small business loans kapitus lending

Should You Take Out a Business Loan? Consider this Checklist

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If your small business is ready to obtain financing, that means you should be in a great position – your sales are flowing, your earnings are consistent, and you’re ready to expand your business’ footprint. Before you do take out a loan, however, it’s crucial that you decide first whether taking on debt is truly advantageous to your business, and which lending product is best to meet your goals.

Should You Take Out a Loan?

One of the most pressing questions you need to answer before taking on any new financing is: how well-equipped is your business to take on new debt? To answer this question, you should complete a comprehensive checklist regarding your business:

#1 Do I Even Qualify for a Loan?

Different types of loans require different qualifications, but you should first make sure that your business meets certain requirements from lenders. Your minimum FICO score should probably be in the 680 to 700 range for certain financing products such as a term loan, although alternative lenders such as Kapitus may require slightly lower scores, depending on which financing vehicle you are applying for. 

Lenders will also want to see how strong your company’s business plan is; how long you’ve been in business; what your plans for growth are, and the consistency of your cash flow in order to gauge whether you have the ability to pay back the loan. 

If you’re not sure whether you qualify, you should speak to a lending officer at the institution you are seeking to borrow from, who can walk you through the steps in which your business needs to take in order to qualify for a loan.

#2 Why Do You Need a Loan?

Ideally, you are seeking to borrow money to expand your business and increase revenue, and hopefully, that increased revenue will offset the cost of capital for your loan as well as enable you to make monthly loan payments. 

As we all know, however, we’re currently not living in an ideal economic environment, as small businesses are still struggling to make ends meet in a turbulent economy. Fortunately, there are a variety of financing products to choose from that can provide much-needed cash for all sorts of reasons. Some of these are:

  • The development of a new product or service which you foresee increasing sales.
  • Opening a new office or facility.
  • An emergency such as a collapsed roof or crucial machinery breaking down in which you need emergency cash to keep your business in operation. 
  • Getting immediate cash for invoices.
  • Increasing your inventory to meet high demand.
  • Meeting off-season expenses.
  • Purchasing new equipment. 

Once you’ve decided the reason you need financing, you can examine several distinctly different financing products that can meet your needs.

#3 How Strong is Your Cash Flow?

After credit score and business longevity, lenders will want to see your business’ cash flow – the net balance of cash that’s moving in and out of your business on a regular basis. If you’re borrowing to finance the development of a new product, for example, and sales of that product don’t end up being as strong as you thought they would be, a lender will want to know if you’ll still be able to make monthly installment payments on the loan you took out. This is what a strong cash flow will indicate to them.

There are several ways to improve your cash flow if necessary – you may want to examine ways to cut unnecessary spending, optimize inventory management, hound customers to pay their invoices and improve your cash flow forecasting. Your loan approval could very well depend upon the strength of your cash flow. 

#4 Is the Price Right?

Courtesy: CBS Television. No, you don’t have to be a contestant on The Price is Right, but you do shop around for the best prices in terms of cost of capital.

Anytime you borrow money, be it through a business credit card, a mortgage or a term loan, you are going to have to pay a cost of capital. This can be the interest rate associated with a term loan, the APR on a business credit card or line of credit, or the costs associated with invoice factoring or revenue-based financing. Whatever financing instrument you choose, it’s crucial that you ask the lender the total amount you will be paying back over time. 

It’s also just as crucial to shop around for lenders and consider which ones may be offering the best terms, and which ones can offer you a quick turnaround. 

Traditional banks often have more stringent borrowing requirements, while alternative lenders often are  more expensive but will typically offer a quicker turnaround time on your loan with fewer requirements. 

Something else you should consider – the Fed has just hiked the overnight rate by a half percentage point – that’s after a quarter-point hike last month – so some loans are going to be even more expensive than they were at the beginning of the year. 

#5 Are you Willing to put up Collateral?

Depending on your credit score and other factors, some lenders may require you to put up collateral or even a personal guarantee. Collateral would include the liquid assets of your business such as your equipment, business savings and/or investments and future invoices. 

Some may even want you to give a personal guarantee that you’ll pay back the loan by putting up some of your own assets as collateral, such as your house or your personal investments, in case you default on the loan.

Putting up collateral may increase your risk in taking out a loan, but keep in mind that lenders really aren’t interested in seizing your assets – they would much rather see your business succeed and for you to pay back the loan in a financially healthy manner. Therefore, when you’re taking a loan, it’s imperative that you sit down with your lender and carefully go over the terms of collateral and the exact steps that will be taken should you default. 

Carefully Weigh Your Options

Before you take out a business loan, it’s always a good idea to consider other ways to raise money besides going into debt. Crowdfunding, asking for outside investments, borrowing money from family are other options. If you do decide to take out a loan, carefully consider the above questions and decide which loan will help your business the most and which would be most cost-efficient.

cash loan short-term financing

Best Sources for Short-term Finance (Updated For 2022)

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Every small business owner deals with capital and cash flow management, which can include capital shortages. Whatever the reason for a shortage may be, it’s the owner’s job to find ways to infuse additional capital into their business when one occurs. Short-term financing can be a viable solution in such instances.

The good news is, there are many forms of short-term funding available for consideration. In this article, we’ll highlight some of the best sources of short term financing available to help you grow your business.  So, if you need short-term business financing to improve cash flow or for another reason, consider these options.

Short-Term Loans

As its name suggests, this type of business loan matures after a short term, usually within a few months.  While these loans typically come with fixed interest rates, there are some lenders that offer variable interest as well.

Short term loans are best used to address immediate cash flow needs. For example, you lack the cash to pay your employees’ salaries because your business is dealing with the tail-end of your slow season. These short term business loans can fill the gap until business picks back up.

Because of their short maturity periods, a short term loan is typically granted with lower borrowing caps than you would see with financing that has a longer maturity period.  Still, the overall cost of financing is often lower than a long term loan.

