If you’re a small service business owner looking to expand, manage cash flow, or handle unexpected expenses, you might have heard about revolving credit. But what exactly is revolving credit, and is it the right financial tool for your business? In this article, we’ll break down the pros and cons of revolving credit in easy-to-understand terms, so you can make an informed decision for your small service business.
Aspect
Pros of Revolving Credit
Cons of Revolving Credit
Flexibility
Allows for flexible borrowing and repayment, making it easier to manage unpredictable expenses.
Missed or late payments can negatively impact your business credit score.
Emergency Fund
Serves as an emergency fund for unexpected expenses.
Variable interest rates on some revolving credit options can increase over time, affecting overall borrowing costs.
Understanding Revolving Credit
Revolving credit is like having a financial safety net for your business. It’s a flexible form of credit that allows you to borrow up to a certain limit and repay it over time. Unlike traditional loans with fixed monthly payments, revolving credit gives you the freedom to borrow, repay, and borrow again as needed.
Pros of Revolving Credit for Small Service Businesses
Let’s dive into the advantages of using revolving credit for your small service business:
Flexibility:
One of the biggest benefits of revolving credit is flexibility. It’s there when you need it, and you only pay interest on the amount you use. This flexibility can be a lifesaver when facing unpredictable business expenses.
Easy Access: Revolving credit is easily accessible. Once approved, you can access the funds whenever you need them, making it a convenient option for managing cash flow gaps or seizing growth opportunities.
No Fixed Repayment Schedule:
Unlike traditional loans, revolving credit doesn’t come with a fixed repayment schedule. You can make minimum payments or pay off the balance in full, depending on your business’s financial situation.
Builds Credit:
Responsible use of revolving credit can help you build your business credit score, which may open doors to better financing options in the future.
Emergency Fund:
It serves as an emergency fund for unexpected expenses, such as equipment breakdowns or sudden drops in revenue.
Cons of Revolving Credit for Small Service Businesses
While revolving credit offers several advantages, it’s important to be aware of the potential drawbacks:
Interest Costs:
The flexibility of revolving credit comes at a price—interest. The interest rates can be higher than those of traditional loans, so it’s essential to manage your balances wisely.
Debt Accumulation:
Without a fixed repayment schedule, it’s easy to accumulate debt. Small business owners should be disciplined about making payments to avoid long-term financial stress.
Credit Score Impact:
Missed or late payments can negatively impact your business credit score, potentially limiting your access to future financing.
Variable Interest Rates:
Some forms of revolving credit, like credit cards, may have variable interest rates that can increase over time, affecting your overall borrowing costs.
Credit Limit:
Your credit limit depends on your creditworthiness. Small service businesses with a limited credit history may not qualify for substantial credit limits.
Conclusion
In conclusion, revolving credit can be a valuable financial tool for small service businesses, offering flexibility and easy access to funds. However, it’s not without its downsides, including interest costs and the potential for debt accumulation. To make the most of revolving credit, it’s crucial to use it responsibly, make timely payments, and carefully consider your business’s financial needs.
Before applying for revolving credit, assess your business’s financial situation and determine whether the benefits outweigh the drawbacks. If used wisely, revolving credit from a reputable source like New Bridge Merchant Capital can provide the financial support your small service business needs to thrive.
For more information and personalized financial guidance, feel free to call New Bridge Merchant Capital at 844-228-0593. Our experts are here to help you make the right financial decisions for your small service business.
As business owners face increasing financial pressures, a revolving business line of credit is among the more desirable options for accessing fast working capital when needed. By giving companies the flexibility to control their financial runway, small business loans in NJ like these are increasingly becoming attractive forms of financing to many small business owners in the region.
This article explains the advantages of a revolving business line of credit and the steps and qualifications required to secure such a loan. The following sections will tell you everything you need to know about this popular financing option so you can decide if it is the best funding solution for your organization.
A revolving line of credit can provide a short-term source of capital to help sustain a company during uncertain times and unforeseen circumstances. Moreover, many lines of credit are secured by collateral. This can give business access to larger sums of money than they have on their balance sheet.
Credit lines allow companies to draw funds when necessary. They can fill funding gaps brought about by short-term cash flow problems. By providing instant access to funds, your organization can continue operating and support its efforts to expand its footprint.
At a basic level, a business line of credit works in two stages. The first is the draw period, during which the borrower can access borrowed funds in smaller, periodic payments. This is usually followed by a repayment period, in which the borrower must repay the loan in fixed monthly principal and interest payments.
Lenders vary in the terms and conditions of their business lines of credit; some may convert the line of credit into a structured loan after the draw period ends. As such, familiarizing yourself with the terms of the loan agreement and understanding the fine print before entering into a contract is crucial.
Business lines of credit provide flexible access to capital for business owners, allowing them to draw funds in smaller, periodic payments to later repay them in full after the draw period ends. This loan product effectively serves as a short-term source of capital during times of uncertainty, making them a valuable tool for companies in need of fast access to capital. To get the most out of a business line of credit, remember to evaluate all the terms of the agreement and the proposed payment structure.
Key Stages:
Draw Period: Borrower can access borrowed funds in smaller, periodic payments.
Repayment Period: Borrower must repay the loan in fixed monthly principal and interest payments.
Business Revolving Line of Credit vs Term Loans
Criteria
Business Revolving Line of Credit
| Term Loans
Flexibility
High
Low
Repayment
Flexible, based on usage
Fixed term
Interest
Only on borrowed amount
On entire loan amount
Use Case
Working capital, emergency funds
Specific investments like equipment
Business Revolving Line of Credit vs Term Loans
Business lines of credit and conventional term loans are two popular financing solutions for small companies looking to extend their investment costs beyond their immediate cash flow. Both have their advantages, but they also have distinct differences when it comes to their individual structures and requirements.
For start-ups and established companies alike, it can be difficult to get the required financing to fund advancements and investments during business expansion. Depending on the size of the investment and the cash flow of the business, one of two primary loan types – business lines of credit or conventional term loans – may be used.
A business line of credit is a flexible product whereby an agreed-upon value is offered to the small business owner, who can later draw from it on demand within their pre-agreed limit. You’ll only make repayments on the borrowed portion, with interest payable only when funds are owned. Business lines of credit often provide quick access to working capital loans in New Jersey, which can be critical for cash-flow management.
Conventional term loans, on the other hand, offer an agreed amount of money to the small business owner, who then pays back the loan over an established term. Lenders charge interest from the beginning of the term through the remaining life of the loan. These loans are most often used as a one-time financing solution for a specific purpose, such as purchasing equipment or covering business expansion costs.
Now that we’ve covered the basics, let’s delve further into the unique benefits of these different financing options and examine which one may be the best for your particular applications.
Business Revolving Line of Credit vs Invoice Factoring
Criteria
Business Revolving Line of Credit
Invoice Factoring
Flexibility
High
Moderate
Repayment
Flexible, based on usage
Based on invoice payments
Interest
Only on borrowed amount
Fees charged by factor
Use Case
Working capital, emergency funds
Immediate cash flow
Business lines of credit and invoice factoring are two popular forms of business financing that small business owners can use to strengthen their finances. Lines of credit are flexible instruments that allow a business to borrow and repay funds as needed, while invoice factoring uses outstanding invoices to supply immediate working capital. Both options have their own unique benefits and drawbacks depending on the business’s current financial situation.
Credit lines are ideal for businesses that need consistent access to a set amount of working capital. With a revolving line of credit, a company will be approved for a certain amount and can withdraw at any time up to the maximum credit limit. Typically, a line of credit has two rates. The first is the “draw rate.” You use this when you withdraw the funds, while the “commitment rate” is the rate charged when funds are borrowed but not withdrawn.
Credit lines require regular payments until the balance is reduced to zero, at which point the line is ready to use again. These revolving lines of credit can provide an ongoing source of capital for a business as long as the payments remain current and the company doesn’t exceed its approved line limit.
