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Obtaining a Surety Bond to Land a Federal Contract

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A record number of federal contracts for small businesses are expected to be issued throughout 2023 due to the Infrastructure Investment and Jobs Act. Businesses, however, shouldn’t celebrate just yet –many of them could be excluded from competing for lucrative federal projects due to constrictive bonding requirements. 

This was evidenced in 2022 – according to the US Small Business Administration, a record 27.2% of federal contracts, or $154.23 billion, were awarded to small businesses, an $8 billion increase from 2021. While this may seem like good news for Main Street businesses, the number of small businesses winning those contracts dwindled down to just over 71,000 companies from roughly 125,000 just a decade ago, as more well-established companies with greater access to surety bonds were awarded contracts.

The federal government also failed to reach its goal of awarding a certain percentage of those contracts to women- and minority-owned small businesses, as well as small businesses operating in underserved communities. One of the main reasons is that those businesses have a more difficult time in getting approved for and putting up the required capital to purchase surety bonds. 

What are Surety Bonds?

When public works projects were created during the New Deal to combat unemployment, the federal government passed the Miller Act in 1935. This is a federal statute that requires companies contracted by the federal government to provide payment and performance bonds to ensure that the government could recoup any losses if the contracted company defaults on its work or goes well over its budget. 

Are Surety Bonds Cost Prohibitive?

These bonds are typically equivalent to the value of the contract, and most state governments also require surety bonds for local construction projects. The problem for small businesses is that they are typically required to pay a premium for the bond. While the premium is typically a small percentage of the total amount of the bond, this amount can be exorbitant for small businesses that don’t have a lot of available cash. 

For example, if the total value of the bond is $1 million and the upfront cost is 5%, that would be $50,000 that the small business would have to put up. That amount could be prohibitive for small construction companies that already operate on a thin profit margin, especially at a time when inflation and labor costs are rising. 

If your company doesn’t have a lot of cash on hand to put up for a surety bond, one possible solution is to establish a line of credit so that your business has money at its disposal to pay for the bond.

You Must Qualify

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Your small construction firm will keep getting turned down for federal contracts until you make sure you qualify for some type of surety bond.

Most large insurance companies offer surety bonds, and there are hundreds of small companies that specialize in offering them. Additionally, the SBA has a surety bond program for emerging small businesses that may find it difficult to qualify for a bond. Similar to many of its small business loan programs, the SBA doesn’t actually offer surety bonds, rather, it will serve as a guarantor for the bond, thus making it easier for qualifying small businesses to obtain a bond and win a government contract. 

Qualifying for a surety bond is somewhat similar to qualifying for a small business loan and can be difficult for small businesses that are newly established or don’t have a long credit history. Bonding companies typically require that:

  • The applicant has the capacity to complete the project. This means that the small construction firm has the experience and the know-how to complete the given construction project. If your company is fairly new, you may want to hire workers who have worked on similar projects.
  • The applicant has good credit. Doing what you can to improve your FICO score will go a long way towards qualifying for a surety bond. Additionally, being in good standing with a lending institution will help, as bonding companies often require a letter of credit from a bank guaranteeing your financial obligation to the bond.
  • The applicant offers a promissory note. If your small business cannot get a letter of credit or has poor financials, the bonding company will often require you to write a personal promissory note guaranteeing the value of the bond.
  • The applicant puts up cash collateral. If you have a less-than-stellar FICO score, some bonding companies may require you to put up cash collateral in addition to the premium to help guarantee the bond. 
  • The applicant can handle the upfront costs associated with the project. Often, the bonding company will require that the applicant have an established line of credit to handle those costs.

Different Types of Surety Bonds 

There are several types of surety bonds that companies will have to purchase before engaging in a government construction project, depending on the terms of the contract:

Performance Bonds – Performance bonds ensure that the project owner (the federal or state government) will be compensated in the event that the contracted company fails to meet its expectations. This is the most popular, and most expensive, type of surety bond.

Payment Bonds – Bonds that ensure that workers and subcontractors on a project be compensated.

Bid Bonds – Bonds that ensure that a government agency will be compensated if the winning bidder unexpectedly backs out of the project.

Supply Bonds – These bonds ensure that the contracted company uses the money paid to it to purchase the appropriate supplies and materials to complete the given project. It’s relatively rare, however, that these types of bonds will be required. 

Be Prepared!

If your small business is seeking to compete for a government contract, it’s important to do what you can to ensure that your company can meet the basic requirements of obtaining surety bonds. One of the most important things you can do is to establish a history of completing projects on time and on budget. It’s also important to follow tips on winning government contracts, such as getting your inventory in order and researching contacts at government agencies that may be offering bids on contracts. 

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How Will Rising Rates Impact Small Business Lending?

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The Federal Reserve Bank has raised the overnight rate four times so far in 2022 to try to tame runaway inflation, with more hikes likely coming. This leaves Main Street businesses that rely on financing in a major bind – rising rates mean small business loans have become far more expensive than they were just a year ago, and that added expense creates yet another challenge for those that have already faced rising costs, a demand for higher wages and supply chain shortages, among other things.

So now that we’ve been forced to live with higher interest rates for the time being, what should small businesses do? Should small businesses hold off on plans to take out loans until interest rates come back down? What if you need financing now, despite the current interest rate environment? 

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“Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates,” says Ben Johnston. Kapitus’ chief operating officer.

Ben Johnston, the Chief Operating Officer at Kapitus, tries to decode this situation by offering valuable advice for small businesses during these difficult times. 

Borrow for the Right Reasons

With the cost of capital being especially high right now, small businesses may want to hold off on borrowing if they can afford to. Interest rates often swing wildly from year-to-year, and once the current inflationary environment begins to settle down, the Federal Reserve may start to loosen its belt once again, so it may be worth waiting until then to apply for financing. 

If you need to borrow money now, however, it’s now more important than ever to make sure you are using the proceeds of that loan to invest in a project or aspect of your business that will increase your profits. These can include growing your business with new hires or expanded inventory, or the development of a new product that is projected to increase your revenue. The increased revenue should offset higher costs of capital and will enable you to comfortably pay back the loan.

“Small businesses should always weigh the cost of the capital that they are seeking with the expected economic return of the project they are financing,” said Johnston. “If the project provides sufficient returns at the cost of capital being offered, then they should move forward with the project. Unfortunately, as interest rates rise the number of economically viable projects declines, meaning that many small businesses will choose to hold off on financing growth until rates either come down or revenue and expense prospects improve.”