Merchant Cash Advance

If your business has not built a credit history yet, you may still qualify for a merchant cash advance, This financing option is not a loan with traditional rates and terms.  Instead, a financing company purchases a business’ future sales as a discounted rate.  Payback occurs as you make sales or your accounts receivables are paid during your normal course of business, with a percentage of that incoming revenue.

There are a number of perks to taking out a merchant cash advance. One is the fact that you, the borrower, can negotiate the rates. You also don’t typically need collateral to secure the loan, but personal guarantees are required, and approval times are generally faster than a traditional term loan.

On the flip side, merchant cash advances subject borrowers to higher interest rates than traditional loans due to the uncertainty involved with sales.

Accounts Receivable Financing

Accounts receivable financing, also known as invoice factoring, allows borrowers to leverage their outstanding invoices for immediate capital. Lenders can give you up to 90% of the total invoice value upfront, and you’ll receive the rest (minus a factor fee) once your customers pay their dues. You can receive the money within a matter of days, and stellar credit isn’t required On your end. Instead, terms are based on your customer’s creditworthiness.   As such, invoice Factoring is an ideal financial product if your business has several outstanding invoices with well-established businesses.

Accounts receivable loans can be repaid in two ways. The first is structured where you pay back the amount borrowed after you’ve collected payment for your invoices, plus the interest you and the lender agreed upon when you were approved for the loan.

The second option is to sell your invoices to the lender at a pre-determined rate. Instead of repaying the loan, you’re actually shifting the burden of collecting and settling the amounts due from your customers to the loan company.

Be sure that you understand the terms of your agreement and consider the factor fees and other rates. This way, you know how much this short-term funding will cost your business in the long run.

Business Line of Credit

A business credit line grants you access to a set amount of credit that you can borrow from as needed. Instead of providing you with a lump-sum loan, a business credit line allows you to select however much cash you need, within your limit, at any given time. The rest of your credit remains available, for the term of your agreement, for you to borrow when the need arises again.

This alternative to traditional business loans is advantageous because you’re not limited by preset loan amounts. For example, if you only need $5,000 and have a credit line worth $10,000, you can borrow what you need and still have $5,000 to draw from when cash flow requires it again. The only downside is that lines of credit generally run-on variable rates. Therefore, interest on the loan can fluctuate.  However, a credit line gives you the flexibility to take money as needed; it also gives you more freedom in using that money vs. a business credit card which limits your.

Trade Credit

Trade credit is essentially a “buy now, pay later” agreement between a vendor and their supplier. Through this type of short-term financing, you can buy much-needed inventory from your supplier that you can pay for at a later date. This eliminates the need to have cash on hand to pay the supplier upon delivery.

While it does not provide you with cash, the trade credit arrangement still helps to improve cash flow by providing you with inventory that you can sell off and earn revenues from. If you have a good working relationship with your vendors, you can expect very low or even no interest at all!

Trade credits are beneficial if you’re expecting huge sales of a specific product or product line. For example, if you need inventory for a Black Friday sale and don’t have the cash, you can arrange for credits with your suppliers instead.

Another perk to using trade credit for short-term financing is that these transactions can improve your business credit.

Inventory Financing

Inventory financing is another ideal short-term financing avenue that product-based small businesses might consider. This type of financing offers working capital to purchase inventory. The inventory serves as collateral for the loan.. It is a secured loan, but you don’t need to pledge any business assets to the lender. Instead, the inventory that you’ll be purchasing serves as collateral.

Just like trade credits, inventory financing is a great option when you’re expecting a huge inventory movement like seasonal sales, but your supplies have already run low and you have no capital available. Just make sure you pay off the loan once you’ve sold off the inventory you pledged for it, or else the lender will seize your supplies upon default.

Business Credit Cards

Like their consumer counterparts, business credit cards can provide purchasing power even when your cash flow is tied up. You use credits assigned to your card to make purchases and then pay them off when the due date arrives. Paying off the credits makes them available once again for use.

Business credit cards are generally more advantageous because they provide you with flexibility in repaying the credit. Depending on the type of card you apply for, you can also earn various rewards that can be put towards your business needs. Plus, it’s easier to apply for a business credit card than for a business loan.

Peer to Peer Financing

Peer-to-peer financing generally involves individual investors that act as lenders. Instead of a financial institution, these people are found on P2P platforms where they offer businesses or individuals the opportunity to apply for loans from them.

Just like traditional loans, the borrower and the lenders agree to a loan with fixed interest rates. The transaction is made between the two parties directly. The only “middleman” involved is the platform.

The more personal nature of the negotiations also improves the borrower’s chances of being approved instead of trying to borrow from a financial institution. The interest rates may also be more favorable.

While it gives borrowers direct access to funds, peer-to-peer financing also complicates the process. This is because not all lenders will want to finance the amount needed. For example, if you’re seeking a loan of $20,000, one lender may agree to let you borrow $1,000, another will extend you $5,000, and so on and so forth. This means multiple negotiations and, as a result, multiple loan agreements with varying dates and interest rates.

It’s good to know what options for short-term financing are available for your business when you’re in a pinch. This knowledge saves you from a lot of stress and headaches from wondering where you can get quick financial aid.

Decoding SBA’s Lending Reforms for Disadvantaged Small Businesses

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The US SBA is giving small businesses operating in low-income and rural areas a boost when it comes to lending, as it has announced reforms to its Community Advantage (CA) Pilot Program – a lending program designed for 11.2 million small businesses in economically disadvantaged zones. 

These small businesses especially suffered during the height of the pandemic, as more than 500,000 of them were forced to shut their doors, displacing millions of workers in low-income and rural communities. 

The SBA’s CA program was launched in 2019 to encourage Community Financial Development Institutions – lenders specializing in supporting small businesses in economically disadvantaged communities – and other participating lenders to lend up to $25,000 in unsecured loans and offered lending levels of up to $250,000. The program was set to expire in September 2022, and a four-year moratorium on new lender applicants was set in place. 

