent, but other lenders may charge 30 percent or more! Funding can occur in a week or less, which can help companies that are in a pinch. Unlike traditional small business loans from a bank, working capital loans usually do not require a lot of paperwork to complete. Often they do not require collateral, but the money has to be paid back quickly.
Business Lines of Credit
If you have a little more time to ramp up, a business line of credit can be a good solution. It’s like having money in a bank account that is readily accessible in times of need. The best thing about it is that the business owner only pays interest on the amount of money currently in use (withdrawn from the account). Business lines of credit typically are for $10,000 to $1 million. Repayment terms range from six months to five years. Interest rates are often quite attractive, ranging from 7-8 percent to 25 percent on the highest end.
Merchant Cash Advance
A merchant cash advance (MCA) can be the solution for someone who needs an immediate lump sum of money. Cash advance companies can provide an infusion of capital in just 48 hours in return for a percentage of your future credit card receipts and other business receipts.
As with everything else, you get what you pay for: MCA funders charge a large premium for the speed with which they can deliver the money. Amounts usually range from $2,500 to $250,000, and MCA funders are less concerned with your creditworthiness than traditional funders. They will take an agreed-upon percentage of daily or weekly future receivables until the amount is repaid. For instance, if you borrow $100,000, the amount you pay back will be $120,000.There is no fixed term and no interest rates for MCA.
The payback time depends on how well your business does. If it booms, the amount gets paid back quickly. If you are stalling, the payment time drags out substantially. Thus, MCAs can be more expensive than other alternative business funding methods. The daily or weekly percent skim off the top of your credit card receipts or other accounts receivable also can be a big drain on cash flow. MCA funding is not a good long-term solution for any business.
The least costly forms of third-party funding are usually a business term loan from a bank or an SBA loan from an approved SBA partner lender (usually a bank). However, if you have bad credit (scores of 600 or less), this type of funding will be hard to achieve. Traditional small business loans usually come at interest rates of seven to 25 percent, depending on creditworthiness, and come with terms of 1 to 5 years. Securing approval for a traditional small business loan from a bank or credit union can take weeks. If you are in dire need of immediate funding, it won’t be the right solution.
In the U.S. we are accustomed to getting things quickly, and Americans have proven again and again that they are willing to pay for speed. For instance, Universal Studios Hollywood offers Universal Express tickets that allow visitors to jump to the head of each line. These tickets cost $179 to $269, compared to the general admission price of $105 to $116. People who want things fast have to pay for that privilege; small business funding is no exception.
If speed is of the essence for funding your company, be sure you understand the higher costs involved. The quickest loans are usually the most expensive. Conversely, the lowest interest third-party loans (traditional small business loans and SBA loans) take the longest time to secure.