If you’re ready to take on a loan or any other type of financing for your small business, you should give yourself a pat on the back. That usually means that your business has grown to the point where you’re ready to take on additional growth opportunities or you just need funding to keep your operations running smoothly. Before you get that business loan, however, one of the most important questions you need to ask is, ‘what type of financing should I get?’
Various types of small business lenders offer an array of loan options and other financing products for different purposes, and it’s crucial that you determine which product best suits your needs as a small business owner. While nobody really wants to pay interest, each financing option will offer a different cost of capital. There are also those that offer different repayment terms, while there are still others that are designed to fund specific business needs.
What types of loans are there and which one is best for you? You have an array of options, and which one you choose should depend on how you plan to use the funds, your business and personal credit scores, as well as the loan amount you’re seeking.
Types of Business Loans
Here are the different types of small business loans you can seek for your small business and how they can help you the most:
Term loans.
Term loans are offered by both traditional banks and alternative lenders. It is a large chunk of money that you receive all at once and agree to pay back over time with interest. The proceeds of a term loan (also called a bank loan) typically must be used for a specific purpose, such as expanding your business, developing and marketing a new product, or consolidating debt.
Traditional banks usually offer slightly lower interest rates than alternative lenders, but often demand that you have a good to excellent personal FICO and business credit score. The application process tends to be longer and more complicated than alternative lenders, and the funds may take days or weeks to be delivered to you. Alternative lenders typically charge higher interest rates but offer a simpler application process, typically have less stringent qualification requirements, and can deliver funds to you in as little as a day.
Small Business Administration (SBA) 7(a) loan
SBA 7(a) loans are essentially term loans given out by both traditional and alternative lenders, while the US Small Business Administration guarantees a large portion of them and sets the general borrowing requirements for small business owners. These loans typically offer the best interest rates when it comes to term loans, but come with a long list of requirements such as an excellent FICO (680 and above) and a business (80 or above) credit score. Also, it may take weeks to actually obtain the funds.
Working capital loan
These loans are typically offered by online lenders and typically don’t require a personal FICO or business credit score as high as a term loan. They are usually meant for small businesses with seasonal or uneven cash flows throughout the year that need to keep operations going during the offseason or when there’s a downturn in the economy. Depending on the borrower’s credit score, the interest rate can be very high.
Non-Recourse Loan
Non-recourse loans are often used in commercial transactions in which the real estate itself acts as collateral. In a non-recourse loan, the lender may only seize the collateral in the event of default or bankruptcy, even if the collateral does not equal the full value of the loan. A non-recourse loan, in rare cases, can also be applied to a secured term loan.
Lenders usually offer this type of loan with strict requirements, such as a very high credit score or performance guarantees. The SBA also offers some non-recourse loans through intermediary lenders, which also usually carry exceptionally strict requirements.
Commercial Real estate loan
If you’re a small real estate company seeking to invest in a property or a small business owner who’s decided that it’s in your best interest to purchase the property from which your business operates, a commercial real estate loan is your best option. It is essentially a commercial mortgage from a traditional bank in which the property being acquired becomes the collateral, so your credit score may not matter as much as your business plan.
SBA Microloan
An SBA microloan is offered through intermediaries, many of which are not-for-profit and are geared towards young small businesses (at least 6 months in operation) and carry fewer requirements and lower interest rates than bank loans. In some communities, these loans are offered exclusively to women- and minority-owned businesses, or small businesses operating in underserved communities. The maximum loan amount is $50,000 with the average amount in 2022 being slightly less than $17,000.
SBA CDC/504 loan
Like the SBA Microloan, these loans are typically offered through not-for-profit intermediaries and are typically granted to small businesses for the purpose of enhancing their communities through storefront renovation and increasing local hiring. They can also be used for land acquisitions and equipment purchases, and carry less strict requirements than bank loans. Unlike the SBA Microloan, they do offer larger amounts, with the maximum being $5 million.
Equipment loan
An equipment loan, commonly referred to as equipment financing, is just that: a loan that pays for the entirety of a piece of revenue-producing machinery (such as a business vehicle, tractor or manufacturing equipment) for your business. This is offered directly by traditional banks and alternative lenders. This type of loan usually offers an interest rate that is less than a bank loan, depending on the credit score of the borrower, since the machinery purchased acts as collateral for the loan. The catch is that the interest rate on this loan will usually be higher than if you went directly to a dealer and financed that equipment. However, if you buy directly from a dealer, you usually have to make a large down payment.
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Non-Loan Business Financing Options
While there are a lot of different types of business loans, there are also financing products that are not technically considered loans, even though they involve lenders giving money to businesses in exchange for the principal and an interest rate or “factor” fees. These types of financing products can come in handy for specific purposes and sometimes can be more convenient than traditional loans.
Business Line of Credit (BLoC)
A business line of credit, offered by traditional banks and alternative lenders, gives your small business a predetermined amount of debt to draw upon for any business need. While conceptually similar to a credit card in that way, there are many differences. A BLoC often offers a lower interest rate than a business credit card but doesn’t offer rewards of any kind. Additionally, a BLOC has to be renewed, sometimes on an annual basis. It often has minimum withdrawal amounts; penalties for non-use and repayment terms that include full payment at various intervals.
BLoCs, however, are very flexible financing tools for a small business owner – the money can be used for any purpose at any time, including meeting payroll during the offseason or for purchasing additional inventory when customer demand unexpectedly swells.
Revenue Based financing (RBF)
RBF is a contract-based financing tool typically offered by alternative lenders. A lender will give a lump sum of money to a small business owner in exchange for a predetermined percentage of the business’ future receipts. The contract is based on a factoring model, which means that the portion of each receipt will be factored as a percentage to give to the lender or factoring company.
While this is usually a more expensive form of financing than a loan, RBF can be very useful if a small business owner comes across an unexpected growth opportunity or an emergency business expense. One positive is that factoring companies usually don’t consider your credit score as the most important qualifier when deciding to do business with you.
Invoice Financing
Often referred to as invoice factoring, this is a financing tool in which an alternative lender gives you money upfront for your unpaid invoices. The money upfront will be slightly less than the combined value of the invoices, but this type of financing enables small business owners to unburden themselves of the risk of slow-to-pay customers never paying. The potential drawback is that the small business owner may be forced into a longer contract than desired, and depending on the terms of the contract, may be on the hook for a portion of the money if the customers never pay their invoices.
Purchase Order Financing
Let’s say your small business receives a large order from a major retailer. However, the cost to produce this order is beyond your reach right now or you’re just not comfortable using up that much of your available cash flow to fulfill the order. This is where purchase order financing, another type of factoring product, can be incredibly useful.
With purchase order financing – usually done through an alternative lender – the lender will pay your suppliers upfront for inventory in exchange for a small percentage of the purchases being made, which are referred to as factoring fees. While this can be a bit expensive compared to other types of loan products, the cost of purchase order financing is covered by the amount you would be paid when fulfilling the order. While it may eat into your profit a bit, that is profit you wouldn’t have had if you had to turn down the order due to a lack of inventory. Additionally, high credit scores on your end will not be a requirement for this type of financing because the credit that is taken into account is the credit of your customer that made the purchase order.