Invoice factoring, on the other hand, is a type of finance solution for businesses with a consistent stream of invoices. Instead of relying on borrowing from a third party, factoring allows companies to leverage their pending invoices to receive immediate working capital.
Once an invoice is sold to a factoring company, the business will receive an initial cash advance of around 85 to 90 percent of the invoice value and the remaining balance once the customer pays the invoice. It’s a quick and easy way to get paid upfront, and factoring can provide an unlimited source of working capital as long as the business generates enough monthly invoices.
When comparing business lines of credit versus invoice factoring, you’ll have to look carefully at the benefits and drawbacks of each loan. Business lines of credit can be beneficial for businesses that need consistent access to funds but may not have substantial collateral to offer. However, lines of credit often require higher credit qualifications, which can reduce the number of business owners that qualify.
Invoice factoring is attractive to business owners that can’t get a loan or line of credit due to their FICO score, as the factor purchases the invoices outright. This is, of course, in contrast to lending the business money to secure the stock. On the downside, invoice factoring can be expensive since the factor will charge a fee for their services, and businesses with a very slow accounts receivables cycle won’t benefit from the quick cash advances offered by invoice factoring.
Knowing the key differences between business lines of credit and invoice factoring will only enhance your chances of getting approved for the right business loan product and ensure that you do not agree to terms that fail to provide maximal benefit.
Business Revolving Line of Credit vs Merchant Cash Advance
Criteria
Business Revolving Line of Credit
Merchant Cash Advance
Flexibility
High
Low
Repayment
Flexible, based on usage
Percentage of future sales
Interest
Only on borrowed amount
Can be expensive
Use Case
Working capital, emergency funds
Short-term operating costs
When small business owners need quick financing to cover short-term operating costs, they have two main options: business lines of credit and merchant cash advances (MCAs). Each type of loan has advantages and drawbacks. This is why understanding the difference between them as you decide which of the two will be best for your needs is crucial.
A business line of credit provides access to a specified amount of money that can be borrowed, repaid, and borrowed again as needed. A lender typically sets the maximum loan amount, and interest is only accrued when the balance is not paid in full each month. This way, the repayment terms remain flexible, giving you optimal control over how you leverage the funds. This customizability factor means that business owners can access funds quickly. Nonetheless, borrowers must maintain their creditworthiness to continue using their line of credit without the risk of losing it.
A merchant cash advance (MCA) is a type of loan typically provided to business owners by online lenders. The creditor will advance a set amount of money to the borrower in exchange for a percentage of their future sales. The business then repays the loan according to its sales. This means that the payments can vary depending on how much money the company makes each month.
The biggest advantage of an MCA is that it often entails a fast approval process. Merchant cash advances can be a great option for businesses that do not have a long credit history. One downside, though, is that the repayment terms can be more expensive than a business line of credit.
A business line of credit will generally come with more flexible payment terms that are easier to manage. However, MCAs can provide expedient access to financing and may be more suitable for businesses that do not have strong credit. Ultimately, the choice between the two almost always boils down to the individual needs of the business owner. It’s, therefore, important to look at prospective loans from all angles before making a final decision.
How to Apply for a Business Revolving Line of Credit in New Jersey
To be approved for a business line of credit, lenders typically evaluate several qualifications including:
Time in business – At least two years is ideal but some lenders may be more flexible.
Personal and/or business credit scores – Credit score requirements can vary greatly, but personal credit scores are often required to be between 620-650 and banks sometimes require scores of 680-700 or higher.
Revenues – Bank and financial statement receipts and/or tax returns will be used to confirm revenue.
Business entity – Some lenders will not lend to sole proprietors, so considering setting up an LLC, S Corp, or C Corp could be beneficial.
Secured collateral – Most business lines of credit are unsecured loans, meaning you won’t need to pledge personal or business assets such as equipment or real estate to qualify. However, in some cases, lenders may offer secured lines of credit or require collateral.
For New Jersey business owners, financial security and sustainability means having access to the right working capital solutions. Alternative lenders like New Bridge Merchant Capital offers a full suite of business lending products that are customizable to meet the unique needs of your business. By partnering with New Bridge Merchant Capital, you’ll not only start taking the steps to secure critical funding, but you’ll also have access to dedicated assistance from a team of seasoned lending consultants with decades of combined experience.
You can apply for a business line of credit to purchase inventory, expand product lines, or cover your operating costs. This type of credit also provides a safety net, especially during a financial shortfall, giving companies the flexibility to manage their operations more effectively.
Where to Apply for Small Business Loans in NJ
New Bridge Merchant Capital’s business lines of credit can be designed to fit each business owner’s unique situation. Furthermore, our revolving lines of credit come with a simple application process and a fast decision. These credit lines allow clients to take advantage of flexible repayment options and competitive terms.
We encouraged New Jersey business owners to explore New Bridge Merchant Capital’s full suite of lending products. Contact a senior business lending consultant now at 844-228-0593 for additional information and an obligation-free quote. New Bridge Merchant Capital is ready to provide you with expert guidance and advice on how to access and utilize business loan products to help your organization meet its revenue and strategic growth objectives.
Cash flow constraints are a common issue for contractors, especially since industry payment cycles tend to be unpredictable. For many small contracting businesses, this means it’s only a matter of time before they experience a financial shortfall and need to start exploring options for additional working capital.
Luckily, there are sources for small business loans in New Jersey that can give you a reliable path to overcoming delayed payments and unexpected losses. Contractor financing is an invaluable tool for securing materials and assets. The lending solutions let businesses scale their projects with confidence. Offered in myriad forms, from lines of credit to invoice factoring, contractor financing helps businesses make strategic decisions about when and where to invest, all while ensuring constant and reliable cash flows.
How Does Contractor Financing Work?
Building a successful business requires effective management of cash flow. Contractors often discover early on that while costs for a particular project may be considerable at the outset, with materials and labor, it will be several months before a project is completed and paid for. Such a cash flow issue can force contractors to seek financing to cover their costs until the next payment arrives.
Banks and other traditional lenders consider it risky to finance construction projects, leaving many builders struggling to encounter suitable financing options for project expenses like labor, materials, and equipment. In the following sections, we’ll introduce you to a range of contractor financing solutions along with the advantages and disadvantages of each.
Contractor financing is a category of financial instruments available to construction businesses that can help ease their cash flow issues. These loans are divided into two types: advances and deferrals. Advances cover material costs and other expenses before they’re paid for, while a deferral effectively lengthens payment terms and allows the contractor to fund labor, materials, and equipment more slowly.
In other industries, businesses can access traditional funding sources with minimal risk, enabling them to finance their operations at relatively low rates. Because of the risks inherent to construction, however, traditional banks and lenders are hesitant to provide financing products to contractors.
Without access to conventional financing, construction businesses have started turning to a range of emergent small business loans in New Jersey designed to meet their requirements. These specialized solutions exist to bridge the gap between the time when payments are received and when your expenses must be covered.
Through an array of alternative contractor financing options, construction businesses can rest assured in knowing that cash is available to pay for labor and materials while guaranteeing they get paid for each project. Whether through a cost deferral or an advance, you can use contractor financing to keep your business profitable.
What Are The Typical Types of Contractor Financing?
Contractors face increasingly complex challenges when seeking working capital. To overcome these obstacles, forward-looking companies have stepped into the breach with an array of options to help keep their supply chains healthy and thriving.
From invoice factoring to lines of credit, you’ll find an array of alternative financing solutions available to contractors who need capital to grow their businesses, take on larger projects, or meet predictable gaps in cash flow. Let’s take a look at a few of these options in more detail below.
Traditional Bank Loans
As a business owner, you’ve likely heard about traditional bank loans as a potential working capital solution. These loans are typically offered by established banks or credit unions; however, they may also be obtained through online lenders and creditors specializing in business loans.