Changes Made

According to a joint announcement from the SBA and the Biden Administration, the new reforms to the program include:

  1. Extending the program to September 30, 2024.
  2. Lift the four-year moratorium on new lender applicants to increase the amount of capital being offered by the program.
  3. Allow participating lenders access to the SBA’s popular 7(a) loan government-guaranteed loan program at lending levels up to $350,000 from $250,000.
  4. Allow small business owners with criminal backgrounds to apply for funding through the program. 
  5. Ease collateral requirements for borrowers and increase the maximum loan size to $35,000 from $25,000.
  6. Allow participating lenders to offer lines of credit, interest-only periods and other loan modifications.

Which Businesses are Eligible?

SBA Loan small business rural Kapitus

Small businesses operating in rural areas could get a big boost from reforms to the SBA’s Community Advantage program.

The move should help small businesses in low-to-moderate income (LMI) and rural communities that often struggle to find lending. The businesses that are eligible to participate in the program are:

  • Low-to-Moderate Income (LMI) communities.
  • Businesses where more than 50% of the full-time workers are low-income workers or workers who live in LMI census tracts.
  • Empowerment Zones and Enterprise Communities – communities that are identified by the federal government as an areas in which there is a high level of poverty and economic distress where businesses may be eligible for federal grants and tax incentives.
  • HUBZones – Areas that are identified by the SBA in which small companies operate and employ workers in historically underutilized business zones. 
  • Businesses in operation for less than two years, since roughly 20% of small businesses, on average, fail after two years.
  • Businesses eligible for SBA Veterans Advantage Program.
  • Small businesses in rural areas.

For loans through the CA program, the SBA will provide 85% loan guarantees for up to $150,000, 75% for loans greater than $150,000 and 90% for international trade loans. The maximum interest rate for these 7(a) loans is prime plus 6%, and the turnaround time for getting the loan is five- to 10 business days.

More information on these loans can be found on the SBA’s website.

Reforms to the CA program should benefit pandemic-ravaged small businesses and could boost the US economy. According to the Brookings Institute, small businesses with less than 500 employees are responsible for providing roughly 65% of the jobs in non-metropolitan counties in the US, while small businesses with less than 50 employees account for 42%. 

Statistics for small businesses operating in LMI communities are scant, but the SBA released a report in February identifying nearly 6,800 small businesses operating in HUBZones. According to a past report from the Economic Justice Fund, there are 11.2 million small businesses operating in low-income communities. In both rural and low-income communities, small businesses can be a major source of jobs that can lift individuals out of poverty and aid in community development.

Who are the Lenders?

Several different types of lenders can sign up to participate in the SBA’s CA program. The most prolific are community development financial institutions (CDFIs) – lenders that specialize in serving small businesses in economically disadvantaged communities such as LMI neighborhoods and rural areas. According to the Opportunity Finance Network, there are approximately 1,200 CDFIs nationwide that manage over $222 billion in lending to small businesses and new homeowners. These types of lenders must be certified with the US Treasury Dept. 

They are not the only lenders, though. Others include microloan program intermediaries, as well as intermediary lending pilot (ILP) program members. Local and regional banks can also register to participate in the program, as well as alternative lenders. Some financial institutions do shy away from participating in lending to businesses in LMI areas given the heightened risk, however.

Lending institutions can register with the SBA to participate in the CA program online. Small businesses that are eligible to participate in the program can find a list of qualified lenders on the SBA’s website.

Don’t Miss Out

If your small business operates in a rural area or underserved community, you’d be well-advised not to miss out by taking advantage of these reforms. As the economy is still feeling the effects of the pandemic, rising inflation and worker shortages, now is probably a great time to seek financing to get you through.

Term loan duration small business lending

What Should the Duration of Your Term Loan be?

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If you’re ready to apply for a term loan for your small business, you want the terms of your loan to be as unique as your business. That said, one of the most important factors you should look at when taking on a term loan is…how long should your loan last? In the world of small businesses, the general impression has been that term loans offered by both banks and alternative lenders are typically short-term, usually with a maximum duration of 24 months. 

That has changed in recent years, however, as more banks and alternative lenders, such as Kapitus, have begun offering a new option to small business borrowers – term loans extending up to 60 months. In some cases, long-term loans may offer benefits for established small businesses such as a lower fixed payment. 

What Factors Should You Consider?

There are several factors to consider when determining what the duration of your loan should be. Additionally, the factors you should consider for a 60-month loan may be different than the ones you would consider for a loan that is 24 months or shorter. 

Josh Jones Kapitus small business lending

Josh Jones, Kapitus’ Chief Revenue Officer, said the duration of your term loan should be a major factor when deciding to get financing.

“If you’re able to get something approved outside of two years, you have a different decision as a business owner,” said Josh Jones, Kapitus’ Chief Revenue Officer. He added that when a small business owner is considering taking a loan of 24 months or shorter, they should examine what they are using the borrowed assets for and when they expect a return on those assets. 

For example, if your business is borrowing money to develop and market a new product that will be introduced to consumers in two years, then maybe a 24-month loan makes more sense for you. 

“For something 24 months or shorter, you have to look at your needs, and kind of do some liability matching to what the use of the capital is and whenever it is a return is going to happen,” said Jones.  

If you’re considering a 24-month loan, you should take into account the total amount that you would be paying back the lender over two years, and the fact that new debt will most likely be available to you, if needed, once you’ve paid off the loan. 

“Typically, debt payment coverage based on the use of the money is a big thing,” said Jones. “Or the fact that I know I have regular needs for capital. If I know my business can support that regular payment, I may not want anything longer than 24 months because I always want an available credit limit.”

Factors to Consider When Going Long

When considering taking a loan longer than 24 months, there are several factors that you need to consider the the total cost of the loan. If you apply for a term loan that will be paid back over 60 months, for example, the total interest will be higher on that loan because the lender is taking on longevity risk – the risk that your business may not still be around in five years. After all, the average lifespan of a small business in the US is 8½ years, according to NAV.

Are you, the borrower, willing to pay more for a five-year loan than a 24-month loan? The answer to this depends on your ability to consistently make payments, and what you are using the borrowed assets for. 

