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"When can you look at your financing?"
Eighty-two percent of business owners are planning for growth
—with 35% saying they intend to borrow the money to expand.
A professional capital advisor does not charge fees; their service is free, and you save time and money when you get the right funding for your unique business. Your cost of money is the same (or even less) as dealing directly with the funding source, if you could.
Understanding where your company fits within the dynamic new world of small business financing is still the most important information. The funding options available vary by sources who focus on different industries, loan size, interest rate and term length depending on the type, age and size of your business – and your specific unique needs and timing requirement. Though one thing is certain; today there is such a wide array of options available that most business owners should be able to secure funding easily - for any reason.
(Small Business Administration) loans are considered some of the best
funding options available for their low interest rates, though their
detailed paperwork and lengthy approval process tend to limit the types
of firms who can secure these loans. There are three different types of
loans offered by the SBA; 7(a) SBA Loan Program, CDC/504 SBA Loan
Program and the less used Microloan Program. We will delve deeper below
but these loans are designed for companies with very good credit,
collateral and a solid business plan. The loans are not delivered
directly by the SBA, the SBA acts as a guarantor so the banks can then
allocate some of their small business lending to the SBA programs. Some
of the top lenders in this space include Wells Fargo, US Bank and JP
Morgan Chase; national, regional and community banks are the main
lenders of SBA Loans.
Amount – $5,000 – $5,000,000
is the most well known and most commonly used loan that the SBA program
offers. This loan can be used to expand a company, finance equipment,
purchase real estate or to make an acquisition. Businesses consider SBA
loans as the top financing product to get approved for, however the
process of applying and ultimately being approved is quite extensive.
Companies need to provide financial statements, explanation of use of
proceeds, details on collateral and full business descriptions. The
process is still very similar to getting a traditional loan through a
bank as the entire period can last about 90 days.
Amount – $5,000 – $5,000,000
can be considered one of the more complicated loans a small business can
apply to get. The 504 program as it is more commonly known, is not used
nearly as much as the 7(a) program and is focused on companies who need
the capital to acquire assets, expand or update certain aspects of their
business. The loan consists of three parts; 10% from the borrower, 50%
directly from a bank and the remaining 40% is funded by a Certified
Development Corporation. The interest rate is not calculated at the time
of the loan because the CDC groups all of their loans into a pool for
investors to buy at auction, when the auction takes place an interest
rate is then calculated based on the investor credit model.
Amount – $2,500 – $5,000,000
Short-term unsecured loans tend to be the most common loans and easiest to understand – a business borrows money for a specific reason then repays the loan over a period of time. These loans can typically be divided up into long term or short term options. Long term loans are typically for companies with better credit and more collateral. More established companies receive the long term loan and usually pay back monthly with an interest rate that can be fixed or variable. Short term loans are often used by companies with less than stellar credit, they fill a short term need and cost a great deal more than long term loans. Short terms loans are typically paid back with daily payments, though the structure can be different for each loan.
capital is the most diverse grouping of funding as small businesses can
secure cash today in return for discounted future revenues, accounts receivable or invoice financing, merchant cash advance
financing or supply chain financing (also known as factoring - one of
the oldest forms of business financing.). Each type of financing does have
one thing in common: sales at your business – cash flow from selling
products or services. If you search for business loans online, this is
mainly what you will find, and since it is an unregulated marketplace
with a similar products generally offered to every applicant, regardless,
you will pay higher rates and needless fess when you do not find the
right funding for your business. This is an area where a trustworthy
capital advisor can save you considerable time and money.
Amount – up to 85% of invoice amount
receivable or invoice financing allows businesses to use their sales to
borrow capital for a short period of time. Invoices are usually sent to
customers with due dates of 30, 60, 90 or 120 days; companies in turn
need steady cash flow to meet different needs and lenders can fill this
void by using the invoice as a form of collateral. Financing your
business this way can be expensive though, as lenders typically charge
processing and factor fees. There are many different ways financing
within this space as some lenders operate in a more traditional sense
where they pay you upfront for close to 85% of your invoices and other
lenders use your business activity to tailor a specific financing
/ Merchant Advance
/ Merchant Advance
Amount – $5,000 – $250,000
advance financing is a quick but expensive option for a business to
use, there is no collateral required and even those with poor credit can qualify.