A traditional bank loan is a sum of money lent to a business by a financial institution; this money must then be repaid in full, with interest, over a previously agreed upon period of time. Usually, bank loans come with fixed interest rates and loan terms ranging from just a few months to several years. Bank loans also give businesses access to the funds needed to cover their daily expenses, purchase new equipment, and implement needed marketing strategies.
However, it’s worth noting that obtaining a traditional bank loan can be a lengthy and arduous process. In most cases, banks require extensive paperwork to verify the borrower’s financial history and the current financial health of the business. Additionally, the financial institution may need to conduct a detailed review of the proposal to ensure that the owners can adequately manage and repay the loan.
For companies that qualify for a traditional bank loan, there are both advantages and disadvantages to consider. On the plus side, the loan offers a fixed loan amount with fixed interest rates. The is usually secured with collateral, ensuring that the bank will be paid back. On the downside, the process to obtain a traditional bank loan can be lengthy and requires a considerable amount of documentation. Moreover, the bank may charge additional fees for setting up the loan along with any late payments.
A traditional bank loan can provide a dependable source of working capital for businesses. If you have time to complete the necessary paperwork and have good credit scores, the odds of qualifying for small business loans in New Jersey are strong. However, remember to weigh the pros and cons carefully before committing to a loan agreement.
Equipment Financing
Equipment financing is ideal for construction companies looking to purchase large equipment such as heavy machinery, vehicles, tools, and other operational equipment that makes workers more productive. It works like a car loan or mortgage, wherein a bank loans the construction company money to purchase the equipment and then uses the equipment as collateral. Generally, the higher the amount borrowed, the higher the interest rate, which is always something to consider.
Oftentimes, the borrower would need to put down a certain deposit percentage for the value of the equipment. However, some lenders offer 100% funding. Irrespective of the deposit percentage, the loan would need to be approved with a thorough credit check and financial statement review. Moreover, the property is at risk if you miss payments, since the bank is within its rights to repossess the equipment.
The pros and cons of such financing are worth mentioning, as well. To begin with, the interest rate is usually lower since you’re securing the loan with collateral. The increased productivity from the new equipment, however, will help cover the cost of the loan. On the other hand, a down payment may be required to obtain the financing. The risk of not making payments on time could result in the repossession of your equipment, something that always hangs over the heads of those who fail to do so.
Equipment financing is a viable solution for construction companies. It can help them obtain the necessary operational tools to be more productive, however, one must be cautious of the potential risk that comes with it. Remember to factor in the deposit percentage, the interest rate, as well as the credit check and financial statement review that is typically required.
Lines of Credit
Business lines of credit can be invaluable sources of working capital for contractors and essentially any other small business owner. This lending option offers shorter-term funding than a traditional business loan, allowing for more manageable withdrawals and payments. It also provides a flexible method of borrowing money when necessary, with no need for lengthy applications or waiting periods.
A business line of credit comes in two forms: secured or unsecured. An unsecured line of credit, also known as a “revolving line of credit,” does not require collateral and carries a higher interest rate. Secured lines typically come with higher limits, but lower interest rates, since the lender can seize assets if need be.
The benefits of a business line of credit are numerous. The flexible nature of this financing means you only pay interest on the amount you borrow, giving you control over expenses without the risk of over-borrowing. You can also withdraw and repay the money as many times as you need, allowing for more precise allocations of finances.
On the other hand, business lines of credit also come with certain drawbacks. These lines of credit usually carry higher interest rates than traditional lines of credit. Likewise, the nature of a line of credit usually requires strong financial statements and a good credit score before lenders will approve your application.
Merchant Cash Advances
Merchant cash advances are an excellent option for contractors who need reliable sources of working capital. A merchant cash advance gives businesses an up-front sum of money in exchange for a share of their future revenue. This percentage of future income is usually determined by the cash advance company after analyzing the contractor’s cash flows. It is then deducted automatically on a daily basis until you pay the balance owed.
The simplicity with which cash advances can be secured makes them attractive to contractors. The entire process can usually be done in under a week. No collateral is required, as the percentage of future income serves as repayment. This can be a substantial benefit for businesses that don’t have a lot of assets.
However, while merchant cash advances are typically easier to obtain than traditional loans, the high cost of capital can be notably prohibitive. Interest rates are often higher for these advances than for traditional bank loans. Also, since the calculation of the rate of repayment can be difficult to predict, contractors may end up paying a lot more than they bargained for if business suddenly slows down.
Small Business Administration (SBA) Loans
Small Business Administration (SBA) loans can provide an advantage for contractors who don’t need instant working capital. The SBA is a federal program that supports small and medium-sized businesses providing them with access to capital and financial assistance, usually offering loan programs tailored to contracting businesses.
These lending platforms target companies in the construction industry and may provide access to the funds needed to support operations. SBA loans are backed by the government and offer borrowers lower interest rates, longer repayment terms, and large loan amounts. With an SBA loan, contractors get access to the financing required to make the necessary investments in their business. Recent federal regulations have made the process of obtaining business loans slightly easier, as well, only increasing the accessibility of this product.
However, the SBA loan application can prove lengthy and complicated. Applicants must provide documents such as financial records, business plans, and tax returns, which can take a considerable amount of time to gather and organize. Once all the proper paperwork has been submitted, you may still face months of additional waiting while your application is reviewed, approved, or denied.
In terms of pros and cons, remember that interest rates for an SBA loan may be lower with the SBA guarantee, but the repayment term might be longer than traditional loans. Also, SBA loans are for very specific purposes and are often used for working capital or to purchase equipment, buildings, inventory, etc. Businesses cannot leverage them to pay dividends, however. On the plus side, since these loans are guaranteed by the government, your credit score and other documents won’t be as important.
Which Aspects of Your Contractor Business Can You Finance in NJ?
As a contractor in New Jersey, you’ll encounter several options for financing the various parts of your business. Here’s what contractors typically finance in New Jersey:
Labor: Covering labor costs can help manage the cash flow of your business.
Materials: Taking out a loan for materials can help ensure you have all the necessary resources to complete the job.
Equipment: Financing equipment can help you acquire the tools and machinery needed for job completion.
How to Qualify for Competitive Small Business Loans in NJ
Identifying the right New Jersey small business loans for contractors is an important process. You’ll need to consider the terms, costs, and potential benefits that come with each loan. Contractors should always measure their options objectively and look for a financial partner who can provide them with the flexibility to do business on their terms.
New Bridge Merchant Capital assists contractors like yourself with evaluating their financing options to find the right fit for their business. After consulting with one of our seasoned advisors, we’re certain that you’ll be able to make an informed decision about which business financing product best meets your needs.
Complete your application online now or call New Bridge Merchant Capital at 844-228-0593 for a loan quote.
Making an informed decision about your second business loan will undeniably have a long-lasting impact on the growth and success of your company. Second business loan origination, also known as loan stacking or piggyback loans, describes the process of taking out secondary secured or unsecured business financing in addition to the loan product you currently have.
While most savvy business owners are aware of the potential risks of opening multiple loan accounts, it is still worth reiterating which secondary loan products could be beneficial. Discussing other viable alternatives to opening another loan is valuable, as well. The following information will help you make the best choice when it comes to evaluating how to support the financial health and profitability of your business.
In this article, we will discuss the risks associated with second business loans, potential alternatives to taking out another loan when you have an existing one, and how to make an educated decision on whether secondary business financing is right for your business.
What are second business loans?
Second loans are relatively common among business owners seeking to expand, restructure, or take advantage of new business opportunities. Opening a new loan account on top of the one you already have can provide the necessary working capital for entrepreneurs facing financial shortfalls, cash flow challenges, and time-sensitive opportunities.
Several secondary business lending products can supply the extra boost your organization needs to realize its growth potential. However, since it carries various risks that could damage a company’s fiscal health, whenever you take on additional business debt, this decision should never be taken lightly.