“With total cost, the shorter you go, the more the total cost goes down,” said Jones. “It is possible that the annual percentage rate (APR) of a 24-month loan will be more, but business owners should be more concerned about the total cost of financing, not just the APR. I’m borrowing this money, what is my total payback? If I can reduce the cost, if my business can support the payment, or my opportunity supports the payment of my debt, then that’s going to be the winning factor.”

With a longer-duration loan, you need to carefully consider:

  1. The amount you will be paying each month. Generally, the total cost of a 60-month loan will be greater than that of a 24-month loan (of the same amount). Therefore, if you need to borrow assets, and your cash flow only allows you to pay a limited amount of debt service coverage every month, a long-term loan may make more sense since the fixed payments will be lower than a short-term loan. 
  2. Prepay Options. If you take out a 60-month loan and you want to pay it back in full in 24 months, you may have a few options in terms of the total cost of capital. Some lenders will charge you a prepay penalty by charging you the interest you would have paid had the loan gone to term. Other lenders may give you a prepay discount – they’ll discount the amount of interest you would have owed had the loan gone to term. In either case, you should carefully examine which option would be cheaper for you when you set the terms of the loan. 

What Should I Use a 60-Month Loan For, and How Do I Qualify?

You can use the proceeds of a 60-month loan on anything you choose for your business, and the amount

term loan duration small business financing

Carefully consider the total cost of capital with a long-term vs. a short-term loan

taken out for a long-term loan is typically higher than a short-term one. 

Generally speaking, proceeds for a long-term loan are usually spent on permanent assets for your business, which could include the purchase of property, office equipment, office furniture, computers and company vehicles. Perhaps you need a long-term loan to acquire a well-established business to complement your own.

Be aware that the requirements and underwriting process for obtaining a loan beyond 24 months are more stringent than a standard two-year loan, mainly because the lender is taking on that longevity risk. 

“Even if you have a great credit score, it can be very difficult for a business to get a 60-month loan unless they have [many] years in business,” said Jones. “That’s because the likelihood of a business [that’s well established] making it another five years is much higher than a business that’s shorter. It’s not meant to be insulting to anyone’s good business, it’s just the way the stats play out.”

Talk to Your Financing Specialist

The duration of your term loan will depend on several different factors; but, like with most loans, your ability to pay the loan back will usually be the key. Examine your balance sheet and cash flow history, and talk to the financing specialist about whether lower payments over a longer time horizon may be a better option for your business.

Two hands handling a credit card in front of a portable computer.

Finding the Right Business Credit Card with No Annual Fee

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Having reliable business credit is a valuable tool for day-to-day operations. As needs pop up at your business, having a business credit card on-hand can make a tough situation easier to deal with. Business credit cards, however, come in many shapes and sizes. And some of those cards on the larger side may have benefits or perks not suited to the way you do business. In addition, these cards often have an annual fee, making your business credit card yet another expense. However, if your small business is looking for a business credit card without a ton of extra bells and whistles, there are several practical card options that have no annual fee. Because no two small businesses have the same credit card needs, this list is in no order of preference; only you, the business owner, will be able to determine the card best suited to you.

 The Blue Business® Plus Card from American Express

It’s not often American Express finds itself on a list of “no annual fee” offerings, but in recent years American Express has expanded beyond their premium Gold and Platinum cards to offer several competitive basic credit cards. The Blue Business Plus Card from American Express has both no annual fee and 0% APR for the first year. After the first year, American Express will determine cardholders’ APR based on their credit and several other relevant factors. This card, for having no annual fee, has an incredibly lucrative points deal too: up to $50,000 annually, the Blue Business Plus Card doles out double points on nearly all purchases and potentially more points for travel booked through the American Express portal.

Like their premium card offerings, American Express gives Blue Business Plus cardholders a unique kind of buying power. According to AmEx, “There are no over-limit fees, no enrollment steps to take and you can continue to earn Membership Rewards® points or cash back on purchases above your credit limit.” The one catch is that balances over your existing spending power must be paid along with your monthly minimum.

Bank of America® Business Advantage Customized Cash Rewards Mastercard®

If you’re more interested in cash back than points, you may want to look at offerings from players like Bank of America. The Business Advantage Customized Cash Rewards Mastercard by Bank of America offers a great opening bonus: cardholders can get a $300 statement credit after spending at least $3,000 in the first 90 days after opening their account. In the long term, as well, the Business Advantage card offers 3% cash back in the transaction category of your choice, 2% back on dining, and 1% back on all other purchases. Those 3% and 2% cash back deals, however, only extend to the first $50,000 in relevant purchases each calendar year. All of this, of course, with no annual fee and a  0% intro APR for the first year. APR after the first year will be determined based on cardholder credit and other relevant factors.

If you already have a Bank of America business checking account, BofA explains that “You can earn up to 75% more cash back on every purchase, if you have a business checking account with Bank of America and qualify for our highest Preferred Rewards for Business tier.” In essence, you can take advantage of both cash back deals at once, meaning those cash back numbers become 5.25%, 3.5%, and 1.75%.

Chase Ink Business Unlimited® Credit Card

Chase’s Ink cards get good press in the business world for good reason: these sensible cards have just about every benefit you could look for in a business card and are generally a safe, straightforward solution for businesses in need of a credit card that can handle daily expenses. The Ink Business Unlimited® card is a reasonably competitive offering in the “no annual fee” credit card space with more than sufficient perks: cardholders have unlimited 1.5% cash back on every business purchase as well as a 0% intro APR for the first year; APR afterward will be determined by (you guessed it!) cardholder credit and other relevant factors. Unlike Bank of America, Chase credit card rewards go through points like American Express; also, like American Express, Chase points can be redeemed for a multitude of business uses like straight cash back or travel expenses.

As of this article’s publishing, the Ink Business Unlimited card is offering $750 cash back for cardholders who spend $7,500 on purchases in the first three months after opening their account.