Consider a Checklist to Help You Select the Right Business Loan for You
Choosing from the different small business loans available to grow your small business, meet unexpected expenses, or keep your business running smoothly is one of the most important decisions you need to make as a small business owner. Before applying, you should go down a fundamental checklist of questions you should answer before seeking financing:
- Why do I need financing/what will the money be used for?
- How much am I willing to pay for business financing?
- Which types of financing are most convenient for me in terms of how I can use the money and how quickly will I receive it?
- Which financing products am I most qualified for?
- Do I have a realistic plan for making loan payments or paying the factoring fees?
- Does my current cash flow justify taking on financing?
Answering these questions beforehand will help you make the wisest decision possible on what type of financing you need, what financing you’re able to afford, and will – ultimately – help your small business flourish in the long run.
Life is a process of trials and errors, and there’s probably no one for whom that statement rings more true than a small business owner. This statement especially applies when small business owners apply for loans to gain much-needed capital to ensure their businesses grow or to smooth out their cash flows. What if, however, a lender denies your application for a small business loan, even though you thought you took all the necessary steps to obtain that financing?
First thing’s first: while getting a business loan rejection is frustrating and disheartening, you need to keep a positive mindset. If your business loan was declined, don’t look at it as a failure, look at it as one of the many lessons you will learn as you run your business. There are specific steps you can take to make sure you get approved the next time around – and it might not take as long as you think.
The following are steps to take after you’ve been rejected from a business loan and how you can improve your situation to increase your chances of approval on your next attempt.
Talk to Your Lender
The first thing you should do after being rejected for a small business loan is try to get into the mindset of the lender.
Small business lenders – be it traditional banks, alternative lenders or credit unions – make money by giving loans and collecting interest and fees on those loans. Therefore, whenever a small business applies for a loan, they want to be able to approve it. So, if you do get rejected, give them a call, and they will be happy to give you the specific reasons why your application was rejected.
Also, keep in mind that lenders are in the risk business. The simplest and most general reason that you, the small business owner, gets rejected for a loan is that the lender does not have enough confidence that you will be able to pay back the loan and believe that you represent too much of a risk of default. There are a lot of factors that go into deciding how risky you are as a borrower, and again, the lender will be more than happy to tell you which criteria you didn’t meet.
Improve Your Credit Scores
When you apply for most types of business loans, the first two items the lender will look at are your credit reports – for both your personal credit score and your business credit score. One of the most common reasons small business owners get turned down for loans is that their credit scores aren’t high enough.
You can find lenders that are willing to give loans to those with poor credit scores, but they charge exceptionally high interest rates. So, if you’ve been turned down for a business loan because of your credit scores, it’s worth it to take the time and effort to take steps to improve those scores to avoid paying high interest rates.
Some steps you can take are:
- Check your credit reports. You can easily access your detailed, personal credit reports through the three main credit bureaus – Experian, Equifax, and Transunion, and you should check your business credit score through the most commonly used business credit bureau, Dun & Bradstreet. Check for any errors that may be dragging your score down. Remember, in 2022 it was found that on average, 1 in 5 people had errors on their reports. You may have to pay a small fee to gain access to your reports, but it’s worth it in the long run.
- Make sure you have at least 6-9 months’ worth of on-time payments towards your existing debts. This includes payments towards business and personal credit cards and any other debt your small business may have. Nothing hurts your credit score more than a history of late payments on your debt.
- Pay down existing debt. Credit utilization (the amount of debt you have on your credit cards or business lines of credit vs. your credit limit) is factored heavily into your credit score, so if you can, take a few months to bring that number down.
- Get another credit card. This might seem counterintuitive at first as you may be thinking, ‘The last thing I need is another credit card.’ However, getting another personal or business credit card (but not using it!) will decrease your credit utilization and can boost both your personal FICO and business credit scores. BUT, note that this will only help in some situations and it may take some time for you to see the positive impact. Getting a new card can initially lower your score due to the hard credit pull by the card issuers. In addition, a new card can lower the average age of your accounts. However, the longer-term gain may just be what you need to tip the scales in your favor!
- Get trade references. If you have good relationships with your suppliers, you can try to convince them to write letters to your credit bureaus stating such. These letters are called trade references, and they can boost your business credit score as most business credit bureaus don’t initially factor that into your credit report.
Reconsider Your Financing Options
A term loan from a traditional bank isn’t the only way to get the capital you need for your small business, nor are traditional banks the only types or lenders out there. There are financing products in which lenders don’t put as heavy of an emphasis your credit scores, such as:
- Secured loans. A secured bank loan or business line of credit will emphasize credit scores less since they are backed by collateral.
- Equipment loans. Equipment loans use the equipment being purchased as collateral, so your credit scores typically don’t have to be as high as they would for a standard business loan.
- Small Business Administration (SBA) microloans and 504 loans. These types of SBA loans are backed by the SBA and are often geared towards younger small businesses, women- and minority-owned small businesses and small businesses that operate in underserved communities, so lenders typically don’t heavily emphasize credit scores when approving these loans.
Also, if you’ve gotten a loan rejection from a traditional bank (especially for a SBA 7a loan, which has very high standards) because your credit scores are borderline, you may want to try applying with an alternative lender. Alternative lenders often have simpler business loan applications and are more willing to approve borrowers with borderline credit than traditional banks.
Improve Your Cash Flow
Almost every type of lender will want to see several months worth of bank statements for your business, as well as several years of tax returns in order to gauge your cash flow history. Cash flow is simply the money flowing into your small business vs. the money that’s flowing out. In some cases, you could get rejected for a loan if your cash flow isn’t strong enough.
In this case, you may want to seek ways to improve that cash flow, but it may be a painful process. The most immediate way to improve your cash flow is to curb your business expenditures. This may mean letting some employees go and curbing excessive business expenses such as trips, business meals, cutting down on low-selling inventory, etc. Doing so could very well get you approved next time.
Improve Your Business Plan
Traditional banks often require you to present your business plan, especially if you are applying for an SBA 7a loan, which has strict borrowing requirements. If you’re seeking a loan to expand and grow your business, you need to convince the lender that you are going to increase your revenue stream. This is where a business plan comes in handy.
A detailed business plan tells a lender that you’ve done your research about the market your business operates in, why you believe your business has an edge on its competitors, and how you plan to make money. A convincing and detailed business plan can mean the difference between an approval or a rejection. You can find business plan templates online, and many of them are free.
Take an Inventory of Your Assets
If your credit scores are borderline, a traditional bank or credit union may ask for a personal guarantee for your loan, which often means putting up collateral. Collateral can include any investment accounts you may have, personal items of high value or even the deeds to your house or car. Keep in mind that these assets can be seized in the event that you default on your loan payments.
Of course, putting up collateral presents a high risk to you, the borrower, but it does have potential rewards. Collateralized loans or business lines of credit can notch you a higher borrowing amount and lower interest rate, as well as cut down on fees and required balloon payments. In essence, collateral can dramatically cut the cost of capital on your loan.