Opening another loan account demands careful consideration because it could disrupt your financial stability if you make the wrong choice. It’s not uncommon for businesses that feel like they need additional funding to land themselves in the wrong financial product that strains their ability to repay their existing loans while keeping up with another payment schedule and interest rate.
Moreover, failure to repay this new loan could lead to significant financial losses, due to the added expenses, potential late penalties, and loan origination fees. Remember, your second loan’s pricing is premised upon your credit rating and the overall financial health of your business, making the loan more costly if you overextend your debt or haven’t been keeping up with your existing payments.
Before making any decision to take out a second business loan, entrepreneurs should also assess the various alternatives. You should first consider whether or not can safely utilize existing capital, available credit lines, or your other loan accounts, since this option could prove less expensive in the long run. One such viable alternative may include applying for governmental programs or restructuring your current loans in a refinance to improve the terms.
Regardless of whether you decide to take out a loan or an alternative, exercising caution is crucial. Before making the decision, ensure that you understand the repayment terms, interest rates, length of term, and total costs of the loan. Thoroughly researching a prospective loan product and consulting a trusted business lending consultant is essential. Ensure that you understand the financial benefits of the loan before signing any agreement, and the terms should be tailored to your company’s specific needs and abilities to repay in full.
For entrepreneurs to make an informed decision on whether a second business loan is the right option, they should assess their overall situation and available alternatives. Familiarizing yourself with the tangible risks a second loan could pose to their business is equally important.
When you thoroughly research all terms and conditions and understand the repayment structure and potential hidden costs associated with the loan, you’ll be in a much better position to benefit from a second loan product. This approach ultimately helps you make the most informed decision possible on whether taking out a second business loan is the best path for your organization.
Can I get a second loan?
When your business needs fast capital, and you already have an existing loan your only option may be to apply for secondary business financing. Of course, this is not always the most financially wise decision, so considering the consequences before applying is vital. To get approved for a second loan, you must qualify by evidencing a solid financial history and meeting certain criteria.
When considering a second loan, the first step is to review credit reports from all three of the major credit bureaus: Experian, Equifax, and TransUnion for personal credit scores and the Dun & Bradstreet PAYDEX score in the case of your business credit profile, if you have one. Since lenders base loan approval decisions upon personal and business credit scores, ensuring accurate reporting information is crucial. Any discrepancies in your report should be addressed before submitting a new application.
You should also carefully analyze the type of loan for which you’re applying. In most cases, you’ll have the option of choosing between secured and unsecured loans. Unsecured loans are generally more difficult to qualify for and often come with steeper interest rates. Secured loans, on the other hand, require collateral, but you don’t always need perfect credit, and they typically come with more favorable pricing.
Borrowers should, likewise, be prepared to provide financial information to the lender, such as profit and loss statements, balance sheets, and tax returns. Creditors also require personal information, such as names, addresses, dates of birth, and Social Security numbers for all business owners. Lenders, depending on the circumstances often request additional information, such as a business plan and/or collateral.
Once your application process is complete and the lender has approved the loan request, the borrower will either receive the loan funds directly or through a third party. The repayment terms vary based on the loan amount and product type, so borrowers should ensure that they read and understand all of the relevant loan documentation before signing any agreement.
When deciding if a second business loan is a suitable next step, be sure to consider all of your options carefully. There are advantages and disadvantages to taking out a second business loan; but, with proper research and planning, businesses are all but assured to secure the necessary funds at a reasonable cost.
What are the risks associated with stacking small business loans?
When you cannot obtain adequate funding through traditional avenues, you might find stacking your business loans to finance your operations is always a viable option. And while it can be beneficial to certain businesses, be aware that there are a few potential risks and pitfalls to consider before signing onto a secondary business loan.
One such risk is having too much debt. Businesses that take on multiple loans, each with their own interest rates and repayment terms, can quickly find themselves in a financially precarious position. You want to ensure that the new debt burden won’t become unsustainable. Additionally, businesses should be mindful of their credit health, since multiple loan inquiries and new debt can negatively impact future borrowing capabilities.
Accumulating excessive debt may also lead to less-than-optimal cash flow performance. When you take out different loans from competing lenders, you will find yourself dealing with multiple loan payments with varying due dates. While this is often overlooked, having more than one due date can throw your cash flow out of whack, potentially making it difficult to cover your operating expenses.
Another risk small business owners should be aware of is what might happen in the event of a loan default. When you open more than one loan, this increases the likelihood of falling behind on at least one account. Defaulting on any business loan can have devastating consequences, including a call for full repayment, loss of collateral, legal action, and damage to their credit score. This is why a proper risk assessment before taking any secondary business financing is essential.
Finally, be aware that servicing multiple business loans can lengthen the amount of time you stay in debt. Carrying multiple loan obligations to different lenders with varying terms usually reduces the business’ ability to quickly pay off its debts. If you are extending repayment terms, this decision should be analyzed carefully before committing to a second business or third loan account.
Stacking your business loans offers you the opportunity to access the funds you need, but, as a business owner, you should carefully examine the potential risks associated with this approach. Look at the new debt burden, cash flow demands, potential for default, and the total repayment timeline before deciding if a second business loan is a suitable fit for your organization.
How many business loans can you have at once?
How many business loans can you get? The answer is that it depends. The number of business loans you can hold at one time depends on several factors. The main considerations include your credit score, the amount of capital you have available to invest in the venture, the size of the loan, and the industry you are in. Many lenders will not offer more than one loan to a single borrower. This is due to the increased risk for the lender and the potential for default.
The business lending industry follows generally accepted guidelines for piggyback loans, which are multiple loans taken out on the same collateral within a specific timeframe. The Centers for Industry Research and Standards (CIRS) notes that piggyback loans should not exceed 75% of the collateral’s value. For example, if your collateral is a building worth $2,000,000, the maximum loan amount is $1,500,000. The remaining $500,000 may be used to secure additional financing from other lenders.
As a borrower, consider the total cost of all the loans when planning your business financing strategy. Secondary loans can be a great way to make use of the value of existing assets, but they can also be costly in terms of interest payments. Remember to research and calculate the total cost before taking out multiple loans.
The lending industry follows specific criteria for secondary loan limits. Generally speaking, lenders will not allow a single borrower to have more than three loans at one time. Depending on the amount of the loans, your FICO and DUNS scores, and the creditworthiness of your industry, taking out three loans or more is entirely possible.
Whichever the case, we advise that you consult with an experienced business lending advisor before taking out multiple loans. Since there are numerous factors to consider, a seasoned loan consultant familiar with your industry can give you a better sense of the risks associated with taking out multiple loans and help you plan a reliable long-term growth strategy.
In addition to the loan limit, being aware of the regulations in your state and industry is critical. Some states have specific laws governing the number of loans a single borrower can have at any given time. Before taking out any new secondary financing, refer to your local regulatory guidelines to ensure compliance with all the necessary lending standards.
The most common types of second business loans
The need for additional business financing usually arises after business owners have already leveraged popular options such as conventional bank loans and credit cards. While these are often the go-to choices for business owners, there are several other loan types that shouldn’t be overlooked when you need additional funding. The four most common second business loan types are merchant cash advances, invoice factoring, equipment financing, and business lines of credit.
A merchant cash advance is one of the most common second loan types available and allows for a business to borrow a pre-determined amount of money in exchange for a percentage of future sales. Invoice factoring doesn’t just offer businesses an influx of immediate cash. It also allows the time that would normally be spent chasing down late payments to be focused on other more productive tasks.
Equipment financing options are beneficial when large purchases are necessary as they allow companies to buy now and pay later. Lastly, a business line of credit loan is an effective business finance tool since it lets a business borrow and lend as needed—up to a specified limit or amount.
Considering all of your available options for second business loans?