Fix Your Credit Score

Despite the fact that the prime rate is now far higher than it was a year ago, one fundamental rule of

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Fixing your business’ credit score is especially important in a high interest rate environment.

lending still applies: the higher your credit score, the less you will have to pay in interest rates. As the COVID-19 pandemic winds down, however, many small businesses may have taken hits to their credit scores given the COVID-related recession the US endured in 2020 and 2021. 

“Most lending companies are seeing their own cost of capital increase, and over time, this rise in interest rates can be expected to be passed on to small business customers in the form of higher rates as well,” said Johnston. “Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates.”

If you struggled during the pandemic and your FICO score decreased as a result, don’t worry – fixing it may not be as daunting of a task as you may think. There are some basic steps you can take to possibly improve it:

  • Talk to your creditors. If you have any outstanding debt, it’s worth contacting your creditors to see if you can modify your payment structures. Remember, creditors would much rather negotiate a new payment arrangement with their borrowers than have to send the debt to collections. Once a new arrangement is agreed upon, you can comfortably make payments without having any late payments show up on your credit score.
  • Pay off or lower your revolving debt. If you can afford to, make sure your debt on your line of credit or business credit card is 25% to 30% of your spending limit, as that is the credit utilization level that credit agencies prefer to see. Not only will this reduce your interest rate payments, it also lets potential lenders know that you can properly manage your debt.
  • Encourage your suppliers to give you trade references. Having a strong payment history with your suppliers will not be reflected on your credit report. However, your suppliers can give you a trade reference: a verbal or written notice to credit reporting agencies such as Dunn & Bradstreet, Experian Business or Equifax stating that you’ve always made payments on time. These positive references may increase your score and will be looked upon favorably by potential lenders. 
  • Try to increase your credit limits. If you have a line of credit or a business credit card, increasing your limits on them can increase your credit utilization ratio and help boost your FICO score. 

Consider Alternative Lenders

Higher costs of capital means that traditional banks will have to take on more risk when they lend to small businesses. As a result, many banks will have stricter requirements for small businesses seeking financing, thus making it harder for Main Street businesses to qualify for loans. This may make alternative lenders – non-bank lenders such as Kapitus – more attractive. 

Alternative lenders often require less paperwork and fewer requirements than banks for small businesses seeking financing. Plus, interest rate hikes often don’t affect the cost of capital from alternative lenders as much as they do traditional banks. 

“Banks too are seeing the effect of higher interest rates on their cost of capital and all lenders are looking warily at the economic uncertainty in today’s economy,” said Johnston. “Given this uncertainty, we can expect banks to reduce their exposure to small business loans in the coming months, and to continue to increase the cost of capital offered to small businesses. This means that Kapitus and other non-bank small business lenders will play an even more important role in providing small businesses with the capital they need to grow and weather uncertainty in this challenging economic time.” 

Johnston added that he “absolutely” expects that alternative lenders will be more attractive in the small business loan market than traditional banks. “I expect that non-bank small businesses lenders will be slower to raise rates to strong credit quality customers and will be less likely to tighten their credit boxes significantly, making small business lenders a critical source of capital in the coming months.”

Be Prudent

It’s no secret that we are living in uncertain economic times. Small business owners that rely on financing would be wise to shop around for the best rates, lower their revolving debt and seek financing products, such as SBA and term loans, that typically offer the lowest costs of capital. As the country is officially in a recession, small businesses should seek ways to tighten their spending and maximize profits. 

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Pros and Cons of a Secured Business Line of Credit

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If your business needs to have fast access to cash, having a business line of credit (BLOC) in place can be invaluable. Before you apply for one, however, one of the first questions you need to ask is whether a secured or unsecured business line of credit is for you. Both options come with pros and cons, so it’s crucial that you carefully consider which is best for you.

What is a Line of Credit?

Secured and unsecured lines of credit are types of financing that give your business the flexibility to borrow funds at will with pre-agreed upon payback terms and credit limit. Whether you need cash to meet a business emergency or to meet payroll during the offseason, you can use the borrowed money to finance any aspect of your business that you see fit. 

Secured and unsecured lines of credits, however, have different risk profiles for the borrower, so they  usually come with different limits and interest rates. 

What’s the Difference? 

A secured BLOC is a form of financing that requires collateral to ensure that you pay back the borrowed amount, while an unsecured line of credit does not require collateral. 

An unsecured line of credit typically requires a high FICO score, a certain number of years in business (usually at least two years) and a strong cash flow. This type of line of credit normally ranges between $10,000 and $100,000, depending on the needs of the borrower, and comes with a variable interest rate often pegged to the prime rate plus several percentage points.

A secured line of credit, while typically reserved for business owners with lower credit scores, requires borrowers to put up valuable assets as collateral. That collateral can include real estate, equipment, present and future invoices and inventory. If you operate a pass-through business, you may even have to put up personal assets such as your house or personal savings. That said, however, a secured line of credit does have distinct advantages:

#1 Secured Lines of Credit Usually Offer Lower Interest Rates

The Federal Reserve has hiked interest rates five times so far this year with more probably coming, so cost of capital is a major concern for borrowers. Since a secured line of credit is collateralized with tangible assets, the lender takes on much less risk when providing this type of loan, so therefore, depending on your FICO score and the amount of collateral you put up, there’s a good chance that the interest rate on a secured BLOC could be lower than an unsecured one. 

#2 Your FICO Score can be Lower

Almost all lenders consider a high credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to secure a loan may be a frustrating experience. Since a secured BLOC is backed by assets, your chance of getting approved with a lower credit score is far higher than if you were applying for an unsecured line of credit.

#3 You Could Secure a Higher Line of Credit

A secured line of credit could come with a higher limit than an unsecured one.

While not in all cases, an unsecured BLOC usually tops out at $100,000 to limit the risk of the lender. Even for small business owners with great credit who are able to get approval for an unsecured BLOC, they often have to put up collateral if they want a limit exceeding $100,000. Depending on the value of the collateral being put up, a small business owner is more likely to obtain a higher limit with a secured BLOC than an unsecured one. 

#4 Secured BLOCs May Have Longer Repayment Terms

Securing your line of credit brings a host of benefits, and one of them is that your repayment term will usually be longer than with an unsecured BLOC. Putting up real estate as collateral can be especially beneficial, as the lender may increase the repayment term and the limit since the value of real estate usually increases over time. In some cases, the repayment term on an unsecured BLOC can be up to 10 years, whereas with an unsecured BLOC, it is usually far less. 