Try to Expunge Your Record
While it’s rare, small business owners may get rejected for a loan because many lenders want to do business with people of “high character.” This means that if you’ve made a mistake in the past and have been convicted of a crime, late on child support payments, or have an IRS tax lien on your finances, lenders will consider this a red flag and you may get rejected for a loan. If this is the case, you may want to speak to your attorney to see if you can get your record expunged, and get caught up on any child support payments or back taxes you may owe.
Don’t Give Up
We all know the line made famous by The Godfather: “It’s not personal, it’s just business.”
This is precisely the case when you’re turned down for a business loan. If you do get rejected, don’t take it personally, and don’t give up. All a loan rejection means is that you need to take steps in order to get approved next time so that you can get the funding you need to improve your small business. Follow the above outlined steps to improve your situation so that, next time, you can get the funding you need to enhance your small business.
There are many ways to describe what it’s like to start a business: exciting, ambitious, and passionate, to name a few. Almost every small business owner would agree, however, that there’s one word they would never use – easy. For all types of businesses, one of the most difficult challenges for any new small business owner is obtaining capital to launch your new endeavor. After all, some 47% of small businesses that fail after two years do so because they run out of money.
Apart from new dentists and doctors’ offices, traditional banks generally don’t offer loans to brand-new businesses, so startup business owners must look elsewhere for funding. The good news is that there are business loans available for new business owners, but each carries a different interest rate, terms, and personal credit score requirements, so it’s important to get educated on the different sources of funding available.
How to Qualify for a Startup Business Loan
Before you begin exploring the best business loans for a startup, take steps to make sure you qualify. This means that you need to check factors such as:
- Your personal credit score. Much of your personal credit score (or FICO score) is determined by your debt repayment history, your debt-to-credit ratio, and how much outstanding debt you have compared to your income. As soon as you begin your application process for a small business loan, this is the first factor that lenders will look at.
If you have less-than-stellar credit, some of the ways you can improve your FICO score are by making sure you are current on all of your credit cards; paying down as much of the outstanding balances as possible. It’s also crucial to check your credit report with the three major credit bureaus to get rid of any errors that may be on it.
- Your Repayment Plan. Ask your potential lender for a detailed repayment plan on the types of financing you’re considering. You can impress your lender by showing them a detailed plan of how you intend to meet your payment obligations. This could be in the form of a simple document demonstrating the income you believe your business will achieve and how you believe you will be able to handle the repayment terms.
- Potential collateral. Many private lenders will require collateral as a condition of approving the loan, especially for startup business owners with poor credit. If you own a house, have money in your personal savings, or own other items of high value, the lender may require that you put those up as collateral.
- Your sales pitch. If you need a loan to start a business, or you need working capital to fund your new business, you’ll need to convince a lender that your business is viable as part of the application process. This means explaining to your potential lender why you believe your business will make money, who your market is, and what differentiates your small business from your competitors. Lenders will be impressed if you show them that you’ve done a thorough evaluation of your market and have a sound marketing plan to sell your products and services. If your business has been running for a short time, it would also help to show your potential lender your financial statements to demonstrate a strong cash flow.
Assess Your Financial Needs
Before considering a small business loan or other types of financing for your new venture, you need to itemize what you need to spend money on, and what the general costs are. This will give you an idea of how much money you need to borrow and the type of loan you should consider. Once you’ve come up with your unique idea and product offerings for your business, assess what you will need to spend money on to make it happen:
- Manufacturing and inventory. Whether your business is online or operates out of a brick-and-mortar location, it won’t get very far if you don’t have products to sell. Manufacturing your product and having enough inventory will cost money. It’s crucial that you realistically gauge the market and determine the amount of products or services that you expect to sell and figure out how much that will cost.
- Marketing strategies. Your great product or service won’t do you much good if potential customers don’t know about them. Determine who your target audience is and devise a marketing strategy to reach them. This may involve having to purchase marketing software that enables you to reach your potential customers via SMS, email, social media, and search engine optimization strategies. Determine what software you need and estimate the cost.
- A website. No matter what type of business you are running, having an online presence– even a rudimentary one – is crucial, as most consumers today begin their search for products and services online. Even if you use a website builder and hosting service such as Wix or Squarespace, there can be fees involved. Do your best to estimate the cost for this vital business component.
- Equipment/machinery. If you’re planning to launch a new restaurant, construction company, or any other small business that offers physical services, you’re going to need equipment to run your business. Assess what equipment you’re going to need and the costs.
- Rent money for a physical space. If your business will operate out of a physical location, shop around to determine the ideal location and price for your space, as well as the cost to design it.
- Outside contractors. There’s no shame in admitting that you can’t do something, and if you have the means to do so, contracting outside help for things like logo and website design and marketing could make your life a lot easier and greatly improve your business. These services are expensive, so shop around and guestimate the cost if you feel bringing on contractors is necessary.
- Employees. Whether you’re opening a plumbing business, small accounting firm, or construction company, you will probably need employees at some point. A small business loan can help you get started on payroll until your business is pulling in enough revenue to pay your employees.
Where to Get Start-up Business Loans
There are not many types of start-up loans available. There are even less start-up loans for those with bad credit. So, getting an unsecured loan for your startup business will be difficult but not impossible. While most traditional banks and many alternative lenders do not offer them, as many of them view startups as too risky, there are some options:
Startup Business Loan Options
- Online Lenders. There are online lenders that specialize in giving loans to startup businesses, even to new small business owners with less than stellar FICO scores. These finance options can include term loans, lines of credit, and equipment financing.
Drawbacks: Because they are taking on so much risk, these lenders often charge very high interest rates – in some cases as much as 30% – to new small business owners, depending on their FICO scores.
- Personal Loans. Personal loans have become popular over the past decade as online lending has become more prevalent. They are often easy to apply for, have far lower requirements than a standard business loan, and funding is typically quick. They can be a good source of bridge financing to pay for the startup costs if your personal savings aren’t enough to cover everything.
Drawbacks: Personal loans usually don’t offer as much money as business loans, so you may not be able to borrow the amount that you need. Additionally, depending on your FICO score, the interest rate on a personal loan can be extremely high.
- SBA Loans. The SBA loan program offers two specific types of loans that new small businesses may be eligible for: the SBA Microloan and the SBA 504 Loan. These loans have much lower requirements than the popular SBA 7a loan and pay relatively small loan amounts to new businesses and offer much lower interest rates than online or personal lenders. They are typically offered through not-for-profit intermediaries, often called community development companies (CDCs), although some for-profit private lenders may offer these types of loans as well.
Drawbacks: These loans are usually offered to small businesses that have been operating for at least six months, with some form of working capital foundation, so if you can somehow be in business for that long, the loan may be worth it. Additionally, CDCs and lenders often only provide business loans for minorities, those that operate in underserved communities, and veteran-owned businesses. The biggest potential drawback is that the amount you borrow may not be enough to cover your costs – while the maximum amount you can borrow for a microloan is $50,000, the average SBA microloan size in 2022 was a little more than $16,000.
- Personal Credit Card. If you’re desperate for funding and have no alternative sources of capital, then your personal card gives you a line of credit to draw upon to fund any start-up expenses. Make sure to get receipts so you can separate your personal expenses from your business ones so that you can take advantage of business tax deductions.