Connect with New Bridge Merchant Capital business lending consultant today to ensure you receive the best possible terms on your secondary financing. New Bridge Merchant Capital equips companies like yours with the expert advice and premium lending services you need to ensure you make the right decision before opening a second business loan account.
Apply online today, or contact us now at 844-228-0593 to learn more about pricing and our secondary business loan services.
Maintaining sufficient working capital is among the primary challenges small business owners face in today’s unpredictable economic clime. When your cash flow starts flagging, seemingly without notice, access to fast funding might appear daunting at first. But luckily, there are several sources of alternative business funding you may not have considered yet, one of which is inventory financing.
In this article, we’ll provide you with a comprehensive overview of inventory financing, its suitability to different business types and applications, its associated pros and cons, and best practices for applying for an inventory-secured loan. By the end, you’ll have sufficient knowledge to make an informed decision about whether or not inventory financing is right for you.
The concept is fairly simple. Any inventory you purchase, as well as your existing stock, serves as collateral for the loan. Should your business default on the finance payments, the assets you staked can be collected by the lender to cover any potential losses.
The nice thing about inventory financing is that it’s customizable pursuant to your business needs. You can expect this financing type to come with several unique financial terms engineered to meet your specific requirements and strategic objectives.
The lending terms can vary, with payoff lengths from three months up to three years or more. Borrowers may opt for a set or variable annual percentage rate (APR). Depending on the lending institution, inventory financing term loans, for example, can start as low as $20,000 and go up to $1 million for qualified businesses. Some creditors may allow you to borrow up to 100 percent of your inventory’s value, as well.
Since inventory financing can be tailored to your specific needs, you’ll usually find ample flexibility when it comes to selecting your ideal loan terms. For business owners who need an adaptable financing solution, inventory financing often serves as a reliable long-term option.
This financing type is a great way to build your business through the acquisition of new inventory that you may not have the capital to cover. With the guidance of a business finance expert at New Bridge Merchant Capital, business owners will find identifying and securing an efficient and cost-effective inventory financing option that can be custom tailored to meet their unique business needs.
Which types of business benefit from inventory financing?
Inventory financing is, of course, by implication, best suited to businesses that sell tangible products. It helps ensure your shelves are well-stocked, even in the face of an unexpected financial shortfall.
Inventory financing lenders help companies like yours maintain healthy cash flow while they increase their stock levels. While inventory financing is primarily orientated toward retail stores, wholesalers, and specialty shops, it also offers seasonal businesses a reliable means of boosting their cash flows.
This financing type works by allowing companies to use the value of their inventory as collateral for the proposed funding. The funding structure is generally flexible, and certain lenders may focus on specific types of businesses.
To qualify you for inventory financing, lenders typically assess your financial track record rather than the items you aim to sell. The traditional approval process could make inventory financing less suitable for startups buying inventory for the first time or those with no prior sales.
The possibility of attain an inventory financing loan when you’re first starting out is, by no means, excluded, however, when you consider alternative lending sources. Regardless of who you choose to finance your inventory, this method of borrowing can help you build your business credit and generate short-term working capital to leverage long-term growth.
When should you consider inventory financing?
Any established business that needs to stay well-stocked and increase its inventory levels should consider inventory financing. It’s suitable for several business types, including retailers, wholesalers, and specialty stores. It may also be an effective solution for businesses that experience seasonal fluctuations in demand and need to cover their expenses during the off-season.
Inventory financing lenders assess your business’s financial track record rather than the individual goods you stock. As mentioned, this can make the option less suitable if you’re just starting out.
However, before discounting this option entirely, it’s worth consulting with a reputable business lender to see if you can still qualify for inventory financings or other alternative funding solutions, such as a business credit card, merchant capital advance, or secured term loan.
Inventory financing is a dependable way to sustain a healthy cash flow while expanding your inventory levels to increase sales. But remember to never underestimate the importance of working with credible inventory financing lenders that understand your industry and can provide the right terms to meet your specific requirements. You should also weigh your inventory financing options carefully against other alternative financing solutions to ensure there isn’t a better loan product for your application.
The different types of inventory financing
Many small businesses rely on short-term funding to restock their shelves and pay for supplies upfront, which is why inventory financing has proven vital for managing a stable and profitable business. There are essentially two traditional inventory financing options: loans secured by inventory, or inventory equity loans, and term loans. Both have advantages and disadvantages, and the effectiveness of the financing depends on the season and fiscal health of your company.
For example, inventory financing has grown popular because it allows business owners to use their inventory as collateral to secure a loan from lenders. This type of loan also allows lower credit scores when compared to other loan options, making it among the more accessible short-term financing solutions for low-credit or no-credit business owners. These loans tend to carry a higher interest rate, however, which is why you should explore all your options before committing to any one product.
Unsecured term loans, on the other hand, do not require you to stake personal or business collateral. This loan type usually benefits customers with higher credit scores who are in a good position to take advantage of the lowest borrowing costs. With that mentioned, since the loans are unsecured, they traditionally have stiffer credit requirements than secured loans and, in some cases, higher interest rates.
Alternatives to inventory financing include merchant cash advances, lines of credit, and accounts receivable financing, which many often misconstrued as inventory financing. These alternatives can be more expensive than traditional inventory financing solutions. Nonetheless, they typically entail a streamlined application process for unconventional borrowers who need fast access to working capital.
Knowing the advantages and disadvantages of inventory-secured financing will help you decide on which option best suits your needs. Whether it’s traditional inventory financing or an alternative solution, business owners should take the time to consider every available loan product to ensure the best results.
Loans secured by inventory advantages and disadvantages
While traditional inventory financing is a popular option for many small business owners, the decision to pursue this type of financing must be carefully evaluated. It can provide capital for increased inventory purchases or prevent cash flow issues. It’s not entirely without its downsides, however.
Inventory lines of credit and inventory term loans are generally considered “traditional” inventory financing. Your inventory secures these loans, and the maximum dispersal amount depends on the value of the goods you’re staking as collateral.
In many cases, down payments of around 20 percent may be required before securing the financing. Borrowers must repay the loan in a timely manner, or the inventory is subject to repossession. Likewise, you may be required to use specific fulfillment centers in order to qualify for the loan.
When it comes to satisfying the obligation, you’ll make monthly installments, or the lender may collect a percentage of your sales. It’s also common for a fixed fee to be charged instead of interest, resulting in APRs (annual percentage rates) often surpassing 100 percent. Further alternatives to traditional inventory financing include alternative bank lines of credit, merchant cash advances, and secured and unsecured term loans.
Now that you have the gist of how conventional inventory financing works let’s take a look at a few different popular alternatives to traditional inventory financing:
Lines of credit
Lines of credit give you access to the funds required to replenish your inventory as needed. You can use your inventory as collateral. Or, if you qualify, apply for an unsecured line to cover your operating costs.
Lines of credit require a few more steps than inventory finance loans, however, because you’ll likely have to hand the payment over to the manufacturer yourself. This can make the option more labor-intensive than traditional inventory financing, one reason why some prefer the latter over the former.
Compared to inventory financing fees, the costs to open and maintain a line of credit are usually less expensive. Credit lines typically have an interest rate rather than a fixed fee. Nevertheless, credit lines from online lenders may have higher rates – with APRs reaching as high as 80 percent or more in some cases.
Like a line of credit, you can stake your inventory as collateral for the loan. Assuming you qualify, you might also pursue an unsecured term loan that requires no collateral and shifts more risk onto the lender than secured financing.
It’s worth noting that, while the term loan gives you access to funds for attaining additional stock, unlike inventory financing, you are still responsible for paying your suppliers directly, and it may take more time to obtain the inventory itself.
Merchant cash advances
Lenders provide merchant cash advances based on the average monthly sales for businesses that serve customers, such as retailers. Business owners will receive a percentage of their average monthly sales up front and pay it back with a portion of their daily sales plus a fixed fee.