While this tends to be an expensive option, it does serve a sizable need
for companies who cannot get approval for more traditional working
capital. The big advantage to using this type of funding is flexibility
of payments because daily repayment is done by allowing the lender to
deduct a percentage of daily credit card sales. On slow days the payment
is less, on days with higher sales, the payment is higher. While this
type of funding is useful for short term needs, it is typically not seen
as a good long term option for companies to continue to use.
Amount – up to 95% of the invoice
Supply chain finance is a growing option for companies who are looking for financing options but do not want to incur large fees that usually accompany invoice financing. This option is not a traditional means of lending but rather an alternative for companies who usually have large buyers. Companies are able to essentially sell their invoices for close to full value and in return the lender is able to collect when the invoice reaches full maturity. Companies are typically able to get about 95% of the value of an invoice in return for rapid payment, Fees are usually small as buyers tend to be bigger corporations.
Amount – $1,000 – $1,000,000
of credit financing is a flexible way for businesses to draw on cash
when needed and are only required to pay interest on the amount used.
This type of financing is good for companies who have seasonal sales or
bumpy sales cycles. There are two types of Line of Credit Financing, the
traditional pool of capital to draw on and a business credit card which
can act like a line of credit for purchases. Businesses with good credit
can secure lines of credit from banks with preferable rates, or more
expensive online lenders.
Amount – up to 100% of equipment value
financing is used by businesses to buy a piece of equipment or device to
help them produce more goods and increase revenue. This type of
financing can be one of the easiest to secure, though this is not always
the case, as the equipment acts as collateral for the lender in case the
business in unable to pay back the loan. Lenders tend to not extend
repayment terms for fear of equipment becoming out of date and borrowers
should be careful to borrow for equipment that can last. Loans can be
expensive depending on the company’s credit profile, though most
companies see this type of funding as worth the cost because of the
increased production that accompanies the new equipment.
Limits – dependent on credit profile
Business credit cards are a form of financing every small business needs; companies use cards for purchases, travel, equipment and to help pay invoices. Rates on cards will vary based on the personal credit profile of the business owner and are offered by the main card companies like AMEX, Chase, Capital One and Bank of America. This form of financing is something that many business owners rely on and tends to be the most popular form of financing for companies who are just starting to gain traction.
Small businesses have plenty of options when they need working capital for any reason. When looking at outside sources of capital, business owners should consider why they need the financing, how long they need the money, and when they need the funding.
Understanding your business, how and when sales are generated, and the cycle of your revenue stream will help a lender determine the best option. Determining the total cost of funds in dollars and the payment structure - not just the interest rate or APR - is crucial to knowing if the new financing makes sense -- if it will help you accomplish your project or achieve your goal.
advice: Use an experienced business capital advisor to get the right
funding for your business; don’t just take whatever is offered online
to everyone on a website calculator or instant "loan
application", or a
direct mail offer that is sent to everybody, regardless.
that online “loan applications” and "loan calculators" often are collecting your data to be
sold and resold as a “sales lead.” Who
are you really dealing with? Your business ID, financials and personal information
could be exposed widely on the Internet and you won’t know who has your data.
You probably will be inundated with robotic sales calls and telemarketers who
may not have your best interests as their priority and who do not take
the time to learn specific details about your unique business and your
established competitive sources of capital tend to specialize in various business
categories, types and size of financing or credit risks, and they are
not easily found by searching online because they do not want a flood of
unqualified applicants. They
primarily work with and rely on professional business capital advisors.
A professional capital advisor will not charge additional fees or upfront fees. Professional capital advisors do not sell products and services; they provide advice, consulting and guidance; they can identify trusted sources with the right funding for your unique business, and their service is free to you so your cost of funding is no more than dealing directly with the funding source, if you could.
Not too long ago, making decisions about small
business capital was straightforward. That is not the case today.
With all the
available options, business owners need to become better informed and
more savvy about small business capital. The last few years have seen a
lot of changes in how small businesses access capital — which makes it
difficult to stay on top of what’s available and make sense of the
type of business-use cases where you might consider applying for an
online business loan, a traditional loan at the bank, or some other type
of business funding for working capital.
speaking to small business owners all across the country, I’ve
recognized two common misconceptions about online business lending.”