Drawbacks: Personal credit cards typically carry a much higher interest rate than a business loan. Plus, startup business costs are usually high, and this will cause you to draw down your available credit significantly. That, in turn, will affect your FICO score, as your credit utilization rate is a big factor when calculating your score among all three major credit bureaus.
- Home Equity Line of Credit (HELOC). A HELOC allows you to establish a line of credit using the equity in your home as collateral. You can use the money for large purchases, such as the cost of funding your new business.
Drawbacks: This might not be an option for you if you recently bought your house, as most banks require you to own a certain amount of equity in your home to use this type of finance option. Also, when you borrow against the equity of your home and are somehow unable to repay the debt, you could risk losing your home.
- Friends and Family Loans. Hey, you can always remind your friends and family members that Michael Dell started Dell Computers with a $1,000 loan from his parents. Seriously, if you have family members and close friends who trust you and you’re possibly willing to share with them a piece of your future success, this is always an option.
Drawbacks: If you were a troublemaker as a kid or never paid back that $100 your friend spotted you back in the day, then asking your parents or close friends for a loan may not be an option, no matter how much begging you do. So, if you’re planning on asking, try to make amends with them beforehand.
What to do if You’re Declined
Rejection is always a bitter pill to swallow, but if you are turned down for a startup business loan, you shouldn’t see it as a failure, but as a valuable lesson. Lenders make money by giving loans and charging interest on them, so in most cases, they want to see your small business succeed. As such, if you are turned down, they will usually be happy to specify why they turned you down and give you advice on how to get approved next time. The most common reasons for getting turned down are credit score, lack of assets, and a poor business plan. The ways to improve this are:
Make sure you are caught up on your bills. Having at least six months’ worth of on-time payments toward your current debt will go a long way toward improving your FICO score.
Apply for new debt. This may sound counterintuitive, but a strong debt-to-credit ratio is a big part of your credit score. The more unused debt you have, the more favorably a lender will look upon you.
Save money! Of course, this is easier said than done, but if you have savings and any other assets of value such as your house, lenders will see that you have potential collateral, thus making it easier for you to qualify for a loan.
Have a strong pitch! Improving your business plan to include careful market research will improve your chances of getting a loan. Some of the questions you need to answer are: What differentiates your products and services? How will your business turn a profit? Do you have a strong marketing plan?
Other Financing Options for Startups
If getting a startup loan isn’t an option, worry not, as there are avenues to explore to obtain capital for your new venture.
- Crowdfunding. Over the past decade, crowdfunding has become a popular way to raise funds for start-up businesses. It is the practice of raising funds through popular crowdfunding websites. Setting up a crowdfunding campaign is relatively easy and typically done through a crowdfunding platform. Once you’ve set up your account on the platform, write up a compelling description about your company and its products, and indicate the amount of money you are seeking to raise and how you plan to use it. To attract investors, your business plan and products must strike an emotional chord. One of the biggest perks of crowdfunding is that you can retain full ownership of your business. While equity crowdfunding is an option, you can also focus on handing out rewards – such as discounts, special product releases, or profit-sharing – to your investors.
- Small Business Grants. There are several grants available for startups through both private entities and the federal government that could reward you with thousands of dollars in start-up cash, especially if you are launching a woman-owned, minority-owned, or veteran-owned business.
- Small Business Credit Cards. Since there are limited business loan options available for startup businesses, you may want to consider applying for a business credit card as a temporary alternative. Business credit cards issued to startups will require a strong FICO score, which helps to mitigate the risk the card issuer is taking due to your lack of time in business. Like with any credit card, interest is only charged on the amount you use. As an added bonus, business credit cards typically come with perks – such as cash-back rewards, travel points and discounts with select vendors – helping you save money at the same time.
- Venture Capital. VC funds usually have the most stringent requirements, and only invest in companies that are in an industry with the potential for high-margin growth. To invest, VC managers will require a strong business plan, showing growth and revenue milestones you plan to hit and how you will accomplish them. In return for investing VC managers may want high ownership stakes, a seat on the company board of directors, right of first refusal, and anti-dilution protection. VC funding is not easy to obtain. There are hundreds to thousands of businesses vying for funding at any given time. To make their own selection process more seamless, most fund managers will only accept pitches through referrals.
Steps to Take Before Applying for a Startup Business Loan
Before you seek a loan to fund your startup, there are several steps you need to take first to set up and establish your new business. These include:
- Making sure that the federal government knows your business exists. Okay, this may sound strange, but it’s really not – in order for your business to operate, get a loan and take tax deductions, the IRS must know that it exists. That means that you need to obtain a federal Employee Identification Number (EIN) from the IRS. This is a number needed for the IRS to identify your business. You can apply for one on the IRS website.
- Registering your business. For tax reasons (and to also make sure your company officially exists), you should register your business within your state as a limited liability company (LLC), “doing business as” (DBA), or a corporation. Sole proprietors typically become LLCs or DBAs so that they can tie their business’ revenue with their personal incomes, which has tax benefits. Higher-margin small businesses that have multiple owners sometimes register as S corporations, which also have tax and legal benefits. Registration must be made in your state, and each state has slightly different requirements. Either a tax attorney or online legal companies such as legalzoom.com can assist you with this for a fee.
- Creating a business plan. Small business lenders may ask for a business plan before approving you for a loan. A business plan is like a resume for your business. It defines your business, what makes it unique, and states why you believe it’s going to make money, among other things. You can find templates for business plans online, or if you have the means, you can hire someone to do it for you.
- Getting your paperwork in order. Whenever you apply for a start-up loan it’s a good idea to get your paperwork in order BEFORE you start the application process. If you’re seeking to borrow for a startup business, lenders will probably want to see any financial statements you have at this point, your personal tax returns, and a business plan.
Hang in There
Creating a business from scratch is one of the most difficult – albeit rewarding – challenges that anyone can take on, and obtaining capital for your new venture may be the most difficult challenge early on. There are, however, borrowing opportunities and other sources of money that you can tap into besides your personal savings. Carefully evaluate your funding options to make sure you select the one that is right for your business.
KEY TAKEAWAYS
- Short-term financing options like short-term loans and merchant cash advances can offer small business owners fast remedies for addressing cash flow challenges, all while providing flexible repayment terms.
- Accounts receivable financing and business lines of credit offer access to capital based on invoices or credit limits, allowing businesses to manage working capital effectively.
- Trade credit, inventory financing, business credit cards, and peer-to-peer financing can be good alternative sources of short-term finance that cater to specific needs, from delaying supplier payments to securing inventory and accessing peer-based loans.
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, and they can be very beneficial for different businesses under the right circumstance. 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, Unlike traditional loans, merchant cash advances offer a flexible financing solution based on your sales, not fixed rates. 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. Unlock immediate capital with accounts receivable financing by leveraging the value of your outstanding invoices. 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.
No matter its size, no business is recession-proof. And this goes double for small businesses. And with the increasing number of concerns about a future recession, it’s more than fair for small business owners to be looking into ways to financially insulate their businesses.
