What Business Finance Solutions Are Available for Your Company?
Every business needs to borrow money at some point. You may need access to extra capital to fund growth, cover expenses when sales slow down, or meet an unexpected bill. The good news is that there are more business finance solutions available to company owners than ever before, but identifying the right one can be a challenge.
Read on to discover which financial solutions are available to small business owners, where you can apply for funding, and how to choose the right option for your company.
9 Business Finance Solutions Your Business Can Apply For
Here are nine popular business finance solutions available today.
1. Small Business Loans
With a small business loan, like a traditional bank loan, you receive a lump sum of capital upfront and agree to repay it with interest over a set period of time. Repayments are usually monthly, and your lender may wish to set up autopay from your bank account.
Small business loans can be very competitively priced if you and your business have a good credit rating. You can use this type of finance for a wide variety of purposes, like purchasing inventory, funding expansion, and paying for equipment and machinery.
On the downside, you may have to wait for your money to arrive because there is often a lot of paperwork and procedures involved in getting a loan from a bank. Startups and businesses with less-than-perfect credit may struggle to find a lender.
If you want to borrow a larger sum of money, ask your lender about a secured small business loan. To qualify for one, you need to offer collateral, like equity in a residential or commercial property. Bear in mind though that if you default on a secured business loan, the lender will take possession of your collateral and sell it off to clear any outstanding balance.
2. Asset-Based Loans
Asset-based loans require you to put up your company’s property as collateral. The types of security lenders accept include your unsold inventory, any securities you own, any invoices that are unpaid, and any machinery and equipment you own outright.
These types of loans can be competitive for businesses that own valuable assets but struggle with cash flow. They’re an alternative to taking out a traditional secured loan if you don’t like the idea of offering property as collateral.
The downside of this type of loan is that you won’t be able to borrow up to the full value of the assets you pledge. For highly liquid assets like securities, you may be able to borrow up to 85% of the value. For less liquid assets that take longer to sell, like machinery and equipment, the maximum may be as low as 50%. You also risk losing the assets if you fail to repay the loan.
3. Business Lines of Credit
Business lines of credit work similarly to business credit cards. You have a maximum amount of money you can withdraw from — your limit. When you make a repayment, that money becomes available to borrow again. At some point, you will need to get your balance back to zero, which may be, depending on the lender, between 18 months and five years after the facility has been opened.
Upsides to business lines of credit is that you only pay interest on the money you use. So if you have a $20,000 business line of credit and withdraw $5,000, you’ll only pay interest on the $5,000. Having access to a pool of capital on demand is also useful for managing your cash flow. The speed of approving a business line of credit and the disbursement (paying the cash into your account) can be quite fast.
On the negative side, the interest rates you pay on business lines of credit are often higher than you’d pay on a term loan because of the flexibility you’re gaining. You may also have to pay other charges like origination fees, monthly maintenance fees, and payment processing fees with some lenders.
4. Working Capital Advances
Working capital advances are another popular business finance solution. They provide companies with access to cash to meet short-term costs like payroll, rents, inventory purchases, and more.
A key advantage of working capital advances is their very quick approval and disbursement processes. They’re useful if you need money right away to cover an immediate expense or take advantage of a time-sensitive opportunity.
Downsides to working capital advances are that they can be expensive, and you don’t get long to repay the money you borrowed. This can put pressure on your cash flow if your revenues fall short of expectations. It’s best to choose this financing option when you know you have an influx of cash coming in just around the corner that can be used to repay it.
5. Equipment Financing
Companies use equipment financing to buy the machinery or tools they need for their business. For example, a manufacturing company might use an equipment finance loan to purchase assembly line machinery so they can increase their production capacity.
Equipment financing can be easier to obtain than standard business loans because the machinery or tools you’re purchasing is also the collateral for the loan. Your lender can repossess it if you don’t keep up with your payments.
When the term of your facility comes to an end, you can either:
Return the equipment (essentially turning the finance agreement into a form of leasing).
Upgrade to brand-new equipment.
Make one final payment to take full ownership (if your lender agrees to it).
The main drawback of equipment financing is that the machinery and tools you obtain with it may become outdated before the term of the facility ends. You may also need to supply a down payment of 20% or more on the equipment.
6. Commercial Real Estate Loans
Businesses use commercial real estate loans to buy business property like office space, warehouses, or retail stores. Over time, this can be a lot cheaper than renting property from a landlord.
Commercial real estate loans often come with much longer repayment schedules and lower interest rates than other business loans. As the balance of the loan decreases and the value of the property goes up, you also get the opportunity to build equity over time.
On the downside, you’ll often need the funds for a down payment to obtain a commercial real estate loan. The application process can be lengthy and complex too, taking months to complete and requiring you to pay fees on property appraisals and other services.
