Tag Archive for: Business line of credit

Kapitus secured line of credit small business lending

Pros and Cons of a Secured Business Line of Credit

/in , , /by

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.

What Type of Financing is Best for Your Small Business?

/in , /by

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. 

Americans with disabilities, small business funding, Kapitus

Does Your Website Make You Susceptible to an ADA Lawsuit?

/in , /by

Most small business owners know that their physical stores or offices must be compliant with the Americans with Disabilities Act of 1990 (after all, they’ve had more than 30 years to learn and comply with the law), but did you know that despite your efforts, you may still be susceptible to an ADA lawsuit? 

That’s because the ADA itself obviously predates the advent of the internet, and therefore no one is really sure how much legal liability risk you’re carrying as it relates to your website..

Gil vs. Winn Dixie

When the 11th Circuit Appellate court ruled in April that the ADA does not entirely apply to websites in

the Gil v. Winn Dixie case, it gave some short-term clarity on the issue. However, while the court ruled in favor of the business, the case generally put a renewed spotlight on the ambiguous subject of whether business websites should be required to accommodate people with physical and mental impairments. 

In Gil v Winn Dixie, a customer sued the grocery chain because its website did not accommodate visually impaired people, and therefore treated disabled people as “second class shoppers,” according to the plaintiff’s affidavit. In short, the plaintiff, Mr. Gil, claimed that he was given less preferable treatment than non-disabled customers. 

The 11th Circuit court, which covers Alabama, Georgia and Florida, ultimately ruled that Winn Dixie’s website did not fall under “places of public accommodation” under Title III of the law, and therefore its website is not required to be accessible to impaired or disabled people, even though its brick-and-mortar stores do need to be ADA compliant. 

Jury Still Out, Despite Decision

It’s important to note, however, that the judges’ decision in the case was somewhat narrow in its scope. Although they ruled in Winn Dixie’s favor, they did so largely because the company’s website is not a point-of-sale. The judges noted in their decision that there was nothing to prevent Mr. Gil from making transactions at any of Winn Dixie’s physical stores, which are ADA compliant. 

Legal experts have pointed out that if the website were a point-of-sale and disabled people could not conduct transactions on it (i.e., the customer had to renew and pay for a prescription on its site), the decision may have been different. So if your business has a website in which customers can make purchases, you may still face legal liability risk if your site is inaccessible.

Why the Case Matters

In recent years, website accessibility lawsuits have skyrocketed as the legal community continues to wrestle with the issue of whether websites should be ADA compliant. 

According to a study from UsableNet, the number of ADA-related digital lawsuits climbed to 3,550 in the US in 2020, up from 2,314 in 2018. Gil v Winn Dixie, however, was one of the few cases that made it to the Appellate Court, and while the court’s ruling ultimately favored businesses, it also puts a renewed spotlight on how companies – especially small businesses that may not be able to afford costly legal battles – should take steps to avoid sometimes-frivolous ADA lawsuits by making their websites accessible to people with disabilities. 

Last year, the 116th session of Congress ended up voting against the Online Accessibility Act which would have amended the ADA to include requirements to make websites accessible, but with a new Presidential administration and the fact that Senate Democrats now hold a slim majority, the issue could be taken up again shortly.

What are the Current Laws?

ADA requirements for physical stores and offices have been around for nearly three decades and are well-known, but – barring legislation from Congress – the question of how the ADA applies to websites is still murky.

In 2010, the US Dept. of Justice passed the Americans with Disabilities Act Standards for Accessible Design, mandating that electronic and information technology, such as websites, be accessible to those with disabilities such as the visually and hearing-impaired. The act does not, however, cite specific steps companies need to take to make their websites accessible. 

Today, many companies use the Worldwide Web Consortium’s (W3C) Web Content Accessibility Guidelines (WCAG) version 2.1 as a guide to making sure their sites are up to standard. While WCAG is not a legal document, W3C is an international community of web developers that is respected around the globe.

Avoiding an ADA lawsuit

While the issue is still ambiguous, if you’re a small business owner, it’s probably best to err on the side of caution when it comes to your website, lest you find yourself having to pay exorbitant legal fees in order to fend off a lawsuit. 

If you’re concerned about your website and are seeking to make it ADA compliant, you may wish to consult with an attorney. There are also plenty of software packages out there that can assist you in making sure your site is accessible to those with disabilities. 

Screen readers for your website can help you avoid a costly ADA lawsuit.

The first thing you may wish to do is invest in a screen reader for your site. A screen reader is a software program that allows blind or visually impaired individuals to read the text that is displayed on a computer screen via a speech synthesizer or a pad that will translate text on the screen into braille. Many of these software packages are available online and are free.

Following WCAG 

Additionally, your best bet is to carefully read WCAG 2.1 and make sure that your website follows its guidelines. You may wish to do this with an attorney. There are 4 basic principles to WCAG. A website must be:

  • Perceivable – Your website must be perceivable in terms of touch, sound, and sight. This is where a screen reader would most likely come in handy.
  • Operable – A user, regardless of their disability, must have ways to operate and browse your site. For instance, someone with motor difficulties should be able to use a keyboard instead of a mouse.
  • Understandable – Your website must use clear terms, simple instructions, and be able to explain complex issues.
  • Robust – Your website must use recognized standards, such as clean TML or CSS language so that users do not have to rely on additional technology besides their computer to use your website. 

Other Suggestions

Aside from the four principles stated, there are other actions to take to follow WCAG 2.1. On your site, you should make sure to:

  • Create alt tags for all images, video and audio files so that users with disabilities can read or hear alternative descriptions of your content.
  • Create transcripts for video and audio content so that hearing-impaired users can easily access your content.
  • Offer customers alternatives when they run into input errors. If a user is having difficulty navigating your site because of their disability, it is your responsibility to offer recommendations on other ways to navigate to the content they are looking for.

While making sure your website is accessible to all users will take time and energy, it is an exercise worth undertaking. First, it will enable you to avoid a costly lawsuit. Second, showing the world that you’re empathetic to people with disabilities, and making your site accessible will improve your public image. Third, it could even increase your customer base to include more people with disabilities.

About Us

Products

Contact Us