One of the best ways to protect your business is to increase your financial options. And one of the financial options small business owners ought to consider is a business line of credit. While a lump sum you’d get with a business loan is helpful and definitely has its place, a business line of credit offers more flexibility and doesn’t force you to start repaying upon access to the funds.
With lenders traditionally tightening their underwriting requirements in a recession, now is the time to consider the benefits of a business line of credit.
Key Takeaways
- Stabilize your cash flow with a business line of credit
- Cover payroll if you experience an economic downturn
- Gain a reliable supply of working capital
- Pursue recession-based investments and opportunities
- Taking out a line of credit benefits forward-thinking businesses
Benefits of Opening a Business Line of Credit in 2023
Odds are, the US economy is nearing a recessionary environment, with economists predicting a 70% chance of a recession this year. Opening a business line of credit gives your business a credit-based cushion. That credit can help you take advantage of new opportunities or simply take the pressure off your current expenses.
Let’s examine why several business owners are considering the benefits of a business line of credit this year.
1. Flexible Access to Business Funds
Recessions can hit hard and fast, and with that drop comes a drop in consumer spending. A recessionary environment doesn’t just drop your access to customers either; it can also make materials and even general inventory harder to get ahold of.
A drop in working capital and a lack of cash flow is the perfect recipe for a business closing its doors. Having access to a line of credit gives business owners the chance to weather the impacts of slow seasons or outright recessions.
2. Only Pay Back What You Withdraw
A line of credit benefits the business owner that doesn’t have a clear borrowing timeline. As a form of revolving credit, lines of credit only require you to repay what you borrow from or draw on the line.
As long as you stay within your credit line’s limit, you can continually draw on and repay until the line expires.
3. Improve Cash Flow
Decreased cash flow is one of the biggest threats to your business. And that threat gets even more menacing during a recession. On that, a study found that approximately 82% of small businesses fail because they need more capital to cover payroll, materials, and outstanding supplier invoices.
While not every business weathers a recession in the same way, businesses with already thin margins are at the highest risk when the economy takes a downturn. According to CNBC, these are the five industries historically affected the most by recessions:
- Construction
- Travel
- Manufacturing
- Hospitality
- Real estate
Industries that have high upfront investment and pay in sometimes have equally high margins – eventually. In an example like this, businesses may spend their first years building up a customer base and recognition while making a minimal profit. Once their initial investments pay off, (be it machinery, a facility, or even an aggressive marketing campaign) businesses like these can see much bigger profits. But this can only come to pass if a business is financially strong enough to make it through their opening years. A business line of credit can be a great tool for a company already in their journey to increase their financial options while making a bigger investment in their business.
Businesses with a lower profit margin can use a line of credit to help get them through slower seasons or while they are waiting on payment from customers.
4. Cover Unexpected Expenses
Recessions put pressure on every branch of your business. And that pressure can lead to the weakest branch snapping. In business terms, recessions force small businesses to perform in less than stellar conditions. You may be forced to spend more on materials you depend on or find yourself paying more for utilities.
These unexpected business expenses can leave you unable to invest in other areas of your business or prop up the battered arms of your organization.
Taking out a business line of credit adds a cash flow barrier to a business’s bottom line – meaning that unexpected expenses can now have a place in your budget.
5. Build Your Business Credit
Using a business line of credit responsibly and within your means is also a great way to potentially build up your business credit. Habitually drawing manageable amounts of your line of credit and paying them back on a timely basis can only be a good thing for your business.
6. Protection Against Revenue Dips
During the 2008 recession, the US GDP fell by 4.3%. Prices and expectations for supplies changed overnight and proved no business can be too prepared. We’ve seen similar supply issues over the past few years as a result of the pandemic and inflation. Having a line of credit is like having a first line of defense against downturns or increased prices. While you can’t depend on a line of credit solely, businesses with access to viable credit are often the most likely to weather downturns or outright recessions where cash flow cuts fast.
7. Help Meet Payroll in Slower Months
In slower seasons, recessions, or even with day-to-day operations like a large inventory purchase, it’s possible to use a business line of credit to cover operational expenses, like payroll. While this, once again, can’t act as a permanent solution, a business line of credit gives businesses the flexibility to test out new ventures or as a means to hold on during slower seasons.
If you’re expecting slower months ahead in 2023, take out a line of credit now as an additional layer of protection.
How Can a Line of Credit Help Your Business Expand?
Rising inflation, increasing interest rates, and a looming recession don’t affect all businesses equally. Where some businesses may be forced to hunker down for the length of a downturn, there are other businesses that may be able to expand during a recessionary environment.
Here are some ideas for how a line of credit can lead to new opportunities:
- Invest in New Inventory – It’s not just small businesses that face price fluctuations during a recession. Suppliers see it too. Pay close attention to your supply lines. While some suppliers will certainly raise prices, others looking to increase cash flow could do just the opposite. A business with a good line of credit could then take advantage of the timing and increase its inventory.
- Expand Your Marketing – While many businesses may choose to lower marketing costs during a recession, this just means that your business can take up a more competitive edge. Invest in your marketing during a recession to potentially increase your overall reach and find new customer bases.
Opting for a line of credit is both an offensive and a defensive measure for small business owners. Not all lines of credit are the same, so ensure you choose a lender that you can trust. At Kapitus, we specialize in getting ambitious business owners lines of credit (along with a number of other financing options) with strong track records of success.
Get ahead of the competition and take advantage of the multitude of benefits that could come with a business line of credit. To secure the financial future of your business, apply now for your line of credit.
KEY TAKEAWAYS
- Private investors can share in your profits, unlike traditional business loans, which require repayment, creating a potentially mutually beneficial arrangement.
- Accepting investors may mean giving up decision-making control.
- Private investors often opt for equity investments, aligning their interests with your business’s success.
Running a small business requires a constant and considerable flow of capital; and getting a small business idea off the ground requires just as much (if not more). While there are several kinds of financing geared toward sustaining and expanding small businesses, another option to consider when looking for capital is taking on private investors. Private investors can come in many forms but most frequently operate as venture capital firms or seed funds, also known as angel funds. But not all private funding falls into those two categories. In truth, private funding encompasses all non-bank and non-financing routes for getting capital into your business from a third party. Today, we are specifically addressing the potential pros and cons of accepting investments from private persons into an existing business.
Pro: Let Your Business (Not Your Credit) Speak for Itself
Convincing a private investor to support your business is a completely different process than if you were to seek funding at a bank or online financing company. While banks and all secured financial institutions blanketly require seeing your credit score, and frequently your entire financial history, private investors are often interested in different elements of your business. Specifically, private investors want to be certain their money will make them (and you) more money and that you, the business owner, are a reliable mast with which they can knot their sail.
Working with investors gives you the freedom to sell yourself and your business on the merits which truly excite you; the best investors will match your excitement and see that as a reason to trust your business. Private investors are a great source of capital, then, for newer businesses with a shorter credit history or businesses that can meaningly convey their plans to expand and make investors’ money expand as well; banks and financial institutions don’t get excited for your business’s growth in the same way an investor might.