One of the primary upsides to merchant cash advances is that creditors rarely require credit checks or business seasoning. Merchant cash advances are among the most expensive business financing types, however, accruing APRs regularly reaching 300 percent.
The daily payments can be inflexible, as well. Seasoned business owners should, therefore, consider all their lending options before committing to a merchant cash advance since the costs can be high.
How to secure inventory financing
Inventory financing is an essential and viable solution to attain working capital, but it’s equally important to remember you have access to several other effective funding solutions. Inventory loans, secured by inventory and accounts receivable, are suitable for businesses operating in competitive and cyclical markets where timely financing for inventory purchases is crucial.
This approach to borrowing can help you manage cash flow and stay ahead of your industry counterparts. While inventory financing has its benefits, there are a few disadvantages, like higher borrowing costs and a lack of flexibility with your repayment options. It’s, therefore, crucial that you weigh the pros and cons and explore all your options before securing any business financing.
The experienced lending consultants at New Bridge Merchant Capital can guide you through the process of evaluating whether inventory financing is right for you. We can help you assess a diverse range of small business financing products, including alternative bank lines of credit, merchant cash advances, and secured and unsecured term loans.
Our decades of exposure to the business lending space can put your organization on the path to success, while our financing solutions deliver creative, customized options to businesses across several industries.
Searching for the right loan to secure your business inventory needs?
If you have additional questions on how to finance inventory, dial 844-228-0593 to speak with a New Bridge Merchant Capital lending consultant or apply online now. We’ll guide you through our full suite of business lending solutions that can help you take the next step towards expanding your footprint and securing stable, long-term profits.
Business and personal credit both play essential roles for small business owners. Every budding entrepreneur should know how to distinguish between these two credit types, how they might influence each other, and how to cultivate business credit from scratch.
In this brief guide, we’ll cover all you need to know about these two distinct credit reporting models, including a breakdown of establishing your business credit profile for the first time, a general overview of the personal and business credit reporting process, and more.
Personal and business credit scores: how do they work?
The personal and business credit scoring models share many similarities, but they’re actually two separate rating systems. Your personal credit ties to your Social Security Number and represents a standardized evaluation of your personal financial habits.
Your personal score, also known as a Fair Isaac Corporation or FICO score, gives lenders a big-picture overview of your individual creditworthiness. To establish a favorable personal credit profile, you’ll need to evidence a timely payment history, a low balance-to-limit ratio (typically less than 25%), and avoid negative reporting details such as foreclosures, judgment liens, and charge-offs.
High balances on your open credit lines, limited sources of open credit, and too many hard inquiries when applying for new credit can trigger low personal credit scores. Personal FICOs can vary substantially, ranging from 350 to 800, with scores 800 and above representing the highest score attainable.
A “perfect” rating generally requires a significant history of flawless credit performance. The different credit bureaus report personal credit scores, however, and each may have slightly different criteria for calculating your score.
The DUNS business score ratings typically correspond to the following numeric range:
80-100: Excellent payment history
70-79: Good payment history
60-69: Fair payment history
60-69: Fair payment history
Below 50: Unavailable or seriously delinquent payment history
This scoring system is considerably different than that of your FICO. While it is based on the same principles that apply to your personal credit, your business score looks solely at payment behavior pertaining to the enterprise itself, and not individual credit scores. Like your personal FICO, a strong business credit rating shows you’ve been making timely payments and satisfying your financial commitments over the past seven to 10 years.
While both personal and business credit scores rely on the same core rating concepts, your personal FICO ties to your individual borrower habits only. It looks at credit behaviors as they relate to your personal loans and revolving trade lines. A business credit score, in comparison, focuses solely on accounts managed by the entity itself.
A good personal credit score can open the door to better lending terms and more credit opportunities on both business and personal fronts. To ensure you maintain a good credit score, you’ll need to make timely payments on your accounts and satisfy all your financial obligations as agreed.
What is business credit, and how is it different than personal credit?
While business credit and personal credit follow many of the same principles in evaluating creditworthiness, they are, as mentioned, still fundamentally different. Your business credit profile links to your business’s name and contact information -not your Social Security Number (SSN).
If you are seeking business credit, remember to use your company name and include business contact information instead of your SSN when you apply. This approach ensures you separate the two scores and keep your business credit activities from impacting your personal credit profile.
You’ll also want to verify your assigned business credit score, if you have one, before applying for credit under your business’s name. While many companies start with personal loans and borrowing against credit cards, you’ll want to transition to building a business credit profile as quickly as possible to avoid intermingling your finances. This way, a negative credit event impacting your personal score won’t affect your business credit rating and company finances.
Cultivating your business credit begins with establishing a positive payment history over the span of years. This inevitably leads to a stellar profile. A well-documented record of making timely payments on your company-specific accounts and maintaining low overall debt levels in relation to your trade limits helps lay the groundwork for building exceptional business credit.
You can start this process of building your business credit by establishing a separate Dun & Bradstreet Paydex or DUNS number to differentiate between personal and business credit. This is the key to increasing your chances of landing an approval on your next business credit application.
You can also try creating accounts with partners and suppliers that specialize in reporting business credit information to the three main bureaus. Organizations like these will relay your payment history to the agencies and help you start developing a favorable business credit history. Additionally, banks often use reports from these bureaus to gauge a business’s creditworthiness.
If you don’t have a business credit score yet, consider the following tips to start building your profile right away:
Obtain an EIN to separate your personal and business credit
Ask your business to report to the rating bureaus
Make timely payments to all your business accounts
Dun & Bradstreet, Experian Business, Equifax Business
Impact on Loans
Affects personal loans and may influence business loans
Solely affects business loans
Documentation Required
SSN, Driver’s License, Proof of Income
Business financials, EIN, Proof of Liabilities
Timeframe for History
Generally 7-10 years
Generally 7-10 years
Importance of Timely Payments
Crucial for maintaining a high score
Crucial for maintaining a high score
Separate from Business?
Yes
Should be kept separate
Need more info on building business credit?
Seeking sound professional advice from an experienced business lending consultant is a great place to start developing and protecting your credit. The seasoned consultants at New Bridge Merchant Capital can supply you with invaluable guidance on optimal payment habits, debt levels, and the best loan products for enhancing your business credit score.
Our team will guide you through every step of the lending process by supplying you with a comprehensive list of the personal and financial documents required to open your next business loan account. For more on our premium credit and lending services, connect with a New Bridge Merchant Capital senior business finance consultant by applying online or call us now at 844-228-0593.
The Complete Guide for Sourcing Reliable Small Business Funding in 2023
Navigating the realm of small business financing is often complicated. Sourcing the right loan product for your company is hardly a simple task, especially when confronted with so many different lending options for which your business may or may not qualify.
In an effort to help streamline your search for small business funding, the team at New Bridge Merchant Capital has assembled this free, extended guide to discuss the pros and cons of several common business loan product. By the end, you should have enough valuable information to make an educated decision about how to approach your current funding requirements.
It’s likely that you’re already familiar with some of these funding options. But even if you’ve been exposed to these business lending solutions before, they’re still worth revisiting since this comprehensive review will address several frequently asked questions about leveraging external business funding.
Before we dive into the specifics of how these financing options work, let’s start by looking at some common questions business owners typically ask before financing their projects.
What do my personal and business credit scores look like?
The vast majority of consumer loan products rely on your personal credit or FICO score for establishing creditworthiness and ability to repay the loan. When, for example, you open an unsecured line of credit, as in a revolving credit card, or take a secured auto loan, the lending institution reports your payment history to the following three major credit bureaus:
Most banks and businesses that extend credit convey to the three reporting bureaus your timely payment while penalizing your score if fail to pay within thirty days of your monthly invoice. If you are late an additional thirty days on the account, your credit report will indicate 60 days past due, at which point your FICO score falls even further. This cycle repeats until the creditor finally sells the account to collections.