Cons of a Secured BLOC

While a secured BLOC does have its advantages, there are also potential drawbacks to consider before applying for one:

#1 You Risk Your Most Valuable Assets

To get approval for a secured BLOC, you need to put up valuable collateral. These can include your home or a highly valued piece of property. If your business relies on expensive pieces of equipment such as tractor-trailers or medical devices, or the future payment of invoices, those assets could be put up as collateral but would be at risk if you fail to pay off your debt. Therefore – just as you would with a personal loan – it is crucial that you make sure you can meet the repayment terms before you take out a secured BLOC.

#2 More Paperwork is Involved

You’ll probably need to consult with an attorney when applying for a

A secured line of credit will involve a lot of paperwork, as well as advice from a business attorney.

secured BLOC. That’s because you will need an expert to hash out the terms of repayment, especially if calamity hits and you are unable to pay back the amount you borrowed. An attorney can negotiate terms of what assets you will have to surrender in case you default on payments. 

#3 Interest Rates Vary

While the interest rate on a secured BLOC is generally lower than an unsecured one, the rate will still be variable, meaning that it will fluctuate as interest rates fluctuate. This underscores the importance of making sure you understand the exact terms of the secured BLOC before you take one on. 

A BLOC is not a Credit Card!

There is a common misconception that a line of credit is like a business credit card, but don’t be mistaken – the two are not the same. Yes, they both provide a line of credit and only charge interest on the amount you borrow. However, a line of credit ideally should be used for bigger, foreseeable expenses than a credit card since the interest rate is typically lower, and in some cases, you won’t get the cash from a line of credit for 24 hours. Plus, lines of credit have term limits and different repayment terms than a credit card. 

A business line of credit is a great tool if you need to get new office furniture or appliances, if you need cash for a business emergency, or if there is unexpectedly high demand for one of your products and you suddenly need to purchase more inventory. On the other hand, a business credit card is handy for sudden cash needs, such as picking up the tab for a business meal, or if your flight gets canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks such as travel miles, but generally charge a higher interest rate than a BLOC. 

Carefully Weigh Your Options

A secured BLOC can give you great benefits if you need access to cash to grow your business or for an emergency. However, you need to carefully consider the terms of this type of financing, and like you would with your personal finances, you shouldn’t spend more than you need to.

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How to Handle Another Painful Rate Hike

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More bad news for small business owners – for the fifth time since March, the Federal Reserve Board has hiked the overnight rate, this time by 75 basis points (0.75%) as part of a year-long effort to tame inflation. 

The latest hike will further drive up the cost of capital on most loan products, especially those being offered by traditional banks, and cause more pain for small business owners that have had to rely on financing this year in the wake of skyrocketing inflation, supply chain disruptions and rising worker salaries.

How Painful is the Hike?

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Fed Chair Jerome Powell announces yet another painful rate hike to tame inflation.

Small businesses that rely on financing have already bore the brunt of several rate hikes this year, and the latest rate hike will further raise the cost of capital for both fixed- and variable-rate loan products. The first pain point will be felt by small businesses that already have variable rate financing tools in place, since a hike to the overnight rate means that the prime rate – the interest rate commercial banks charge their most credit-worthy borrowers – will once again rise. 

The prime rate, which is used as a base rate for variable rate financing products such as business lines of credit, which often charge the prime rate plus several percentage points as the cost of capital, will rise once again. Since March, the prime rate has risen from 2.75% to 5.5%, and after this hike, could rise to 6.25%. 

What are the Current Loan Interest Rates as of September 2022?

It’s impossible to tell how high interest rates will go on specific lending products, since the rates charged greatly depend on the creditworthiness and other factors of the borrower. It is fair to assume, however, that the cost of capital for fixed-rate lending products, such as term loans – especially those being offered by traditional banks – will continue to rise. One measure to examine are the rates on the most popular small business loans out there, the SBA 7(a) loan. 

The 7(a) loan is a term loan offered through partner banks to small businesses with generally excellent credit history and at least two years in business. At the end of 2021, when the prime rate was just 3.25%, the maximum interest rate on a 7(a) loan of $25,000 or less with 7-year term or less was 7.5% (assuming the borrower has excellent credit). 

As of the end of August 2022, with the prime rate being 5.5%, the same loan carries a 9.75% rate. For a loan of $50,000 or more with the same term, the rate was 5.5% at the end of 2021, and in August 2022, it was 7.75%.

What can Small Businesses do?

No matter how you slice it, small businesses are going to have to pay higher rates now than they would have at the beginning of the year for most types of financing. If you already have a variable-rate loan, such as a business line of credit, the first thing you want to avoid right now is drawing down that line of credit since you will have to pay a higher interest on any money borrowed. 

Try to Renegotiate

One action to consider is attempting to renegotiate the terms of your loan with the lender, especially if

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Rising interest rates may force small business owners to renegotiate terms with their lenders.

rising rates will affect your ability to pay back borrowed money. 

Remember, if you declare bankruptcy, it will be a long and costly process for the lender to recover any borrowed assets from you, so that’s an option they generally want to avoid and therefore, they will most likely be willing to work with you on a realistic plan to modify your loan. One thing that you can use as a negotiating tactic: if your credit score has improved since you opened the line of credit, you can use that to try and notch a lower interest rate.

Be Selective

If your small business needs financing during this period of rising rates, try to select the lending product that generally offers the lowest interest rate: an SBA loan. While interest rates have risen for SBA loans, they still generally offer the best interest rates and most flexible terms. The downside is that in order to obtain an SBA loan, you usually must have an excellent FICO score as well as a strong cash flow and several years in business, among other qualifications.

If you are seeking a business line of credit, you may even offer to put up collateral even if you have an excellent credit history, as secured lines of credit typically offer lower interest rates since the lender is taking on less risk. Additionally, term loans are typically cheaper than other types of financing, such as merchant cash advances and equipment financing.

Consider Alternative Lenders

An alternative lender, such as Kapitus, may be a good solution for you if you are seeking financing. Alternative lenders typically offer faster approval with fewer requirements and paperwork, and many have upgraded their customer service over the years to offer personalized service. 

Additionally, higher interest rates mean that traditional banks will be tightening their lending standards and make it more difficult for small businesses to obtain a loan, so alternative lenders may be a more appealing option if you’re seeking financing since they typically have less stringent requirements for potential borrowers.

Remain Steadfast

While now is not a great time to seek financing, just remember: interest rates rise and fall over time, depending on economic conditions. The Fed is hiking the overnight rate to combat inflation, so the high interest rate environment won’t last forever. If you must seek financing, try to go with the products that offer the lowest costs of capital possible, and consider looking at lending marketplaces to make lenders compete for your business. 