Con: Investors Expect Influence in Your Business
A private investor, especially one making a major contribution, can want a decision-making seat at the table of your business. This is something all publicly traded companies deal with regularly; but in the case of small businesses the investor and business owner relationship can play out in many ways. At the very least, investors will anticipate that their input and ideas will be genuinely considered and that they will have a legitimate outlet to voice them.
As a small business transfers into the space of equity and investment, it can feel unnatural to become beholden to investors after having truly been your own boss, as many small business owners will attest that the freedom of making your business’s decisions is one of the high points of running your own operation. Taking on investors is both a structural and emotional changing for a business and a business owner
Pro: Private Investments aren’t Always Paid Back Like a Loan
When a private investor puts money out on your business, they are the one taking in the risk. Very often, an investor’s capital is paid back to them in the same way you would pay back a loan. While there are examples of “investment loans” in which the business owner pays back private investors their principal plus interest, those are much less common compared to equity investments. In cases of equity investments, the business owner exchanges the investor’s capital for a negotiated stake in your company with which they then receive a proportional amount of your company’s profits as you earn them.
Consider as well that if your business fails or is bought out, you can’t default on an investment. That investor’s bet on your business has no protection; as the equity value of your business fluctuates, as does the value of that investor’s initial capital.
Con: Unlikely to Benefit Smaller, Local Businesses
Private investors and venture capital firms are large, capital-heavy forces. Private investors also have an understandable interest in making money. They are most frequently attracted to businesses with a wide reach and near-certain potential to grow in a significant way. If you are, for example, a construction firm servicing the greater New England area with no interest in expansion or going national, it is unlikely you will find private investors lining up at your door. This isn’t because our hypothetical business isn’t successful, it’s because that business’s success and continued revenue doesn’t offer extraordinary growth for investors’ capital. Investors want a bomb primed to blow, or more specifically, a bomb primed to blow their investment sky-high. Private investors prize ambition and potential above all else, and it is essential to understand that not all small businesses are likely the right partner for private investors.
Every small business can’t reinvent the wheel, nor does every small business have massive or international ambitions for expansion. But this borders on common sense; businesses who are actively seeking investors likely already have a firm list of reasons why. Private investors aren’t backing every one-location pizzeria and bodega in America, but those pizzerias and bodega who see bigger, equity-based futures for their business may have a different story.
Pro: Trusted Investors Can Become Valuable Partners
A private investor willing to take equity in your company likely both believes in your mission and has existing industry expertise with which they found your business a suitable partner. Your investors have just as much interest in the success of your business as you do; being that your financial success also means financial success for them. You and your investors (especially in the small business space) are likely to become close partners in managing big-picture projects. Adding experienced and educated voices to the large decisions in your business can only be a good thing.
What this section and others before it has hinted at is that taking on investors is as much your decision as it is the decision of the investor. Being that your investors will – in a way – represent your business, you have every right to decide who will become your partner through private investment. Being that your small business likely isn’t on the open market, you have the final say as to whose venture capital funding you want to take on. If an investor or team doesn’t seem like the right fit, you have every right to keep looking.
Invest in Your Business. One Way, or Another
Private investors likely aren’t the right match for many true small businesses but in those cases where small businesses see themselves becoming medium-to-large companies in the future, convincing private investors that your plans are feasible may just be the next step in your business journey. No matter if your business is right for private investors or not, the mentality and presentability that attracts investors is attractive and healthy for any and all businesses. Show your ambition and make detailed plans for the future of your business if not for private investors, perhaps for yourself and your most trusted staff. The good practices that come with attracting investors are in no way restricted to businesses on that certain path. Invest in your business’s future, one way or another.
The trucking industry is the lynchpin of the U.S. economy. Without truckers, overland eCommerce wouldn’t exist. Fleets of trucks are en transit, collecting payloads, and gassing up by the millions as you read this sentence.
Despite the massive number of truckers on the road and logistics companies mapping routes, trucking is still a low-margin business, especially for solo truckers running their own businesses. Getting caught between jobs can make it impossible to stay up-to-date on truck repayments while covering your personal expenses.
A business line of credit, then, is a uniquely valuable tool for small businesses in the trucking industry.
Key Takeaways
- Continue to meet your business expenses during down periods.
- Manage volatile inflation.
- Prevent your cash flow from going into the red.
- Invest in better technology, equipment, and vehicles.
What is a Line of Credit, and Why Does it Make Sense for the Transportation Industry?
A line of credit, or credit line, is a defined amount of money that a bank or other financial institution has agreed to lend to you which you can draw on as needed. Since cash flow is a constant challenge for the transportation industry and needing cash at short notice can strain even the most well-equipped business, a line of credit effectively gives businesses more power to cover timely expenses and cushion margins.
Trucking margins are no joke, as truckers know: Truckload carriers spent 0.18 cents per mile driven on maintenance costs alone. Specialized fleets spend an average of 18.7 cents per mile on maintenance and repair.
These figures may not sound like much, but significant repairs could quickly land your business with a five-figure repair bill. When your truck is your means of survival, it can be crushing to be hit with bills passing $10,000 just to get back on the road.
Lines of credit are designed to provide access to financing without breaking the bank. Unlike conventional business loans, you only begin making repayments when you make a draw on the money. And as a form of revolving credit, as long as the line of credit remains active, you can continually borrow as you repay. An active line of credit is a far more flexible form of financing for your trucking business enabling you to access money anytime you need it.
Trucker Loan vs. Freight Line of Credit
As a business owner, you’re likely exploring your financing options and looking into the pros and cons of both a conventional business loan and a line of credit. Every financing option has its place. At Kapitus, our intention is to match every small business with the financial products that suit them best.
To get you started un understanding the difference between the two options, here’s a quick overview of each:
Here’s a comparison of each option:
| Business Loan | Line of Credit | |
| Loan Term | Six months to five years | Up to 12 months |
| Repayment | Repayments begin immediately | Repay only when you borrow |
| Secured/Unsecured | Both | Both |
| Interest Charges | Charged upon disbursement | Charged only when you borrow |
| Use Case | Buying a new truck | Covering sudden repair expenses |
Truckers confront a range of fixed and variable expenses that can threaten their cash flow. Any time spent off the road means losing money, but with either of the above, you can continue to fulfill your business obligations – depending on your needs.
Inflation and Fuel Costs Can Make a Line of Credit the Perfect Fit
Today, the trucking industry faces unprecedented challenges. Even the leanest and most savvy trucking companies aren’t above feeling the impacts of inflation and supply chain blockages. Carriers of all sizes have been forced to innovate and pivot to continue to meet the needs of American consumers and businesses.
Taking out a secured or unsecured line of credit can be a great fit for your cash flow needs. Let’s examine why a line of credit is a valuable tool in the current trucking ecosystem.
Confronting Trucker Shortages
According to the American Trucking Association (ATA), in 2021, the trucking industry reported a shortage of 80,000 drivers. Carriers have reported a range of reasons for the shortage, including:
- Retiring workers
- Lifestyle clashes
- Salary/Benefits
One of the most consistent pain points for American truckers is salary. The median annual salary for a commercial truck driver is just $56k. In many areas of the country, $56k is not enough to support a family or justify this challenging lifestyle.