If you’ve been operating your business for any substantial length of time and have opened a business bank account, you’ll have a business credit score, as well. Your business credit profile serves the same purpose as your personal credit score.
Instead of evaluating your personal payment history, your business score evaluates the status of your business accounts to determine loan eligibility and interest. If you’ve taken out a business line of credit or leveraged invoice factoring or term loans to fund your business in the past, your business credit score aggregates public records, debt utilization, and your’s company’s risk profile to generate a score.
In the US, like your personal FICO score, your business credit score draws from three reporting bureaus. While Equifax and Transunion report business credit history, Experion does not. In its place, lenders rely on Dun and Bradstreet’s decisioning analytics to establish creditworthiness.
Your business and personal credit scores tend to overlap; however, there are a few key differences worth mentioning. While personal credit scores range from anywhere between 300 and 800, your business credit rates you on a scale of 1 to 100. Under either scoring model, the higher scores indicate a more favorable credit profile. Most lenders look for a minimum of 680 for a personal FICO and at least a 75 on your business score before dispersing funds.
Will the approval process involve customers and supply chain partners?
The answer to this question depends on the financing type. Take invoice factoring, for instance, a loan product in which you sell your outstanding invoices to the creditor in exchange for funding. The lender grants the financing based on your unpaid invoices.
Under this business loan program, the approval process will likely involve contact with your buyers. Of course, on the downside, you’re introducing a third party in your customer relationship. Not all business owners feel comfortable with this dynamic -especially since your creditor collects the invoice payments directly from the buyer.
Alternative, short-term working-capital solutions like invoice financing give businesses an effective means of quickly accessing the funds they need to cover their daily operating expenses.
Ultimately, the decision is up to the business owner to involve their customers with their business funding. Despite this element of customer involvement, loan programs like invoice financing can be a reliable way to access cash for the services you’ve already delivered.
How much business funding do I need?
As you engage the business loan approval process, it’s entirely plausible that the lender could agree to grant you more funds than you actually need. This might sound like a desirable problem for businesses, but remember to keep the precise objectives of the financing in focus to avoid drawing too many funds, as this only increases your borrowing costs.
Unless you’re taking out a revolving business line of credit, you’ll only end up paying interest on the funds you fail to use. The additional interest expenses of borrowing too much can quickly add up, impacting your bottom line and making it a challenge to remain profitable and access financing in the future.
What are borrowing costs?
While borrowing to drive business growth comes with countless benefits, this is hardly a good reason to ignore borrowing costs. No matter who you borrow from, you want to ensure you find the most attractive business loan offer.
Make sure to origination fees, prepayment penalties, subscription fees, and any maintenance fees between prospective lenders. This way, you won’t overpay for your loan. The extra fees you’re looking for are any costs -hidden or expressly stated- that are above and beyond the interest payments made.
All fees should be present on your loan disclosure sheet. Beware closing “estimates” or incomplete loan fee disclosures. You’re likely to discover the costs to originate your business will be considerably higher when it comes to sign for the funding.
The US Small Business Administration defines a small business as any organization with 500 employees or fewer. Assuming you meet this criterion and qualify for small business funding, the creditor will proceed to review your qualifications for your preferred loan product.
Like personal, home, and auto loans, every business loan program comes with its own unique qualifying requirements that vary from creditor to creditor. As you begin the process of applying for business funding, you’ll invariably encounter several common business funding options.
Now, let’s take a detailed look at these business lending options in more detail below:
Traditional bank financing
Before the 2008 global financial crisis, traditional banks handled the lion’s share of the national business funding. In previous decades, as a business owner, you were likely to meet with an agent in person at a local branch where you disclose your credit history and financial details before signing the final loan documents and receiving the funding you need to cover your operating costs and continue driving your strategic growth objectives.
Banks have since tightened their credit requirements across the board, but this is especially true concerning newer companies. Aside from the Great Recession of ‘08, the COVID-19 pandemic brought several significant changes to the traditional lending environment. Business loan approvals declined by as much as half by the start of 2021, just one year into the global health crisis.
The year 2020 saw less than 14% of business loan applications approved. Businesses receiving during this time were well-established with strong financials and impeccable business and personal credit ratings. Even if you meet these stringent requirements and are fortunate enough to get through all the paperwork and the dozens of hoops you need to jump through during the loan approval process, you could wait months before receiving funding.
Traditional bank financing offers a few benefits worth noting, however. Assuming you can spare the additional loan processing time, conventional bank financing typically provides the most competitive interest rates and lowest borrower costs.
Generally speaking, traditional lenders can provide businesses with more substantial loan amounts on a fixed monthly payment schedule. They also prefer to build long-term relationships with their customers with their business banking customers.
Online business lenders and term loans
Traditional banks usually offer rate and term financing, but you can also access these same loan products from online business lenders. Online lending laws vary by state. Depending on your location and credit situation, web-based alternative business financiers can present viable business borrowing solutions.
As business loan approvals at traditional banks approved 13% of all business loans during the pandemic, approval rates for online-based alternative creditors granted loans to nearly a quarter of all applicants by the end of 2020.
Online creditors can typically process your file quicker and release the funds with fewer overall requirements than conventional banks and credit unions. Not all online lenders offer term loans, however. If you are searching for a term loan, New Bridge Merchant Capital can provide you with multiple options, and we work on your behalf to ensure you find the right loan product for your business.
When you take out a term business loan, the creditor releases the funding in one lump sum, typically at a fixed rate of interest, while you repay the balance over scheduled installments over the life of the loan. Business term loans can span anywhere from one to five years, with one year being the most common term length.
The primary advantage of business term loans, whether from a traditional bank or online lender, is that they usually fund higher loan amounts than the other funding options, which we’ll touch on in further detail below. Business owners prefer term loans for their larger, one-time investments that are too hefty to pay off in the immediate term.
Other benefits include:
A fixed amortization schedule over one to five years
Financing for a diverse range of benefits and objectives
Establishes business credit
May exclude prepayment penalties
Enhances future funding eligibility
However, not all term loans waive prepayment penalties, and most require higher credit ratings for approval. Borrowing costs for loan terms spanning one to two years can be steep, and creditors often require a personal guarantee or collateral assets before granting the loan. Like most loans, expect to pay origination and other fees at closing. Always remember to compare these costs against other offers.
Business lines of credit
Business lines of credit are like unsecured consumer credit cards or home equity lines of credit (HELOC). They provide you with a revolving line of capital that you can access when you need it. Unlike term loans, lines of credit give the ability to the outstanding balance down and replenish your existing credit for future use.
For illustration purposes, let’s assume you’re taking out an $80,000 business line of credit. Once approved, unlike a term loan, which is dispersed in one lump sum and paid back over a specified time, you’re entitled to draw funds up $80,000. Likewise, once you draw from your business line of credit, there is no amortization schedule or specified maturity date. You just have to make the minimum monthly payment.
So, in other words, like consumer credit cards, a business line of credit requires companies to pay interest on any outstanding balance they carry. Business owners may qualify for lines of credit with less-than-perfect credit, but they should expect to pay higher interest rates. Business lines of credit lack a fixed repayment schedule, making the loan interest more expensive than term loans, even for those with A credit.
Other details to keep an eye on when applying for a business line of credit are the fees associated with opening and maintaining the line. While you’ll almost always pay interest on the funds you withdraw, unlike term loans. In most cases, your personal and business credit ratings determine how much you can draw from your business line of credit.
In the unlikely event that you can’t repay the balance, depending on whether or not the financing was collateralized, a defaulted credit line could place your business at substantial risk. Like revolving consumer trade lines, it is easy to run up a high balance that can be expensive to repay and take a substantial time to reduce.
Lines of credit help you save on borrowing costs, however. You only pay interest on the funds you use, and you don’t have to originate a new loan to access working capital when you need it.