SSBCI Program Doles Out an Additional $940M to States for Small Business Funding

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The US Treasury Department just approved $940.2 million in small business funding to nine states as part of the $10 billion State Small Business Credit Initiative (SSBCI). If your small business operates in Arizona, Connecticut, Indiana, Maine, New Hampshire, Pennsylvania, South Carolina, South Dakota or Vermont, you should be checking with local small business lenders, venture capital firms and your state government to see if you’re eligible to apply for funding. 

In late May 2022, the US Treasury Dept. issued the first chunk of the federal government’s much-debated SSBCI – a $10 billion program included in the $2.1 trillion America Rescue Plan Act of 2021 that distributes money to states, territories and tribal governments for the purpose of providing venture capital to, and encouraging private lending for, small businesses. 

Here is how much money each individual state has been approved for and what they plan to do with it.

  • Arizona was approved for up to $111 million and will use $87 million of those funds to operate two state-led venture capital programs that will focus on Series A-stage funding for technology startups in underserved markets. The additional $24 million in funding will be used to guarantee loans for small businesses in underserved communities. 
  • Connecticut will use the $119.4 million it was approved for to fund its new Connecticut Future Fund, which will provide financing for entrepreneurs from underserved and diverse backgrounds, and The ClimateTech (CT) Fund, which will support startups that have a focus on clean energy, environmentally safe manufacturing, and climate resiliency.
  • Indiana will fund two different programs with the $99.1 million it was approved for: a venture capital program to which it has allocated over $70 million. The program will fund Indiana startups with between $500,000 and $5 million in equity capital financing, with a portion of those funds targeted to investments in companies started by underserved founders. The state will use the remaining $29.1 million to finance a loan fund investment program aimed at increasing the amount of funding, including low-interest loans, to underserved entrepreneurs and business owners.
  • Maine plans to use the $62.2 million it was approved for to fund two venture capital programs, to which it has allocated $20 million; a $22 million loan participation program focusing on the state’s 10-year economic development plan, and $20 million in loan guarantees to local small business lenders. 
  • New Hampshire will spend the $61.5 million it was allocated on a loan participation program that will support small business loans from community banks in rural and other underserved areas of the state. The program will be administered by the New Hampshire Business Finance Authority.
  • Pennsylvania will use the $267.8 million it was approved for to fund  equity capital investments and venture capital investments programs, to which it has allocated a combined $142 million. The programs will provide equity investments to early-stage technology companies in  conjunction with VC firms Ben Franklin Technology Partners and Life Sciences Greenhouses. The state will also use some of those funds on venture capital investments in new funds under the management of underserved venture capital firms. Additionally, it will fund a $125 million loan participation program that will provide loans of no more than 50% of total financing to small business borrowers through certified economic development organizations (CEDOs) and community development financial institutions (CDFIs).
  • South Carolina was approved for up to $101.3 million and will use $51 million to finance a small business loan participation program, part of which will be earmarked for community development financial institutions (CDFIs), and the remainder on a venture capital program to fund startups in underserved communities and rural areas of the state.
  • South Dakota will use the $60 million it was allocated to fund a loan participation program that will be administered by local banks and CDFIs. The program expands access to capital for underserved communities by using data to identify underserved markets and relying on partners to conduct outreach and raise awareness.
  • Vermont will use $29 million of the $57.9 million it was allocated on two venture capital programs that will provide seed fund investments, investments in leveraging accelerator programs to make small investments in rural, pre-seed stage companies, and investments in high-growth, technology innovation companies in the healthcare sector. The remainer will be used to fund a loan participation program to help small businesses grow, hire and serve underserved markets and address climate change initiatives.

Keep Checking

The US Treasury Dept. still has more than $7 billion to allocate to states for small business funding initiatives over the next two years, but you need to diligently check with your state to see if it has been approved for funding. Continually inquire about funding with local lenders and your state’s small business administration, and keep an eye out for press releases from your state’s Governor’s office to see if your business is eligible for potential funding.

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Best Loan Options for the Trucking Industry

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The COVID-19 pandemic exacerbated problems that had already existed in the commercial trucking industry for years as demand for delivered goods skyrocketed in 2020 and 2021. Those problems included issues surrounding compensation, hazard pay, COVID-19 vaccine mandates as well as a general shortage of licensed truck drivers. 

While it may at first seem counterintuitive, these problems make 2022 and beyond a great time for trucking businesses to finance the expansion of their fleets and hire more drivers. Consider the fact that the demand for delivered goods, especially imported goods, will remain strong. 

Also, supply chain disruptions have created an urgent need for stronger transportation systems for consumer products, and late last year, the Biden Administration announced a program aimed at increasing the number of licensed truck drivers in the country as part of the $1.2 trillion Infrastructure Investment and Jobs Act. 

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Kapitus is now offering long-duration loans specifically tailored to trucking companies.

These are, in fact, just some of the reasons Kapitus recently expanded its criteria for lending to trucking companies by offering equipment financing to purchase new or used commercial trucks via long-duration loans with competitive pricing. 

“When we get filings in, I would say that nearly 70% of the filings are trucking-related, whether it’s just box trucks for local deliveries, trailers and long-haul trucks,” said Kevin Morello, manager, asset-based finance for Kapitus. “These are comfortable deals [for lenders] to make because long-haul trucks are such strong cash flowing assets.”

What are Your Loan Options?

There are several financing options for trucking business owners seeking to expand their fleet or buy their first truck. One of the advantages for trucking companies is that lenders generally have a positive view of commercial trucking companies – especially the big semi-trucks – because the truck itself is a cash-generating asset, and if you do take out a loan for a truck, the vehicle itself becomes the collateral. The supply chain disruptions still being felt have also made trucking services in high demand, and therefore trucks are considered “business essential.” 

Like with any other lending, the type of financing you get to purchase either a used or new truck depends on your credit score and how long you’ve been in business; but there are a large number of traditional and alternative lenders. 

That said, your financing options when purchasing a truck vary:

#1 Finance Directly Through a Vendor

Much like the way you would purchase a car for your personal use, you can purchase a truck through a dealer, who would then search for financing options with several different lenders for you. Traditional banks such as US Bank, Wells Fargo and Bank of America offer lending programs specifically tailored to trucking companies. 

These loans typically offer low-interest rates and long durations, but don’t be surprised if you’re turned down. Traditional banks typically demand down payments which can be quite large, as an average-priced new semi-truck can cost between $100,000 and $200,000. They also have stringent requirements such as credit scores at least in the high 600s, minimum annual revenues and multiple years in business. While lenders still have an overall positive view of trucking companies, they are starting to see them as being a bit more risky in the waning days of the pandemic, as over 3,100 trucking companies went belly up at the height of COVID-19.