While a line of credit is not the best option to increase salaries, it can help your cash flow remain positive, thereby helping to offset the impact that salary increases would have.
Overcoming Inflation Woes
In 2022, consumer inflation reached its highest level in 40 years. Global supply chain disruption resulting from the global COVID-19 response threw the U.S. economy into turmoil.
The Producer Price Index (PPI) for truck trailers and chassis surged throughout 2022, with February seeing a 6.3% rise, and October logging a 10.5% rise. Raw materials like aluminum and lumber spiked, meaning truckers are left paying record prices for their vehicles on top of other equipment.
Taking out a line of credit can support businesses in managing rising prices. Whether it’s helping to cover the cost of fuel or make repairs to one of your trailers to quickly get you back on the road, having a line of credit can make a big difference if those expenses come in between major deliveries. Financial gaps are inevitable in the trucking industry and lines of credit are a meaningful way to combat them.
Using a line of credit for your trucking business as a stopgap can help you cope with high price volatility caused by inflation.
Coping with High Fuel Costs
Fuel costs have been the headline headache for professional drivers worldwide. Russia’s war in Ukraine caused oil prices to spike to $123.07 per barrel in March of 2022. The impact of higher oil prices led to fuel hitting $5.00 per gallon nationwide, with some states experiencing up to $6.00 per gallon.
At the height of the fuel crisis, truckers reported spending $2,400 to fill up their tanks, which is alarming as recent rates ranged from $800 to $1,000.
While prices have come down some, gas is subject to the Feather Theory. This means gas prices have a habit of spiking quickly before slowly decreasing to previous levels.
Operating with a line of credit can provide short-term capital to cope with high fuel costs. Sudden surges can catch even the most well-prepared trucking businesses out. If you’re tied to a fixed contract, you cannot pass these costs onto your clients at short notice.
Your line of credit can stabilize your business and let you get back on the road regardless of which way fuel prices are turning.
Other Use Cases for a Trucker Line of Credit
| Use Case Example | |
| Tied Your Trucking Company Over | If you need to wait 90-180 days for a client to pay you, a line of credit can sustain you until that invoice is paid. |
| Invest in Your Business | Whether upgrading your administrative software or investing in a new hydraulic lift, your line of credit can cover the cost. |
| Pay High-Interest Debts | Lines of credit offer lower interest rates than many other lending options. Tapping a line of credit to pay an expensive credit card bill can save your business money. |
| Build Your Credit | Borrowing and repaying via a line of credit enhances your trucking business’s credit score. Higher credit scores open up new doors for more extensive financing in the future, such as if you need to expand your fleet. |
How Hard is it for a Trucking Company to Get a Line of Credit?
Trucking companies often struggle to secure any form of credit because of unavoidable realities of the industry. Owner-operators are especially vulnerable as most already have outstanding credit they used for their initial purchases of their vehicles and equipment.
As discussed, the trucking industry has low margins compared to other industries and stiff competition for lucrative contracts. Lenders are well aware of this which is why trucker loan applications tend to receive extra scrutiny.
This doesn’t mean, however, that trucking companies can’t get financing. Unlike other businesses, truckers frequently opt for a secured line of credit against their vehicles. As a trucker’s most valuable asset, securing a line of credit against a truck can be one of the easiest ways to get approved.
How to Apply for a Trucking Line of Credit
Applying for any kind of financing ought to come with some introspection about your business and current margins. Moreover, you’ll need to prepare documentation in advance to avoid additional delays to your application.
Understand Your Business Needs
Evaluate your operation from all points of view. Focus on the root cause of any financial issues and you’ll likely see whether or not a line of credit would fit well for your business.
Ask yourself three questions:
- Which expenses are causing me the biggest problems?
- How much capital do I need to accomplish my business goals?
- How much can I repay in a billing period?
Lines of credit ought not be used to revive an unsustainable business model. Lines of credit require prompt repayment, so any expenditure on the line must be one that you certainly can pay within the terms of your line.
Asking the above questions is an important first step that will make your conversation with lenders easier and more productive.
Prepare Your Documentation
Lenders will require you to present specific documents that paint a full picture of your trucking business. You will likely need to provide copies of bank statements, existing credit information, and in some cases a business plan. Each lender requires different documents from the businesses they partner with, so be certain to prepare these ahead of time.
Preparing this documentation in advance will enable you to speed up the application process so that you can access the capital you require as quickly as possible.
Review Your Eligibility
Trucking businesses must meet eligibility requirements set by the lender. Any reliable lender will make their minimum business requirements clear.
Applying for a line of credit through Kapitus requires you to meet minimum standards to take advantage of approvals in as little as four hours, no origination fees, and competitive rates. To apply, your trucking company must meet the following minimum requirements: :
- 650 credit score
- 2+ years in business
- $180,000 average annual revenue
Lenders give requirements to paint the picture of a business who could best partner with them. While these requirements represent a baseline, they are not an upper limit.
There are several ways trucking companies could benefit from a line of credit. From emergency purchases to maintaining daily expenditures, a line of credit offers the flexibility to borrow as and when needed with no ongoing fees.
At Kapitus, our customers can apply for and get approved for a line of credit in as little as four hours. Our commercial lending specialists are ready to pair you with the financing that best fits your business.
Join the more than 50,000 businesses that have chosen Kapitus as their financing partner of choice. Connect with a Kapitus certified financing specialist to apply now for your line of credit.
At Kapitus, our customers can apply for and get approved for a line of credit in as little as four hours. Our commercial lending specialists are ready to pair you with the financing that best fits your business.
Join the more than 64,000 businesses that have chosen Kapitus as their online lender of choice. Connect with a Kapitus specialist to apply now for your line of credit.
Contractors have unique cash flow needs, and they need flexible financing that can put money in their hands when they need it. Unexpected needs to purchase inventory, equipment, and supplies, coupled with the fact that they often face an irregular payment schedule from customers can lead to liquidity problems. This is where a business line of credit (bloc) can be critical for both contractors and small construction companies for completing projects on time
WHAT IS A LINE OF CREDIT?
A line of credit is similar in concept to a business credit card in that it provides a predetermined amount of cash for a borrower to draw upon whenever they need it and for whatever reason they need it for. The borrower only pays interest on the amount borhttps://kapitus.com/resource-center/what-is-the-difference-between-business-line-of-credit-and-business-credit-card/rowed, and there are conditions on how the borrower can spend that money. Borrowers typically draw upon a line of credit to meet short-term cash needs.
Much like a credit card, the interest charged on a bloc is variable – it is usually the prime rate plus a few percentage points. Borrowers can also choose between a secured and unsecured bloc, as each offers certain advantages. Unlike a credit card, however, blocs typically require borrowers to pay down some or all of the debt at various intervals.
One of the biggest benefits of a bloc is flexibility. Contractors often have irregular cash flows and unexpected costs that can cause a project to be delayed or go over budget. Having cash on hand to meet the needs of a project can go a long way towards successfully completing a project and earning you the reputation of being a dependable contractor.
HOW DOES A LINE OF CREDIT MAKE SENSE FOR CONTRACTORS?