Capital One® Spark® Classic for Business

Anyone with a nose for business credit cards likely expected one of Capital One’s Spark® cards to make an appearance on this list. Capital One’s Spark® Classic for Business, unlike the other cards on this list, says upfront that business owners with “fair” credit are the most likely to be considered for the Spark® Classic. If you are concerned about applying for a higher-end card, this may be the card to consider: the Spark® Classic has unlimited 1% cash back, 26.99% APR, along with some more interesting perks: this card’s monthly minimum payment, according to Capital One, “…will be the greater of $15 or 1% of your balance plus new interest, late payment fees, and any past due amount.” This means that business owners looking to carry a balance may find the Spark® Classic to be a lucrative deal.

PNC Cash Rewards® Visa Signature® Business Credit Card

Nearly every “no annual fee” credit card tries to grab business owners’ attention with cash back and points promises, so don’t be surprised that PNC Bank is playing the same game. It’s the little differences that count, however, when choosing a “no annual fee” business credit card, so let’s take a look: the PNC Cash Rewards® Visa Signature® Business Credit Card offers unlimited 1.50% cash back on what they call “net purchases” which, according to PNC, means “The term ‘net purchases’ does not mean all transactions you may make using your credit card. Some limited transactions are excluded.” This card also has a 0% intro APR for the first nine billing cycles and then can range from 10.99% to 19.99% APR (based on the business owner’s credit and other relevant factors) as of the publishing of this article. PNC also offers a $200 cash back bonus for cardholders who make at least $3,000 worth of “net purchases” during their first three billing cycles.

Know Your Needs, Find Your Card

This market of credit cards is often a place for decimals and minor percentage differences; the less you pay in as a cardholder, the less you can expect to get out of your card. Small business owners, however, don’t have to feel like they’re settling when opting for “no annual fee” cards on the market today – having a line of credit with no annual fee can be a fantastic resource for both maintaining a higher credit limit overall and building your credit in general. Consider making a wish list of every process and action you would like your business credit card to complete. Then, make a list of deal breakers like certain APR or cash back percentages. Once you have everything written down, then get to business choosing the right cards for your needs. If any of the above cards speaks to your business needs, consider speaking directly with the bank or financial institution that offers the card, as they can likely help you to further determine if their card is the right choice for you.

What are the Different Business Lines of Credit, and Which One is Best for Your Business?

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Business lines of credit are incredibly valuable tools that offer flexible financing to help small business owners meet expenses and grow. Lines of credit, much like your personal credit card, have borrowing limits and make funds available to you when you need them. They also give you the option to pay down some or all the debt at various, pre-agreed upon intervals. You only pay interest on the amount that you’ve used, and most lines of credit will require you to bring your balance to zero at certain times. 

The benefits of having a line of credit are tremendous, and in some cases, businesses may not be able to survive without one. For example, seasonal businesses may use a line of credit to meet payroll during the off-season or to order inventory in advance of their busy seasons. Credit is also used in case your small business quickly needs emergency cash.

Before you apply for one, however, you should consider that a line of credit is not a one-size-fits-all product. There are different types of lines of credit that you should consider before deciding on which one is best for your business.  Some credit lines may offer higher lines of credit while others may require collateral..

Deciding on the right one for your business can be tricky, and it’s important to know the different types that are available to you, as well as the risks associated with each one:

#1 Secured Line of Credit

A secured business line of credit is one in which you, the borrower, take on a significant amount of risk. In these types of credit lines, you will have to put up collateral, such as your business assets, personal savings, or surplus business cash; or, if your business is a pass-through business, your personal assets such as your home. In the event you can’t pay off your balance, the lender reserves the right to seize those assets. 

That said, there are distinct advantages to a secured line of credit over an unsecured line. First, since you’ve put up collateral, there is a good chance that your line of credit will be bigger than it would be with an unsecured line of credit. Second, since you’re the one taking on much of the risk with a secured line, you most likely will pay less interest. Third, you don’t typically need as high of a credit score as you would with an unsecured line of credit.

#2 Unsecured Line of Credit

An unsecured business line of credit is the more popular option for small businesses since this option requires no collateral, and the lender takes on most of the risk. Applying for an unsecured line of credit is often simpler than a secured line, and approval may be quicker. 

An unsecured line of credit typically carries the same payment requirements as a secured line of credit, but in exchange for taking on much of the risk, the lender will usually require a strong credit score to obtain one. Since it is unsecured, the spending limit may not be as high as a secured line of credit, and the interest rate may be higher than a secured line of credit.

#3 Business Credit Card

If you need to pick up the tab for a business meal or must purchase new office equipment such as a laptop computer or printer at a moment’s notice, a business line of credit would not be convenient for you since it could take days to transfer money from your line of credit to your account. A business credit card, however, is a very handy tool to fulfill immediate cash needs for your business. 

A business credit card works pretty much the same as a personal credit card – it could offer perks such as travel miles and cashback rewards and will be there when you need it. Business credit cards usually have fewer requirements to obtain than a line of credit, and they won’t tie up your personal assets as they don’t require collateral. 

The drawbacks compared to a line of credit, however, is that business cards usually carry a higher interest rate than a line of credit, and many of them charge an annual fee.

#4 Real Estate Line of Credit

If you’re in the business of buying and selling properties, such as a home flipper, for example, then you should consider a real estate line of credit. A real estate line of credit is similar to a home equity line of credit, which is credit based on how much equity you have invested in a piece of real estate. 

Real estate lines of credit work in a similar way to any other lines of credit. They can be either secured or unsecured, depending on your FICO score, and they allow you to buy a piece of property before you sell your existing property.

Choose Carefully

Before you decide to take out a business line of credit over another form of financing, you should carefully consider the reason you need to borrow money in the first place. Lines of credit are probably not good for long-term business needs such as the purchase of expensive but crucial equipment or an office lease, and typically carry higher interest rates than a term loan or other types of financing. 

 

If you have immediate cash needs or want cash available in case there’s an emergency, such as your air conditioner breaking down or a leaky roof in your office, then a line of credit is probably the best solution for you.