CDC/504 Loan

This loan is backed by the US Small Business Administration and is tailored for the purchase of fixed assets. It provides financing of up to $5 million and a term of between 10- to 20 years, and usually offers rates typically pegged to the current market rate of five- and 10-year US Treasury notes. 

These loans are offered through Certified Development Companies (CDCs) and the assets must be used to promote business development within a particular area and increase employment. Like traditional banks, this type of loan carries stringent requirements such as a high credit score and multiple years in business. If you qualify , these loans can be an excellent source of financing for a new or used commercial long-haul truck.

Alternative Lending

If you’ve been turned down for a loan by a dealer or traditional bank, you’re probably going to have better luck with alternative lenders – financing companies that fall outside the traditional banking sphere. Many of these lenders operate online and offer the same range of financing options as traditional banks, often with fewer requirements but at a higher cost of capital. Alternative lenders are just as legitimate and traditional banks, and typically can turn around a loan for you in less time than a traditional bank. 

If you choose to go with an alternative lender, be careful, as there are many of them out there. Do your research on which ones are most popular, legitimate and offer the most competitive rates. Some may make many appealing guarantees, but with any product or service that you purchase, it’s always best to keep that old adage in mind – if it’s too good to be true, it probably is. 

Equipment Financing

Since commercial vehicles are equipment, why not investigate equipment financing? If you don’t meet the strict requirements of traditional banks, alternative lenders may require a slightly lesser credit score, usually require less paperwork and can probably turn the loan around for you more quickly than a traditional bank. 

Additionally, alternative lenders often  don’t require a down payment when it comes to equipment financing. For example, according to Morello, Kapitus sees roughly half of our equipment financing  customers for commercial trucks require a down payment depending on credit score and time in business.

The downside of equipment financing for commercial trucks is that alternative lenders – much like traditional banks – often require a certain amount of time in business. Put simply, it will be easier to get financing to add to your existing fleet of trucks than to obtain financing for your first truck, since lending to an established company will always be deemed less risky than lending to a first time buyer.

“With trucking it’s challenging to finance your first truck,” said Morello. “So whenever customers come to us and it’s an owner-operator, or it’s a sole proprietor, that’s way more challenging than when you start building out your fleet. It’s also super rewarding when people come to us when they have a fleet of two or three or four, and then we can finance more than one vehicle for them.” 

Business Lines of Credit

While commercial trucks typically have long shelf lives – like any piece of machinery – they need regular maintenance and repairs. This is where a business line of credit from either a traditional bank or an alternative lender will come in handy, because when a truck breaks down due to wear and tear, your company will lose money fast. 

A business line of credit can provide immediate cash when you need it to make emergency repairs and maintain a strong resale value for your truck. Like with any financing, it’s important to shop around to see which lenders offer the best terms and easiest  access to capital.

Know Your Options

The trucking industry is in high demand right now and that probably isn’t going to change in the foreseeable future. If you’re seeking to expand your existing fleet or purchase your first truck, it’s important to closely examine your financing options and research various lenders available to you. Getting the best rates and terms on your loans may be just as important as gaining new clients. 

Small Business Grants and Contests Still Available in Illinois

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Illinois, or the Prairie State as some call it, is home to 2.1 million small businesses, with over 232,000 located in the Windy City of Chicago, making it one of the most populous states for small businesses. During the COVID-19 pandemic, nearly 35% of the state’s small businesses were forced to shutter either temporarily or permanently, and rising interest rates, worker shortages and spiking inflation are further squeezing them.

Now is the time for small businesses in the state to search high and low for grant opportunities and contests in which they can gain access to free money in order to survive. Here is a list of grants and contests on both a national and local level that are still available to Illinois-based small businesses. 

On a National Level:

Kapitus’ $250K Building Resilient Businesses Contest – Deadline is Looming!

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000; one second-place winner will receive $50,000 and five third-place winners will each receive $20,000. To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the last two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, click here.

Antares REACH Grant Program

Small business consulting firm Hello Alice will award $20,000 in grants to women- and minority-owned

Antares Reach Small Business Grants Illinois

The Antares REACH Grant program is giving away $20,000 to women- and minority-owned small businesses nationwide.

businesses to help them prepare for the next stages of growth. The grants are being funded by Chicago-based private equity firm Antares Capital. Applicants must have less than $5 million in annual revenue, have a demonstrated need for support and a strong business plan for growth. Grant winners will be eligible for an additional $5,000 in funding after completion of a post-grant support. The deadline for applications is July 15, 2020. To apply, you are required to become a member of Hello Alice’s community of small businesses. For more information, click here.

WomensNet Amber Grant

WomensNet gives away one $10,000 grant and four $1000 grants to women-owned businesses in distinct categories every month such as skilled trades (January), hair care and beauty products (August) and Creative Arts (October). The site also gives grants of $25,000 to two businesses each at the end of each year, with both of them being previous $10,000 monthly grant winners. Applications are due on the last day of every month. To apply, click here. 

American Express and Main Street America’s Inclusive Backing Grants

AmEx and Main Street America are providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LGBTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

Skip Monthly Business Grant

Skip is a California-based social media company that helps both people and businesses get access to government-related services and information and is part of YoGov.org. Every month since March 2020, Skip uses revenues from its YouTube channel which awards $1,000 grants to small business owners as well as free services and information. The winner is announced on its YouTube channel on the third Wednesday of every month. For more information and to apply, click here.  

 

State Level: Open to Illinois Small Businesses Only

The Land of Lincoln also has several grant and contest opportunities, especially in Chicago, that are still open:

Neighborhood Opportunity Fund Grants 

Chicago’s Neighborhood Opportunity Fund is giving away grants three times in 2022 to small businesses in Chicago’s West, Southwest, and South sides to make improvements to their physical locations. These improvements can include land acquisition for expansion, roofing replacement or repairs and money to cover financing fees for a loan or lines of credit. The awards are up to $250,000 for small improvement projects and over $250,000 to $2.5 million for large projects. Deadlines for the second and third rounds of applications have not yet been established, but you can still apply. To learn more, click here.

City of Chicago’s Annual Business Plan Competition

Chicago Small Business Grants loans

The city of Chicago is giving away several grants to keep its small businesses afloat.

Chicago’s Office of the Treasurer Stephanie Neely is administering a contest to startups and young businesses in Chicago. The first-place winner, to be announced sometime in October, will take home $5,000. To enter, a small business must be a startup or no more than three-years-old with annual revenues of no more than $2 million. Applicants must submit their business plans as well as templates for their executive summaries. Applications are due on July 6, 2022. To learn more, click here. 