Merchant cash advances
Businesses that deal substantially in credit card transactions benefit from merchant cash advances the most. Lenders that offer merchant cash advances provide funding to companies in exchange for their future card receipts. Let’s assume the creditor decides to advance you $100,000. The lender will then request a percentage of your monthly credit card sales until you repay the original loan balance.
Typically, merchant cash advances serve as short-term borrowing solutions, and the repayment period rarely exceeds 12 months. Generally speaking, although terms and conditions can vary from bank to bank, the lending institution will aim to recoup around 10% of your monthly credit card sales until as payments for the loan.
The principal upside to merchant cash financing is the short time it takes to process your loan application and disperse the funds. You’ll find this financing option includes less paperwork, there are no collateral requirements, and you can receive the funds in as little as one week. The amount you pay every month is determined by your credit card purchases for the month, so there is no fixed repayment schedule.
High annual percentage interest rates and borrowing costs are among the main drawbacks to merchant cash advances. Funding times for these types of loans are fast, however, and the approval requirements are lax when compared with the funding options listed above.
Merchant cash advances offer a great tool for covering your expenses quickly after a financial shortfall. But keep in mind the repayment period is unfixed, and you’ll have to deal with reduced cash flows until you repay the original loan balance in full.
Small Business Administration loans
Small Business Administration (SBA) are similar to Federal Housing Authority (FHA) loans in the sense that they’re government back and insured financial instruments. Since the government guarantees the loans and they don’t hold all the risk, lenders are usually amenable to approving businesses with riskier credit profiles, or they may consider funding smaller businesses that lack an extensive professional track, as long as they have two years of seasoning.
SBA loans can be an effective funding solution for business owners with less-than-perfect credit or no credit history at all, but there are a few caveats to SBA loans worth mentioning.
The cost to take out an SBA loan is usually more competitive than the alternatives. The interest rates are low, and the repayment terms are longer than other business financing options. Unfortunately, the SBA loan application process is rather involved, and, again, the loan requires you to have been in business for at least two years.
When you apply for an SBA loan, you should expect several weeks to pass before the final approval. Under most circumstances, the SBA requires you to pledge at least some collateral in exchange for the funds.
Business owners can also access several business grant programs. After doing a bit of legwork, you shouldn’t have too much trouble finding grant money to fund your business if the requirements.
Federal, state, and private agents are potential sources for business grant funds. The best part about grants is they’re not loans, and there’s no requirement to pay them back as long you fulfill the conditions of the grant.
We touched upon invoice financing in a prior section. But we didn’t want to leave it off the list. To reiterate, lenders grant funding to small businesses that demonstrate unpaid invoices sufficient enough to borrow against their receivables.
If you’re interested in pursuing invoice financing to fund your company, or any of the business financing options discussed above, consider partnering with New Bridge Merchant Capital.
We’re an alternative business financier offering smaller companies like yours fast and secure funding solutions that ensure you have enough working capital on hand to cover your operating expenses and drive organizational growth.
Get started with New Bridge Merchant Capital by submitting your details online. Or, to get a better idea of what you qualify for, connect with one of our senior business finance consultants by phone now by dialing 844-228-0593.
Business ownership comes with many challenges, especially when you lack a large cash reserve for an emergency. Whether you have unexpected emergencies or need to cover everyday expenses, a business line of credit can help manage any short-term cash needs. What is a business line of credit, and does it differ from other types of loans? Here are a few points to consider when you need cash for your business.
What Is a Business Line of Credit?
Think of a business line as a credit line similar to a credit card. With a business line of credit, business owners often have instant access to the funds. This line of credit is usually dispersed through the business’s checking account or credit card. Like a traditional credit card, the amount will decrease as you draw on the cash. When the amount is paid off, the line of credit restores the available funds. Also, a business line of credit will have an interest rate that applies to any borrowed money.
These lines of credit are based on a review of the applicant’s credit history and score. The interest rate and limit will depend on personal and business credit. Additionally, the owner must renew the credit lines on an annual basis. Owners can use these business lines of credit to help fund any short-term expenses, such as:
Covering payroll
Cash flow emergencies
Seasonal slowdown
Building inventory
Financing accounts receivable
Like any business account, owners should only use these credit lines to fund business-related expenses.
How Does a Business Line of Credit Work?
When a business needs short-term funding, a line of credit may be a good option. As seen with the recent pandemic, unexpected challenges can happen. In some instances, a business may need more cash to pay utilities, rent, or payroll. When the business’s cash flow returns to normal, the owner can repay all the borrowed money with interest.
The interest rates can be fixed or variable. A fixed interest rate will stay the same over the life of the loan, but those variable rates can fluctuate depending on the overall rates in the country. Before applying for a business line of credit, it is crucial to know the type of interest rate. A fluctuating interest rate could be detrimental to the financial health of a business.
Generally, lenders will allow a business owner to repay the borrowed amount without fees. In that case, the business can avoid paying additional interest on the loan. There is often a grace period where no interest will accrue on the borrowed amount. Before applying for a line of credit, business owners must look at the payment schedules. Typically, lenders will require weekly or monthly payments to satisfy the loan amount.
Additionally, many of these lines of credit do charge fees. They can include:
Application or origination fees
Withdrawal fees
Late fees
Inactivity fees
Account maintenance fees
With these lines of credit, owners can draw on the funds as long as there is credit in the account. Like any loan, interest rates and other fees could add to the total amount owed on the credit line. In some situations, business owners can find themselves in financial trouble when relying on these lines of credit for their primary business funding.
What Is the Difference Between an Unsecured and a Secured Line of Credit?
A business line of credit may be secured or unsecured. With a secured line, the lender will require some collateral from the business, usually in the form of property or inventory. If the company cannot repay the line of credit, the lender can seize those assets.
On the other hand, an unsecured line of credit will not require any collateral. While assets are not used to secure the loan, a personal guarantee must be made, holding the owner liable for the borrowed amount. A lender can also put a lien on business assets if the owner fails to repay the loan.
With all that in mind, business owners must carefully examine the lender’s terms. Not repaying on a line of credit could affect the individual’s personal and company credit for years to come, even leading to a seizure of assets.
Getting a Business Line of Credit
Business owners who apply for a line of credit will notice the process is similar to that of a credit card or loan. There are a few steps to follow. First, the owner needs to know how much funding is required. Many business lines of credit range from $2,000 to $250,000. While it could be tempting to overborrow on these lines, the business will be liable for unpaid funds. In many situations, the lender allows a borrower to request an increase in the line of credit.
The eligibility for the loan will depend on a couple of factors, such as personal credit score and monthly business revenue. Most lenders will have a minimum credit score of at least 680, but some will still offer a limited line of credit for those with lower scores. Along with that, lenders want to see a specific minimum monthly revenue. Without that, securing a business line of credit could be challenging.
Business owners will need documentation for the line of credit during the application process. These pieces of information can include articles of incorporation, personal and business bank statements, business licenses, profit and loss statements, and other financial statements. The type of documentation required will vary depending on your lender.
Business owners must correctly fill out these applications. Any error in the business documentation, loan amount, or personal contact information could delay approval. An application should be up-to-date and accurate. Otherwise, it could lead to a denial from the lender.
Should You Apply for a Business Line of Credit?
A business line of credit can help in the short term, but is it a wise financial decision? That answer will depend on the business’s creditworthiness and need for funding. Business owners must approach any credit with some caution. Interest and fees can quickly accumulate, leaving the owners liable for additional business debt. Also, borrowing beyond the company’s repayment means could be tempting.
However, business lines of credit can help bridge any gaps in cash flow. A line of credit provides security and peace of mind for eligible business owners. You must approach any credit with caution to ensure the financial health of your business. Once you understand the basics of a business line of credit and how it works, you can decide whether it is the right choice for your company.
Find Funding from a Leading Lending Company
At New Bridge Merchant Capital, our reputable funding and exceptional customer service have made us a trusted leader in the business finance industry. If you need help selecting the right loan or line of credit for your business, contact us.
