By Adam Stettner
Every business needs money at some point, it’s really just a matter of when. You might need to pull through a slow season, expand products and services, or launch a new digital marketing campaign. Cash flow issues and unforeseen expenses can unexpectedly place you in the red. Therefore, it pays to know the available options for working capital and if they’ll work for your specific situation.
Avenues for obtaining capital vary depending on business needs, length of the loan and the specific terms. Here’s a rundown of a few common choices to consider:
Traditional bank loans offer long terms with fixed payments and some of the lowest interest rate loans available. Banks also require strong personal and/or business credit scores, a personal guarantee, collateral, and solid three-year financials.
Pros: Banks are a good fit if you don’t need the money immediately.
Cons: Applying takes considerable time – about one to three months. It can also be difficult to acquire these loans, as only 30% of small business owners who apply are approved.
Small business line of credit
This type of loan establishes a maximum loan balance for the business owner. This arrangement allows the borrower to draw and repay on the funds as long as they don’t exceed the maximum allowed amount. In this type of arrangement, you only pay interest on the amount used and collateral is usually not required. This flexible option is great for day-to-day costs, meeting payroll and surprise expenses.
Pros: It’s quick access to money with small payments and it can build your business credit score as you make the payments on time.
Cons: A personal guarantee is required and it is tied to your personal credit. This also hinders your ability to borrow from other lenders. Interest accrues quickly if balances aren’t paid on time, and there are initial up-front fees to obtain the line.
Business Credit Card
These cards are designed for business owners. They provide a revolving line of credit with a set limit in order to make purchases and withdraw cash. A small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You may be able to get one through your bank.
Pros: It’s a convenient piece a plastic you can carry around with you for day to day purchases.
Cons: There are annual fees, cash transfer fees and balance transfer fees. The interest rates are high on unsecured debt. Interest compounds rapidly every day and because payments are very minimal, it can create debt that is overbearing on businesses. These are not designed to finance business, just to be used for small everyday purchases.
The majority of small to medium-sized businesses aren’t bankable for one reason or another. Alternative lenders have filled the financing gap for many of them. They evaluate the cash flow, growth potential and overall strength of the business. And as a result, alternative loan options have much higher approval rates. Typical arrangements are:
- Small Business/Working Capital Loans – These are usually more flexible than banks when it comes to loan approval and repayment schedules. They are able to provide cash much quicker than traditional banks can. Usually no collateral is required to apply.
- Merchant Cash Advance -This is technically not a loan, but an advanced based lump sum of money. The funds are usually dispersed quicker than other traditional loans. Payment amounts will fluctuate depending on sales.
Pros: It’s an easy approval, quick access to cash with no collateral required. Programs are designed on an individual basis with no effect on personal credit. You can also re-up at the mid payment point.
Cons: Generally alternative lenders aren’t open to long-term financing, with terms no longer than 12-15 months. They also lend in much lower dollar amounts than other types of financing.
SBA Business Loans
The Small Business Administration offers a variety of loan programs for very specific purposes. Here are two viable choices:
- General Small Business Loans – The 7(a) Loan Program is SBA’s most common loan program. Key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates.
- Real Estate & Equipment Loans: CDC/504 – This program provides financing for major fixed assets such as equipment or real estate.
Pros: They are cheap with minimal payments. Borrowers are able to provide a lower up-front equity injection and get much longer loan terms and pay off schedules in comparison with conventional commercial loans.
Cons: The application/approval process can take up to six months and a clean credit history is required. Limits are capped by business income and it also hinders your ability to borrow from other lenders simultaneously.
Weighing the options for working capital can help you make an informed decision, and it’s a fiscally healthy way to approach any funding process when the need arises.