Restaurant Employee Relief Fund

The Illinois Restaurant Association Education Relief Foundation is awarding grants to restaurant employees who have faced personal and financial hardships within the past 90 days to encourage food service workers in the state to remain at their jobs. Those hardships include unexpected illness or injury, death of a family member or a natural disaster. The grants range from $250 to $1,500. While not paid directly to business owners, this grant can help owners make things a little easier on staff that is sticking it out through the hard times. Deadline to apply is August 31, 2022. To apply, click here.

Small Business Improvement Fund (SBIF) Remodeling Grants

The SBIF Remodeling grants are aimed at larger small businesses in Chicago with physical locations that are seeking to remodel or visually improve their business locations. To be eligible, the applicant must employ up to 200 workers, and have an average of $9 million in annual sales over the previous three years. Or commercial property owners with a net worth of up to $9 million and liquid assets of up to $500,000. The grant will cover 30% to 90% of a business’ remodeling work up to $150,000. The first deadline for applications is June 30, 2022, while the second and third deadlines are on August 1st and August 31st, respectively. To learn more, click here. 

Don’t Give Up Free Money!

With most federal pandemic aid programs dried up and current economic challenges such as inflation and rising interest rates putting a further squeeze on small businesses, it is more important than ever to apply for a chance to get free money for your business, be it through local or national grants or contests. 

 

 

Related Articles:

Small Business Grants and Contests Still Available in New Jersey

Small Business Grants and Contests Still Available in Florida

Small Business Grants Still Available in California

Small Business Grants Still Available in New York

 

 

Small Business Grants Still Available in New Jersey

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New Jersey serves as the headquarters for some of the largest pharmaceutical companies in the world and is known for its sprawling suburbs, manufacturing capabilities, pristine shorelines and its 861,000 small businesses. However, high taxes, bloated state budgets and little support from the state government has always made it a tough place for small businesses to thrive in. 

Those difficulties were compounded by the COVID-19 pandemic, which hit the Garden State’s small business community harder than 2013’s Superstorm Sandy. From restaurants along one of the state’s many boardwalks to retailers in one of the state’s 52 cities, roughly one-third of small businesses temporarily or permanently closed between 2020 and 2021. Many continue to struggle to stay afloat to this day, especially with spiking inflation, interest rate hikes and another recession looming.

Fortunately, there are several grant programs and contests available on both a national and state level that can help those small businesses survive and grow. 

On a national level, there are grants and contests that are still open that can land you a large pool of money and are worth applying for:

Kapitus’ $250K Building Resilient Businesses Contest – Deadline is Looming!

Kapitus has launched its Building Resilient Businesses contest, in which one first-place winner will receive $100,000; one second-place winner will receive $50,000 and five third-place winners will each receive $20,000. 

To enter, simply send a homemade, 2-minute video briefly describing your business, how it was able to persevere over the last two years, and how you would spend $100,000. The contest is open to all small businesses in the US (excluding Vermont and Colorado) that have been in business for at least a year and have less than $5 million in annual revenue. The deadline to apply is June 30, 2022. To enter the contest, click here.

WomensNet Amber Grant

WomensNet gives away one $10,000 grant and four $1000 grants to women-owned businesses in distinct categories every month such as skilled trades (January), hair care and beauty products (August) and Creative Arts (October). The site also gives grants of $25,000 to two businesses each at the end of each year, with both of them being previous $10,000 monthly grant winners. Applications are due on the last day of every month. To apply, click here. 

American Express and Main Street America’s Inclusive Backing Grants

AmEx and Main Street America are providing more than 300 grants of $5,000 each over four cycles throughout 2022 to small businesses located in older or historic commercial districts with priority to be given to small businesses owned by the LGBTQ+ community, Hispanic-owned, veteran-owned, and business owners who are women and people of color. 

Applications for the fourth grant cycle are now being accepted by business owners who identify as native or indigenous people, Hispanic, LGBTQ+ and immigrants and refugees. Membership in the National Main Street Center is not required. Applications for the fourth grant cycle can be found here.

Skip Monthly Business Grant

Skip is a California-based social media company that helps both people and businesses get access to government-related services and information and is part of YoGov.org. Every month since March 2020, Skip uses revenues from its YouTube channel to award $1,000 grants to small business owners as well as free services and information. The winner is announced on its YouTube channel on the third Wednesday of every month. For more information and to apply, click here.  

State Level: Open to New Jersey Small Businesses Only

Despite the fact that most of the pandemic-related federal aid to small businesses has dried up, the state is still offering several grants and inexpensive financing opportunities to assist small- and micro-businesses:

The Small Business Lease Grant

New Jersey Economic Development Small Business Loans Grants

Small Businesses in the Garden State should always keep an eye on The NJ Economic Development Corp. for new grant and tax relief opportunities.

The NJ Economic Development Authority (NJEDA) is administering grants to help small businesses and nonprofits with physical locations pay their rents. The $10 million program was funded by the NJ Economic Recovery Act passed in 2021 and is being funded by the state’s Main Street Recovery Finance Program. 

The idea behind the program is to assist in filling vacant lots across the state and assist in the growth of small businesses. Applicants must have a new or newly amended lease that is at least 250 sq. ft. larger than their previous space, and the lease must be for a minimum of five years. Deadline is ongoing, and funding amount depends on the business. To learn more, click here. 

New Jersey State Trade Expansion Program (STEP)

New Jersey has always been a major hub for international trade due to its many marine ports, such as the Port Newark Container Terminal, the Port Jersey container terminal in Jersey City and South Jersey Port Corp. in Camden. 

As such, the NJ State Trade Expansion Program (STEP), in conjunction with the US Small Business Administration, are offering year-round grants to small businesses in the state that are new to overseas trade or sell their products and services overseas. Applicants must have been in business for at least one year at the time of application and manufacture goods or produce services that are at least 51% US content. To learn more, click here.

NJEDA Small Business Improvement Grant Program

NJEDA is awarding grants of up to $50,000 to assist small businesses with physical locations in making improvements and upgrades to their buildings, as well as with purchasing new furniture, office equipment and fixtures. The project costs must be at least $5,000 and must have been at most two years prior to the date of application. 

Total project costs that exceed $50,000 will be subject to Green Building Standards, and applicants that use at least four workers may be subject to affirmative action requirements. Applicants will be awarded on a first come, first served basis. There is no set deadline for application To learn more about the grant program and apply, click here.

