Here we are going to look at the top 10 types of common business financing programs. Not all are loans. Some are considered selling future receivables where credit scores are not a factor in the approval decision.
1. Bank loans and lines of credit
Traditional bank loans and lines of credit are a staple in business financing. Most are reserved for businesses that have been in business for three years or more, have at least $35,000 a month in gross revenue, and have excellent business credit and bank ratings. The rates are low and the terms are long if you and your business qualify. The personal credit of the business owners will also need to be excellent.
2. SBA loans
The SBA does not make loans. They guarantee a portion of the loan in the case of default so the risk to the actual lender is less. They are designed to help small business owners get approved for loans where the bank would not on their own take the full risk. These loans cap at $5 million dollars and the credit history of the business and its owners still need to be excellent.
These loans cap at $50,000 and are mostly designed for startups. If you have a solid business plan, experience in the industry, and excellent personal credit this may be a great option for you. Here too the SBA guarantees a portion of the loan making it less exposure for the lender and faster to get an approval decision for you.
This is a smaller version of the 7A in that it approves quicker and the amount caps at $350,000. The approval guidelines and interest rates are about the same.
3. Business credit cards
Every business owner and their businesses should be using these. Credit cards are available to startups and existing businesses. The credit approvals are lower than bank or SBA loans. No business plan required. They approve based on stated income so no financials or tax returns required. Each owner of the business can be approved individually meaning you can combine the approvals of 2, 3, or more owners. And they are revolving accounts so you can use them over and over again for years.
4. Equipment financing
Too many business owners spend valuable working capital on equipment items not realizing that almost any type of equipment can be easily financed. Credit requirements are normally lower because the equipment is part of the security and repayment terms can be longer as the amounts get larger. Interest rates are normally 9% to 36% depending on the type of equipment, industry, resale value, business credit, and the owner's credit. Still a good way to conserve cash flow and have use of the equipment your business needs.
5. Invoice financing
Most businesses have invoices out with other businesses for payment. These can be Net 15, 30, or 60-day terms. Then you have to collect on your invoices. Or you can sell your invoices to a factoring company that will normally pay 97% on the dollar. You get your money right away and they take on the task of collecting on the invoice. If you factor invoices monthly you end up paying 36% a year interest. However, you eliminate the need to have an account receivable staff so you save on that expense. Can be a good way to get your invoice money much quicker.
6. Vendor credit
There are over 500,000 businesses in the United States that are extending some type of business to business credit. There are only about 5,000 of those businesses reporting your credit payment history to the business credit reporting agencies. This has the advantage of conserving cash flow for products and services your business needs and it also has the advantage of being either on or off books business financing meaning it can either show up on your business credit reports if you want it to or it can not be reporting.
7. Online loans
A lot of these types of lenders have popped up over the last ten years. Their applications are fully online and their approval amount and terms vary with the status of the business, the business credit scores, and the personal credit of the owners. Rates are typically between 12% and 30% depending upon those factors with amounts in the $35,000 and under range being the most common.
8. Non-SBA Micro-loans
These are loans that typically max out at $50,000. Here the SBA has made grants to community-based development companies or non-profits for the purpose of getting that money out to small community-based businesses to support local jobs and local economies. These lenders have full authority to make their own credit decisions without seeking the traditional SBA approval which can make the process much quicker. They normally want to see a solid business plan highlighting what the business will do for the local community and see the creditworthiness of the business owners.
9. Merchant Cash Advance
This is a very quick but very expensive method of business financing. Here you are selling future credit card receipts and paying it back at a percentage of each new credit receipt. The rates are typically 1.3 to 1.4 paid back for each dollar borrowed. The repayment term is short in the 7 to 9 months range. This makes the effective interest rate somewhere between 50% to 70%. However, if you can make money with this expensive money then it may be worth it. The amount extended is normally 1.5 to 2 times your average monthly credit card receipts for the prior six months.
10. Revenue Based loans
These a similar to merchant cash advances but the advance is based on the last six months of business bank statements. The rates, term, amount extended are all about the same as the MCA but the repayment is by daily ACH withdrawal from your business checking account.
Inside the Level4Finance business success system, you will have access to step-by-step comprehensive business credit building instruction to obtain everything you need to build and maintain strong business credit scores and to pre-qualify for a spectrum of business loans.