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What Documents do I Need for a Small Business Loan

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Any small business owner seeking a business loan can tell you: there’s a lot more paperwork  than you’d guess between finding a satisfactory loan and getting your capital in-hand. While delays can happen for near-boundless reasons, it ought to be the prerogative of every small business owner to be certain those delays aren’t caused by insufficient documentation. All kinds of loans, small business or otherwise, require some amount of paperwork for consideration and eventual approval. While no two business loans are identical, before even considering a loan, small business owners ought to have these documents in good order. This list encompasses the basic requirements for one of the most frequently sought small business loans, the SBA 7(a) loan.  SBA loans have some of the most stringent and comprehensive documentation requirements, so if you’re prepared for this loan, you’ll likely be prepared for almost any loan!

 

Loan Application Form

This may sound obvious, but why not be thorough? Lenders generally require all people who own at least 20% of the applying business, guarantors, and sometimes managers to fill out some information on your application form. Each loan’s requirements are unique, of course, so be sure to check with your lender which members of your business must fill out the loan application form. The SBA’s 1919 Borrower Information Form is a good blueprint for what just about all lenders would like to know before partnering with your business.

 

Personal and Business Résumés

Résumés are important to the loan process; personal résumés reassure lenders of your character and experience while business résumés prove a history of business aptitude and success. For those applying for 7(a) loans, the SBA requires business owners to send résumés for each loan being applied for; this is a near-universal requirement when applying for loans from traditional lenders.

 

Business Plan + Overview and History

Your business plan must lay out – in exact detail – how the small business loan you are seeking will help your business. Whether you are planning to expedite growth through financing or you could simply benefit from more working capital, be certain that you are able to indicate exactly where the principal will go.

Your business overview and history should be a comprehensive retelling of your successes and shortcomings as a business owner. Take off the rose-tinted glasses and talk numbers – your job here is to convince lenders that your business has the potential to succeed and that you have the gusto to overcome unforeseen problems.

 

Loan Application History

Your loan application history often must include all loans you have applied for, not simply the loans that you have received. Include relevant contact information and reference numbers where possible.

 

Statements of Personal History and Financial Background

Unlike the earlier business overview and history statements, this requirement is much more straightforward. The statement of personal history (SBA Form 912) is a generally quite short form asking for basic information like your address and date of birth. SBA Form 912 also asks if you, the business owner, are under indictment, have been arrested recently, or have been convicted of a crime. While loans not guaranteed by the SBA won’t require the 912 form exactly, the form is a good template for questions most lenders are likely to ask.

Your personal financial statement (SBA Form 413) asks you to lay out your assets, collateral, sources of income, stocks and bonds, real estate, as well as nearly any financial liabilities you may have. This type of information usually factors into determining your repayment ability and creditworthiness, so it pays to be comprehensive.

 

Current Business Financial Statements

Organize and compile the following financial documents alongside your loan application:

  • Profit and Loss Statements from at least the last three years & Interim Profit and Loss Statements
  • Year-End Balance Sheet from at least the last three years & Interim Balance Sheets
  • Reconciliation of Net Worth to current day
  • Projected Financial Statement for at least the next 12 months

 

Business Income Tax Returns

In addition to your other financial documents, be certain that you have signed personal and business income tax returns for, at the very least, the past three years.

 

Business Lease

Have a copy of the current lease for your business. If you do not have an existing lease but plan to pursue one following your loan, organize with your landlord for them to provide a certification of a proposed lease.

If you plan to use the principal from your small business loan to purchase another business, there are more articles you will require:

  • Interim Profit and Loss Statements from the business you plan to purchase
  • Proposed bill of sale + list of assets from the business you plan to purchase
  • At least the two previous years of income tax returns from the business you plan to purchase

 

Business Certificate or License

Organizations like the SBA flatly require that your small business have a certificate or be fully licensed as a for-profit business to be considered for a loan. There are several benefits to seeking certification, but squarely among them is consideration for 7(a) loans. Alternative lenders will likely think highly, as well, of those businesses that have certificates and proper licenses.

 

The State of Small Business Loans and the Importance of Being Earnestly Organized

The meter-high stack of documents lenders expect from you aren’t for nothing. The information you provide on yourself and your business are meant to assess how likely it is that you will pay back lenders in a timely fashion. Seismic shifts in the business world are nothing new in the era of COVID-19. But an unexpected side effect of current trends is that lenders offering SBA secured business loans – or loans simply aimed at small business owners – are often looking for businesses with proven track records of timeliness and funding success. It looks even better for your small business when your loan application is well organized.

Keeping your financial and personal documents in an orderly, easy to access manner has benefits far beyond loan preparedness, but those small businesses who are earnestly on top of their current documents digitally and in print are often the most likely to make a positive impression on lenders which can never hurt.

heavy equipment financing

Heavy Equipment Financing 101: Definition, Pros and Cons, Requirements

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Technology is ever-changing and the equipment you’re using can quickly become obsolete. When this happens, your business may have to invest in new heavy equipment to keep itself going and remain competitive. However, large equipment purchases can put a dent in your cash flow, which could impact your operations.

Heavy equipment financing gives you the resources you need to purchase or lease much-needed heavy equipment without dipping into your cash reserves. But what exactly is heavy equipment financing? In this article, we’ll discuss its definition, the pros and cons of utilizing it, and the requirements for approval.

What Is Heavy Equipment Financing?

Heavy equipment financing is a business loan designed specifically for purchasing heavy-duty mowers, backhoes, bulldozers, and other heavy equipment. The loan is prevalent in manufacturing, agriculture, transportation, and even the food industry.

Lenders give you the working capital needed to secure the necessary equipment. You can get up to 100% financing to cover the cost of the equipment depending on several factors, like your credit rating, type of equipment, and the industry you’re in.

Pros of Heavy Equipment Financing

Securing financing for your new heavy equipment provides you with several benefits you won’t enjoy from other options.
One is that a business owner has the potential to claim a full deduction on the amount of the purchase from yearly income tax. Under Section 179 of the Internal Revenue Code, businesses that purchase new machinery this year may be able to claim tax deductions of up to $1.05 million. One of the key requirements, however, is that the equipment must be used in business operations in the tax year for which you’re claiming deductions in order to take advantage of this deduction.