Main Street Micro Business Loan Program

NJEDA also oversees the Main Street Micro Business Loan Program. While this is not a grant program, it is popular among very small businesses in the state because it provides long-term, low interest loans to businesses in the state with 10 or fewer employees and annual revenues of no more than $1.5 million. The maximum term for these loans is 10 years and carry an annualized interest rate of 2%. The applicants must have been in business for at least six months. No collateral is required for the loan. To learn more and apply, click here.

Free Money is Better than Attitude!

Best selling author Janet Evanovitch once described New Jersey as a place “where dignity always runs a poor second to getting in someone’s face.” While the state’s small business owners may be tough and have attitude, they’re still going to need help, especially in the economically volatile times we’re living in. If you do own a small business in the Garden State, keep the door open to any new opportunities for free money.

Handshake in front of crane

To Rent, To Lease or To Buy:  Obtaining Expensive Equipment for Your Business

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Any small business owner stuck between buying or renting essential equipment knows that the query is not a simple binary. Making a choice you are firmly satisfied with requires both a full understanding of your current financial standings as well as a clear picture of where you anticipate your business to stand in the future. And making the wrong decision can have lasting consequences of their own.  Let’s discuss practical use cases to determine where buying, renting, or leasing may be right for your business.

When to Buy…

Potential Benefits to Buying Equipment

Buying property or equipment – whether through cash on-hand or equipment financing – has the obvious incentive of true ownership. Having absolute ownership over your property or expensive equipment has the chance to be a cost-saver in the case of equipment you use frequently or in property that appreciates in value. Consider this example: a farmer with 75 acres of tillable land outright purchases a combine harvester. Since the combine harvester is necessary to reap crops annually, the purchase may very well be a financial gain after several years. Consider as well the IRS Section 179 allowance; businesses were allowed to deduct up to $1,080,000 as a first year write off in equivalence to equipment or software purchased during that tax year in 2022.

Potential Detriments When Buying Equipment

This example, however, plays equally well into the downsides of purchasing: combine harvesters are exceedingly expensive outright (like many industry-specific machines) and can be equally expensive to repair if you don’t already employ sufficient technicians. Imagine, as well, the potential that a certain crop doesn’t properly germinate or labor shortages lead your team to miss proper times for reaping; in the case of leasing or renting, the tangible financial hit of that reduced harvest would likely not be as dire.

Buying is a Bet for the Best

Buying expensive equipment outright requires sage-like industry knowledge as well as an exit strategy in order to be fully insulated, or as much so as is possible. Business owners on their first venture or entering a new industry may find that buying equipment more than double-digit percentages of their total capital is markedly unwise. Small businesses have the most to gain from owning their equipment… but only if that equipment meaningfully returns on its investment. Purchased equipment that fails to see regular use or drastically impacts your capital or overhead has the risk of becoming a monument to rash decisions rather than a useful business tool.

When to Rent…

Potential Benefits to Renting Equipment

Not every industry allows for easy renting of equipment. Renting generally is most beneficial to industries that are wholly seasonal or have tracked busy seasons. If you run a year-round business with consistent revenue, customers, and products, it is unlikely the monthly price and lack of ownership could in any way benefit your business.

Since renting requires the least capital upfront, it is often the most attractive option for freshly minted businesses that are still finding their stride. A worst-case scenario for a small business is preemptively paying for assets that don’t turn around to help your business. Let us consider the example of a farmer and a combine harvester again: in 2022, new or even lightly used combine harvesters can cost stupefying amounts of money upfront, often close to $750,000. In our example of a 75-acre farm, that cost is likely too much capital for a farm of this size which is not the subsidiary of a larger corporate structure. Renting a combine may simply be the only way for smaller farms (or small seasonal businesses) to turn a profit annually. The hope for farms and small businesses with similar structures, of course, is to save enough capital or meaningfully study trends enough to which purchasing expensive equipment amounts to a no-brainer good decision.

Potential Detriments When Renting Equipment

Rented equipment isn’t yours. Flatly, this almost explains any major downside that comes with renting. In the case of damage to any machinery you rent, there is a very good chance you will also have to pay for repairs on top of your existing rate for the rental. And let’s go back to our farmer one more time: Our farmer simply does not have the capital to outright buy a combine harvester (as is the case for many harvest-based farmers) and annually rents a combine from a regional host. Here’s the trouble: seasonal harvests happen all at once for farmers in the same region. This means that every farmer in that region that doesn’t own their own combine is going to rush to rent. In that rush, there is a more than possible chance that certain farmers may not secure a combine and then suffer the loss of an entire harvest. Leaving essential equipment in the hands of a third party introduces unpredictable variables for business owners. And for small business owners with smaller safety nets, suddenly being left without a suitable rental can spell disaster.

Rent From Trusted Sources and Only When You Have To

Unpredictability can quickly shutter seasonal businesses for good; of course, seasonal businesses are also those who are most likely to rent expensive machinery. Renting isn’t bad by nature; many industries like construction and, of course, agriculture wholly depend on rentals in order to remain profitable. This simply means that every choice to rent or buy ought to be informed by genuine industry trend data. Whether this means understanding the potential loss from not renting a certain piece of equipment or funding a safety net in the event of a missed rental or other unexpected hits.

Third Choice… Leasing

For those industries where rentals are rare or simply implausible, leasing can likely be a worthy third choice to consider when dealing with any major, expensive machinery. Leasing is a great option for businesses that use equipment that is constantly changing. With a lease, you’re only committed to equipment for the length of the lease, so you’re not stuck with equipment that can quickly become obsolete. While vehicles, specifically, are most peoples’ first thought for lease potential (our farmer and combine are back!), it’s worth knowing that several major industries lease a wide variety of machines. Offices can lease expensive copy machines, charter schools can lease student laptops, and several more practical examples are out there and likely relevant to just about every industry. 

Leave No Stone Unturned and No Path Untested

No small business owner can be fully certain that buying, renting, or leasing expensive equipment is the right choice. What small business owners can do, however, is consider, as we have here, the potential benefits and detriments to each choice parallel to their own business. Those businesses who make informed decisions with safety nets and back up plans have the least to lose when making a major financial decision.

What Type of Financing is Best for Your Small Business?

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Small businesses, slammed by inflation, supply chain disruptions and staffing shortages,  are expected to rely on debt financing heavily this year, as pandemic relief programs such as the SBA’s Economic Injury Disaster Loan and the Paycheck Protection programs have long since dried up. If you believe your small business needs to take on debt to survive this rough patch, however, you also need to evaluate which of the many financing tools available are right for you.