While this may be
the case in some situations, depending upon why you are borrowing and
the individual lender, this might not be an accurate blanket
description. In my opinion, loan purpose (or the reason you are
borrowing) informs a lot of the decisions you’ll have to make,
particularly regarding the cost of capital and whether a particular
funding option makes sense.
Transactions Association (ETA) recently commissioned Edelman
Intelligence to conduct an online survey of 592 small business
organizations to learn more about their experience with online funding.
The results are quite interesting.
Although it might
feel counter-intuitive, the lower total dollar cost of some online
funding options were a determining factor in why a small business chose online business
funding. Total cost of financing is a very important metric
for financing growth initiatives or other loan purposes with a defined
or reasonably expected return on investment. Depending upon the term, it’s possible for a higher-APR loan to carry a lower overall
dollar cost and make sense given a particular business use-case.
The majority of the
small businesses surveyed were more focused on the total dollar cost of
the loan than the APR when facing a hypothetical short-term opportunity
to capture additional ROI. In fact, 57 percent of them chose a six-month
loan over a nine-month loan (with a lower APR) in order to minimize the
total fees and expenses. While APR is a reasonable way to compare two
loans of the same term, it does not provide the total dollar cost of the
“The business owners in the survey additionally reported they expect an average return of $5 for every $1 borrowed—which may be why they are so focused on total cost.”
You might assume
that online capital is a last resort. It’s a common
misconception. Nevertheless, today many small businesses turn first to
online business funding for financing with the three primary reasons
identified by the ETA survey being:
1. They can access
the capital quickly (63 percent);
2. The application
process is simple and straightforward (57 percent); and
3. The costs are
reasonable (51 percent).
Admittedly, not all
online funding sources are created equal, and as is the case in every industry,
there are good players and those you may not want to do business with.
However, it’s really a matter of looking at small business
creditworthiness through a different lens and with a different paradigm
— not a disregard for good credit practices — that allow them to
approve small business loans that might have been rejected by a more
traditional approach that is largely driven by a personal credit score.
While for most
small business owners their personal credit score will likely always be
part of the equation, I’m not convinced it should be a go/no-go metric
for credit denial when there are so many other data points available
that may provide greater visibility into a business’ creditworthiness.
What many of these online lenders are doing is leveraging technology and
big data to go beyond a credit evaluation based largely upon a business
owner’s personal credit score.
These are important
considerations that are reflected by the 96 percent of those surveyed
who identified they were borrowing to enable growth. Access to capital
can be a major challenge to many of the small business owners. Online
business funding is one of the options available to help them find the
capital they need.
This is a
straightforward question. Unfortunately, popular culture has many
business owners convinced that a lot of money will solve all their
problems. When I have occasion to ask a borrower how much they’re
looking for and the reply is, “As much as I can get,” I cringe. This
answer tells a potential lender that you haven’t really thought
through your loan purpose. Your loan purpose should drive the answer to
I disagree with the
idea that you should borrow as much as you can at any opportunity you
have because you never know when you won’t be able to borrow again.
There are costs associated with borrowing that should be thoughtfully
considered every time you seek borrowed funds. In fairness, I look at
this process from a very conservative point of view. In my opinion, if
the borrowed funds will drive increased returns on investments (“ROI”)
or add value to the business, a small business loan could make a lot of
sense—if not, I wouldn’t suggest borrowing. In other words, borrow
what is required to fulfill your business need, but no more.
96 percent of the
ETA survey respondents say the loan they secured enabled them to drive
business growth. In my opinion, a loan purpose that will generate a
positive ROI or growth of some kind is a good reason to consider a small
amount of money you need can also help you determine which lender to
approach. Over the last several years many traditional lenders have
moved upstream, looking for bigger businesses and bigger loans. Banks,
for example, would rather lend $500,000 or $1 million than $50,000.
It’s hard to blame them; they both carry about the same administrative
and regulatory costs associated with underwriting the loan.
capital funding sources specialize in smaller amounts, which are specifically
geared towards small businesses. According to the ETA survey, the
average amount for online business funding was $25,000. And the
average number of times those business owners had borrowed over the past
five years was three.
To find the right funding for your unique business, you need a professional capital advisor.
No products or services are sold on this educational informational resource website. No fees are charged.