Leasing offers a similar benefit, but you can only deduct the amount you’re paying every month from the lease. The deduction would be equal to the monthly amortization multiplied by 12 months. Leasing does guarantee yearly tax savings throughout the contract, but heavy equipment financing offers a higher lump-sum compensation immediately after purchasing the gear, aside from the annual deductions from the fees and interest incurred.

Another benefit of heavy equipment financing is flexibility. Armed with your financial statements, you have the opportunity to negotiate more comfortable terms. This means you can avoid breaking the bank and maintain good financial standing. You can also exert a degree of control over your cash flow and expenditures.

In all cases, financing is a method that helps businesses like yours build good credit records. You just need to make sure your lender reports your standing to business credit bureaus. It could be a pathway through which you get access to more business credit.

Cons of Heavy Equipment Financing

Like all available options for acquiring heavy equipment, financing also has its own set of disadvantages.
One disadvantage is that the significant amount of the loan and the extended terms can tie your finances down until it matures. It might be difficult for you to secure another loan when you need it, as some lenders are wary about granting loans when borrowers appear to be deep in debt already. This is beyond your control since lenders base decisions on your financial statements.

In addition, the ongoing loan could affect your financial health. Loan payments are accounted for as liabilities, so there’s a risk of your debt-to-asset ratio getting higher. In the eyes of creditors, a high ratio means that a borrower carries a high risk of not paying back a loan. As stated above, they may decline your application or, at the very least, attach high-interest rates to the money they will lend.

While this doesn’t happen often, another drawback is that the lender might require you to secure the loan using existing assets. Some creditors do not require any collateral, preferring instead to secure the loan with the equipment being purchased.

Unless expressly stated during the application process and in your contract, you can rest assured that your business and personal assets are safe even if you default on your obligation in heavy equipment financing.
Last but not least, an overly long repayment period could result in depreciation. In other words, your heavy equipment might become obsolete after it is fully paid off. Of course, this can be avoided by negotiating shorter yet still affordable repayment terms.

How to Apply for a Heavy Equipment Financing

The application process for heavy equipment financing is fast and straightforward. Many lenders, like Kapitus, offer an easy-to-use equipment financing application that should only take about five minutes to complete and requires minimal documentation.

One of the documents required is the vendor invoice. The invoice proves the value of the heavy equipment you’re looking to borrow money for. The lender needs this to know how much you need from them. Your vendor will send this invoice to you as part of your purchase agreement. You don’t have to pay for the invoice right away, which gives you more time to seek financing.

You also need to prepare your financial statements, which include documentation from your bank. It’s highly recommended to have at least six months’ worth of statements on hand when you are applying.
Once you’ve gathered all your documents, you just need to go to the issuer’s website and complete an application. The application covers information about your business, the type of equipment you’re looking to purchase, and some personal information.

Complete the application, attach the needed documents, and you’ve applied!. Make sure to free up some time because a consultant will call you to learn more about your business. After receiving confirmation of approval, you’ll also receive another call to discuss your payment terms just before the lender pays for the vendor invoice.
The payment and final delivery of the equipment then conclude the process. As mentioned earlier, all that’s left to do is to keep your end of the bargain by making payments as agreed upon.

Maximizing the Benefits of Heavy Equipment Financing

As a bonus, here are some tips that could help you maximize the benefits of a heavy equipment loan.
Many businesses choose to purchase new equipment as it’s less likely to break down from frequent use and is covered by warranty for the first few years. In other words, you can avoid expensive maintenance or repair fees that could affect your cash flow.

If you find yourself preferring used equipment, you should enlist a professional mechanic to inspect the equipment before you request an invoice. If there are defects, secure the seller’s commitment to fixing them before moving forward with a purchase. Again, the goal is to avoid spending money on repair and maintenance as much as possible.
Lastly, don’t be afraid to negotiate. There’s a reason why there are a couple of calls before you’re approved for your heavy equipment loan. This gives you time to understand your contract’s terms and allows you to discuss and negotiate those terms.

Your equipment is an integral and essential part of your business. You should not hesitate to invest in new equipment if the old ones in your inventory are way past their useful lives. Many creditors are ready to help you with this significant investment through heavy equipment financing.

The Benefits of Business Lines of Credit 

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For small business owners that have ongoing business expenses and uneven cash flows, a business line of credit may be the most convenient and useful financing method in your toolbox. 

Too often, however, small business owners confuse a business line of credit and a business credit card and end up paying a higher interest rate on revolving debt as a result.

What is a Business Line of Credit?

A business line of credit is typically an unsecured line of credit that can be granted to a small business by either a bank or an alternative lender. The line of credit has a predetermined limit set by the lender (and it’s typically higher than a business credit card) based on the risk you present as a borrower, and like a business credit card, can be used to address any expense that arises for your business. 

Unlike other types of typical small business loans, with a business line of credit, there is no lump-sum disbursement of funds that requires a subsequent monthly payment, and you don’t have to specify to the lender exactly what you intend to use the funds for. 

Also, similar to a credit card, your debt will be revolving, and interest will be accrued only on the amount that you have borrowed. The line of credit typically is subject to a periodic review and renewal, often annually..

Business Line of Credit vs. Business Credit Card 

While both a business line of credit and a business credit card are forms of revolving debt that are typically used for short-term funding needs, the main differences between them are the interest rate and what they generally are used for. 

A business credit card can charge more than 20% APR for purchases, and an even higher rate for cash advances. The rate for a business line of credit usually ranges between 10% to 15%, and the rate will still be the same when you use the line of credit for cash. 

What are Each Used for?

A business line of credit and a credit card may also be used for different reasons. Lines of credit are sometimes used by seasonal small businesses that need funds to cover operating expenses during slow periods of the year, such as payroll; or when it has an unexpected expense. Small businesses can also use their lines of credit to gain access to funds without having the hassle or expense of applying for a loan, and the repayment terms are often more flexible than with business credit cards. 

On the other hand, a small business credit card will come in handy for smaller purchases that you typically wouldn’t use your line of credit for, such as when you have to pick up the tab for a business meal or need to buy a new inkjet printer for the office and don’t wish to make a trip to the bank to withdraw the funds. A credit card also often offers perks such as cash back offers or travel miles that a line of credit would not.