The good news is that there are several types of loans to fit your specific needs – whether you’re seeking money to keep your operations afloat; purchase vital equipment; keep your business running during off-season months; you’re seeking to expand, or you need cash for an emergency – there is an option for you.  Some loans carry more requirements and may be more expensive than others, so it’s crucial that you learn which is the most practical and cost-effective for your business.

Here are some of the most common types of small business financing to choose from, depending on your business’ specific needs:

SBA Loan

SBA Small Business Administration lending Kapitus

While pandemic-related assistance has dried up, the US Small Business Administration still offers plenty of financing options for small businesses.

An SBA loan is backed by US Small Business Administration and is sold through registered agents, be it a traditional bank or an alternative lender. One of the most sought-after loans by small businesses is the SBA 7(a) loan, as it often offers a comparatively low interest rate and terms of between 10 to 25 years and has a maximum borrowing limit of $5 million. This money can be used to grow your business, purchase new equipment or simply as operating cash.

However, just because you want a 7(a) loan, doesn’t mean you’re going to get one. The borrowing requirements are typically more stringent than what a bank or alternative lender would require for a term loan. These include a FICO score near 700, a required number of years in business and a strong, consistent history of cash flow. Other drawbacks of a SBA 7(a) loan include the fact that the turnaround time for the loan can be weeks, and collateral is often required for loans exceeding $350,000. In addition, SBA loans have a unique requirement which indicates that you must use “alternative financial resources, including personal assets, before seeking financial assistance.” 

If you believe your business qualifies for such a loan and you can wait several weeks to get approved and get the money, you should speak to a lending professional regarding what terms you can get.

Term Loans

Term loans, or business loans, are offered by both banks and alternative lenders and are viable financing options if you’ve been turned down for a 7(a) loan or if you need money quickly. The requirements of a term loan usually aren’t as strict as that of a 7(a) loan – for example, your FICO score probably doesn’t need to be as high as it would for a 7(a) loan.

The terms of the loan, such as interest rate and maturity date, are negotiated between the borrower and lender, and in some cases, especially with alternative lenders, you may get approval and funding within 24 hours. Similar to the 7(a) loan, you can use the proceeds for virtually anything related to your small business.

The cons of a term loan are that they are going to carry a higher interest rate than a 7(a) loan – depending on how much risk you represent to the lender – and typically offers terms of five- to 10 years, though they can be much shorter than this depending on the lender. While the requirements of a term loan may be less stringent than a 7(a) loan, you’re still going to need a strong FICO score, at least two years in businesses and a strong cash flow. Traditional lenders may also require you to put up collateral. 

SBA Microloan Program

The SBA also guarantees microloans – small loans of up to $50,000 – through intermediary lenders. These lenders often operate in underserved communities and work with minority- and women-owned businesses, and their purpose is to provide financial help to new businesses. According to the SBA, the average microloan is $13,000. These loans have a maximum term of six years, and interest rates are going to be significantly higher than a term or 7(a) loan, and often require the borrower to put up personal assets as collateral. 

Invoice Factoring

Invoice factoring is typically offered by alternative lenders and can help you with your cash flow if your customers are slow to pay. In this type of financing, a lender will provide you with cash for your outstanding invoices in exchange for a percentage of the money that is owed to you. You can choose which invoices to factor, and this type of financing won’t add debt to your balance sheet since the money that you’re “borrowing” is backed by money that is already owed to you. 

Invoice factoring is best if you need money quickly to keep your operations going while you’re waiting for your customers to pay, and if you don’t mind not getting all the money that is owed to you by customers. The turnaround time for this type of financing is usually very fast, sometimes happening in 5- to 10 business days.

Equipment Financing 

Equipment financing is a great tool to make sure you have the best, most modern machinery to keep your business running.

Whether you’re a small agricultural company that relies on row crop tractors; a contractor that needs bulldozers or backhoes for construction projects, or a doctor or dentist who needs the latest X-ray machine to treat patients, having high-quality, modern equipment is the lifeblood of your business. Machines, however, can cost a fortune, and your small business may not have the cash to pay for that machinery upfront. This is where equipment financing can serve you best.

Your FICO score generally must be in the high 600s and in most cases, you have to have been in business for at least a year. The advantage of equipment financing is that the equipment itself often serves as the collateral – not your personal assets. Ideally, the revenue that your company generates from the equipment you’ve purchased should more than cover the interest and principal payments you’re going to have to make. 

Purchase Order Financing

Obviously, your business needs inventory to sell in order to make money. However, you may not have the cash up front to pay for the inventory you need to meet a customer’s order. This is where purchase order financing comes in. PO financing pays your vendors upfront so you can keep your customers happy, grow your business and maintain your cash flow. 

In some cases, the lender may even take on the responsibility of payment collections from your customers’ orders, freeing you to run your business smoothly. To qualify, you generally should be a profitable business, and it’s your suppliers and customers – not you – that must have good credit. This type of financing typically requires a low factor rate as the cost of capital.

Business Line of Credit

A business line of credit, similar to a personal or business credit card, is typically an unsecured line of credit extended to you by a lender for an annual percentage fee. The limit on the business line of credit is negotiated beforehand and typically, the line of credit must be paid off at various, pre-agreed upon intervals. The benefits of this type of financing are tremendous. 

The APR is typically significantly lower than a business credit card (although you won’t get any rewards points that you might get with a credit card), and the credit can be used for just about any type of business need, such as keeping your business operating during non-seasonal times of the year or through a recession, cash emergencies and the need for sudden, unexpected purchases. 

The caveat is that a business line of credit may not be as convenient as a business credit card for smaller needs, such as a business meal or the purchase of a small piece of office equipment, so carefully consider which one is best for you. 

Revenue-Based Financing

Revenue-based financing is an expensive financing tool in which you essentially borrow against your future sales. If your company is about to launch a new product that you believe will be highly profitable and you need cash to support the initial promotion of it, or if the roof of your office collapses and you need emergency cash to get it fixed to continue your operations, for example, then RBF may be a useful financing tool. 

Before you consider this type of financing, however, consider that the cost of capital is higher than most forms of financing, as your company will be required to make pre-agreed upon payments equal to the percentage of your overall future sales plus a multiple of the borrowed amount. This type of financing requires your business to have a strong sales history, so it should only be considered for specific, short-term cash needs. 

Consider Your Options Carefully

If you decide that your business needs financing, carefully consider which type of product you choose, your needs and what you are willing to pay in terms of cost of capital. Seek counsel from your accountant or financial advisor. Keep in mind that lenders want to do business with you and don’t wish to have you use a financing product that you may not be able to afford, so they will be willing to work with and advise you as well. 

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