7. Invoice Financing
Invoice financing (also called invoice factoring) is a way to borrow money against your accounts receivables — in other words, the invoices you’ve issued that customers have not paid yet. You receive a percentage of the invoice amount upfront, usually 70% to 90%. When the customer actually pays the invoices, you receive the remainder minus a factoring fee.
Invoice financing can greatly improve your cash flow, as it gives you much earlier access to cash tied up in your unpaid invoices. It's particularly useful for businesses that offer long payment terms from clients.
However, this business finance solution can be expensive. Some factorers will require you to submit all your invoices to them, and others will require a personal guarantee. And unless you have non-recourse factoring, your lender may require you to cover any unpaid invoices.
8. Merchant Cash Advances and Revenue-Based Financing
Merchant cash advances are short-term loans made against your future credit and debit card revenues. You’re paid a lump-sum upfront, and then your lender takes a percentage of the revenue that you receive each business day from your payment processor.
Merchant cash advances are useful for companies that want funding in a hurry. Also, as the repayment you make is based on a percentage of your card transactions, you pay less on quieter business days. This form of business finance solution also requires no collateral or personal guarantee.
However, merchant cash advances can be very expensive, with high effective interest rates (called a factor rate). If your business operates on low profit margins and you experience a prolonged dip in sales, you could run out of cash.
Revenue-based financing is similar to merchant cash advances, but when you make a repayment, it’s a percentage of your overall revenues and not just revenues transacted by credit or debit card.
9. Bridge Loans
Bridge loans are a form of short-term finance designed to bridge a gap between a current expenditure need and a future source of funding. They’re used by businesses for a variety of reasons; however, their best known use case is allowing for the purchase of a new property before having sold an existing one.
Bridge loans also provide quick access to capital and are ideal for taking advantage of time-sensitive opportunities. Lenders consider each case on its merits and are willing to make loans on a wide range of assets.
The main downside of bridge loans is that they can be expensive, with both higher interest rates and associated fees. To secure the best interest rate, you may need to offer collateral, which the lender can sell if you don’t repay the loan.
Where Can I Apply for Business Financing?
There are several sources you can turn to for business financing:
Banks and credit unions: Most banks and credit unions offer small business loans and a range of financing options, especially to their account customers. However, most require borrowers to have high credit scores before they approve an application. Borrowers with lower credit scores should consider applying for an SBA loan through their bank or credit union if it is part of the SBA network.
Online lenders: Online-only lenders, like Backd, offer a range of different business finance solutions direct to company owners. Many have lower credit requirements than standard banks and credit unions, meaning your application is more likely to be accepted. Plus, online lenders often have faster turnaround times.
Brokers: Credit brokerages are financial services firms that connect lenders and borrowers. Brokers traditionally have a panel of lenders, and when a borrower applies for funding, they place the facility with the lender most likely to approve their application.
Peer-to-peer platforms: Peer-to-peer lending websites match investors (including individuals, hedge funds, and asset managers) with companies seeking funding. If you pass the platform’s underwriters, your loan proposal will then be offered to investors to fund.
Crowdfunding platforms: Crowdfunding platforms are similar to peer-to-peer platforms but differ in the type of investor they attract (mainly individuals) and the rewards offered to investors. The rewards can include equity, early access to products, or exclusive perks like branded merchandise.
Factors to Think about When Choosing a Business Finance Solution
When deciding which business finance solution is right for your business, take the following into consideration:
Finance type: The best type of finance package is one where you can afford the repayments and clear the debt as soon as possible without adversely affecting your business.
Interest rates and fees: The lower the interest rate, the lower the cost of your credit facility. Some financial products require upfront payments, like broker fees and set-up fees, so you’ll need to make sure you have the cash available to cover them when you apply.
Funding available: The amount you can borrow varies depending on the type of finance package you apply for. For example, secured small business loans will generally offer more than a merchant cash advance. Choose a product that gives you access to all the funding you need.
Turnaround time: Consider how quickly you need the funds, and choose a lender and solution that can meet your time frame.
Eligibility requirements: Different types of business finance solutions and lenders having varying requirements, such as minimum credit scores and time in business. For example, as a startup you may not have as many options as a business that’s been around for a few years.
Collateral and guarantees: Some lenders may require you to put up collateral when you apply for a finance facility. Others may require you to provide a personal guarantee, making you liable for repayment if the business fails. Only commit to what you feel comfortable with.
Apply for the Right Business Finance Solution for Your Company
The decision you make on which lender and financial product you choose will affect your cash flow until you’ve repaid the facility in full. Get it wrong, and it could make running your business a lot harder because you’ll have less cash available to you. Get it right, and it may provide you with the boost you need to secure and grow your business in the long run.
With Backd, U.S. businesses with $100,000 in monthly revenues and credit scores of 625 or more can access our:
Business line of credit: Up to $750,000 capital in reserve to grow your business (at least two years in business required)
Working capital advance: Up to $2 million over a period of up to 16 months (at least one year in business required)
Apply today and you could be funded as soon as tomorrow.