Once again, be warned that business credit cards typically offer a lower credit limit than a business line of credit and are more expensive.

What is a Secured vs. Unsecured Line of Credit?

An unsecured line of credit is not guaranteed by collateral. Typically, it will carry a higher interest rate than a secured line of credit because the lender is taking on greater risk than with a secured line of credit. It is usually granted to businesses that have been in operation for several years and have consistently strong annual revenues. 

With a secured line of credit, you will usually be granted a large business line of credit with a higher spending limit because it is guaranteed by physical assets, which lenders prefer. Some banks, however, may ask that your personal assets be used to secure your line of credit, while alternative lenders typically just ask for your business assets. A lender may also require that you secure your line of credit if you require a limit of more than $100,000.

How Do You Qualify for a Line of Credit?

Business lines of credit are generally more difficult to obtain than business credit cards. Typically, small business owners that have a FICO score of at least 650 and have been in business for at least two years with annual revenue of at least $180,000 will qualify for a business line of credit, but those terms will vary depending on which lender you are doing business with. Alternative lenders often will have less stringent requirements.

Small businesses that don’t qualify for a business line of credit because they don’t have a long history in business or a profit margin that’s too low may find a business credit card to be useful, and there are plenty of them out there that offer perks and cashback rewards. 

In general, however, a business line of credit can be a great reward for small business owners that have worked hard to establish their businesses over time.

Stacks of golden coins coins with a red financial graph behind.

What is Revenue-Based Financing and How Can it Benefit You?

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Let’s say you have an idea for a brilliant new product, but you just don’t have the money to research, develop and market it, and you’ve been turned down by traditional lenders and the private equity markets for capital. What if your small business needs cash to cover a business emergency, but your bank’s lending process just takes too long? 

What do you do? 

The answer could lie in one of the fastest-rising – yet least known – funding solutions out there: revenue based financing (RBF). RBF is a form of financing that could get you the assets you need quickly and without the need for personal collateral or an impeccable credit score.

What is Revenue-Based Financing?

Revenue Based Financing is a capital-raising method in which a lender, such as Kapitus, agrees to provide money to a business in exchange for a predetermined percentage of a company’s future gross revenues, plus a pre-agreed upon multiple of the original amount, over a predetermined time frame.

In essence, it allows a company to successfully raise money without giving away any ownership stake and without the business owner having to pledge personal assets, such as his or her home, as collateral. Furthermore, relative to debt and equity financing, revenue-based financing is a much easier process that requires less documentation when applying. 

In short, RBF is one of a few types of business financing methods that limits the personal exposure of the business owner and looks to the business itself when making underwriting decisions. 

In deciding who qualifies for RBF, lenders primarily look at a company’s sales history. In some cases, all you will need to submit is three months of business bank statements. Therefore, the underwriting process is relatively fast, and approval can come in mere hours. Once approved, many lenders can have funds in your bank within 24 hours.

Who Should Use RBF?

RBF can be used by virtually any small business with a strong sales history. If you own a plumbing or retail business and you need $20,000 because the roof starts leaking or your air conditioning machines break down, RBF may be your solution since you can get cash in your hands quickly with little paperwork relative to a business loan or other forms of financing. 

RBF can also be an ideal solution for larger small businesses, such as consumer software firms that have a strong sales history, which can borrow larger amounts to fund the research, development and marketing of a new product. According to a 2020 report issued by BootStrapp, the most popular users of RBF were software-as-a-service (Saas) companies, followed by food and beverage companies, consumer products companies, eCommerce and healthcare businesses.

How Does RBF Work?

Let’s say you own a larger business, such as a software-as-a-service (SaaS) company, and you believe that the future growth of your business can only be ensured by introducing a new software product that requires an additional $250,000 in capital to research, develop and market. However, you are not able to obtain a loan from traditional lenders because of your credit score, and the initial stakeholders in your company do not want to add any additional investors. 

Your company can arrange a deal with an RBF provider to get $250,000 in exchange for a portion of your company’s future revenues. Your company will be required to make agreed-upon installment payments equal to a percentage of your overall revenue plus a small multiple of the original amount to compensate for the risk.

What are the Advantages of RBF?

In revenue-based financing, investors are entitled to regular repayments of their initially invested capital, so it is like a loan in that regard. However, it differs from a loan in that interest is not charged. Instead, there is a fixed cost of capital, meaning that the repayments are calculated using a predetermined multiple that results in returns that are higher than the initial investment and that cost does not change as long as the terms of the agreement are met. 

Also, RBF offers unique advantages over receiving investments from venture capital or angel investors. With private equity, investors often require collateral, an ownership stake in your company and/or seats on your company’s board of directors, if you have such a board. RBF could also be an attractive financing model if your small business has no intention of going public any time soon – as most small businesses do not – as private equity investors often look for a big exit strategy such as an IPO. 

Who Needs Revenue-Based Financing? 

Really, any business large or small with strong, predictable monthly sales can qualify for RBF, if it is appropriate. In general, companies that have strong sales and are seeking to expand with a new product offering or need money for an emergency or may look to RBF as an alternative to traditional lending. 

What Are the Risks of Revenue Based Financing?

As a business, the biggest risk of RBF is that your sales go south, making the repayment of the loan longer. That said, investors take on much of the risk because the repayment of the investment is in direct proportion to the company’s revenues. For the company receiving the financing, if sales unexpectedly drop, the repayment of the investment will take longer, and the investor will still expect to receive the same multiple on the principal investment amount. 

Generally however, the lender and the borrower both benefit in an RBF deal because they both want the company to be successful and for repayment of the investment to be quick. The structure of the RBF deal prevents either party from getting completely burned, unless the borrowing company goes under and is forced to declare bankruptcy.

Finally, it is important to note that RBF is not for every company. The model works only with companies that historically generate strong revenues, be it a healthcare, consumer software or business services company. A company that wants to use revenue-based financing must also have strong gross sales margins to ensure their ability to repay the investment.

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