Construction projects can involve spending millions of dollars to get started, with payment not guaranteed until the project is completed. Profit margins within the construction businesses are surprisingly small. The average profit margin for commercial projects is just 6%, accoridng to data compiled by Pro Est, a firm specializing in construction estimates.
These thin profit margins are the precise reason why having available cash through a line of credit is so crucial for contractors. Some of the most common use cases for contractor lines of credit include:
- Purchasing Inventory – With rising inflation and the supply chain shortage still hampering US businesses, making sure you have the inventory when you need it is more critical than ever to complete a project. A bloc allows you to quickly purchase inventory when you need it to ensure that your project is completed on time.
- Hiring Employees/Subcontractors – Whether you want to expand your business or take on a subcontractor for a one-time job, hiring is expensive. Lines of credit can enable you to cover payroll until you get paid.
- Purchasing and Maintaining Equipment – Owning and maintaining your own equipment is a powerful method of preserving your cash flow by avoiding high rental costs. Alternatively, you may use a line of credit to lease or purchase specialized equipment for one-time jobs.
- Cover Your Overhead – Overhead costs such as meeting payroll can immediately be funded with a line of credit.
Business Loan vs. Line of Credit
Some contractorS may ask: “If I need money, why not just take out a term loan? After all, they offer a fixed rate, so wouldn’t they offer better protection in a rising interest rate environment?”
The answer is that comparing a term loan to a line of credit is an apples-to-oranges comparison, as they are two different financing products that are usually used for different reasons. A term loan is generally used for long-term expansion plans, while a bloc is typically used to cover short-term cash flow needs such as unexpected expenses. While it is true that a bloc does charge a varying interest rate, it can be advantageous over a term loan for its flexibility.
Kapitus, does offer both financing products but it is important to note the distinct differences between the two:
| Business Loan | Line of Credit | |
| Loan Term | Six months to five years | Up to 12 months |
| Repayment | Repayments begin immediately | Repay only when you borrow |
| Secured/Unsecured | Both | Both |
| Interest Charges | Charged upon disbursement | Charged only when you borrow |
| Use Case | Specific investments | Short-term financial needs |
Neither is strictly better than the other. It’s not uncommon for contractors to use both business loans and lines of credit for different purposes.
Unsecured or Secured Line of Credit?
Secured and unsecured lines of credit both have distinct advantages and disadvantages that contractors need to consider before choosing between the two. A secured line of credit means your borrowing will be secured against specific assets, such as equipment, cash reserves or real estate.
Unsecured lines of credit require no collateral and are the preferred financial products for most contractors However, secured blocs generally offer better rates and make it easier to get approved if you’re a new business or have a poor credit score. Here are the pros and cons of both:
Pros of Unsecured Line of Credit
- No collateral required
- Less risky for your business
- Additional flexibility
- Get approved with a lower credit score
- Lower interest rates
Cons of Unsecured Line of Credit
- Higher credit scores required
- Higher borrowing limits
- Strict underwriting process
- You could lose your assets
Generally speaking, lenders will consider your FICO score, time in business, operational capacity, cash flow and ability to provide collateral in order to approve you for a line of credit.
Streamlined loan application processing means applications are typically approved using automated systems. The first aspect of your application a lender will examine is your credit score. While getting a business line of credit with a poor credit score is possible, you’ll need to contend with higher interest rates.
Some lenders may also cordon off higher credit line amounts for the exclusive use of contractors with a higher business credit score. Newly incorporated contractors may have the option of using their personal credit scores instead to apply for a line of credit for their businesses.
If you’re struggling to obtain a line of credit, you may want to opt for a secured option. Secured options require real estate, equipment, or heavy machinery as collateral, but lenders will usually look more favourably upon your application.
At Kapitus, we provide lines of credit with a minimum credit score of 650, proof of at least two years in business, and average annual revenue of $180,000. To date, we have funded 64,000 businesses to the tune of $3 billion.
VISIT KAPITUS TODAY
The construction industry is a highly competitive landscape, meaning the business with adequate funding usually lasts longer than the business struggling to cover its expenses.
At Kapitus, we have worked with thousands of contractors in the past to provide them with customised lines of credit that are best to meet their specific needs. We offer quick, easy access to financing to give you breathing space when you need it most. Confront any unexpected expense and tackle multiple construction projects at once with the revolving credit you can use anytime you need it. If you want to learn more about how lines of credit work or how to apply for one, contact the Kapitus team today.
The modern lending marketplace gives small business owners a bevy of options for financing or access to capital. While this is overall a great thing for business owners, it’s easy to get overwhelmed by the number of sometimes quite similar options in the marketplace. Specifically, most small business owners have probably asked themselves whether a business credit card or line of credit makes more sense for their business’ needs. Knowing the answer to that question actually takes more than knowing your needs; you also need to know the key benefits of and differences between the two products.
KEY TAKEAWAYS
- Business credit cards can help your business build good credit.
- Your business line of credit helps you access revolving financing on demand.
- Interest rates and your credit limit vary depending on the financial product.
- Using financing products responsibly is a great way to foster business growth.
WHAT ARE THE PRIMARY DIFFERENCES BETWEEN A BUSINESS LINE OF CREDIT AND A CREDIT CARD?
While a line of credit and a credit card serve mostly the same high-level purpose, access to drawable credit, there are several considerable differences between the two products. Learning about the unique qualities of each product can help your business pair up with that option that best fits your needs – both current and future..
Credit Limit
Depending on how large of a credit limit you need, a credit card or line of credit may make more sense for your business. The credit limit on a business line of credit are typically considerably higher than the average credit card. With lenders like Kapitus, you can access a business line of credit to borrow considerably larger sums.
Credit cards are designed for smaller, short-term purchases. For example, you can use a business credit card to make small purchases of incidentals or to cover a business dinner. On the other hand, lines of credit are ideal for larger investments, such as purchasing inventory, covering payroll or buying more expensive equipment.
Interest Rates
Interest rates are one of the most important factors to think about when taking up any financing product. Being aware of your interest rates is essential to running your business, and taking on a new financing product like a credit card or line of credit requires serious vigilance on the part of the business owner.
Interest rates can vary wildly between a business credit card or a business line of credit.
While credit cards often come with higher interest rates than lines of credit, and holding a balance on your credit card can quickly become very costly, you may be able to completely avoid paying credit card interest if you pay your balance in full at the end of each billing cycle.
With a line of credit interest is charged on the principal balance, but lines of credit often come with monthly maintenance fees, so even if you’re paying your balance in full there can still be that additional monthly cost.
Draw Period
Your draw period defines how long you can continue to borrow money after getting approved. Using a business credit card will enable you to continue to borrow for as long as your account is open and remains in good standing.
Lines of credit are a form of revolving financing with a fixed draw period. Your draw period depends on the lender, but it’s not uncommon for draw periods to last for two to three years and in some rare cases going out as far as five years.. You can continually borrow up to your credit limit during the active draw period.
Fees
Line of credit providers commonly charge origination fees that will typically range anywhere from 1-5%. In addition, some lenders may charge maintenance, draw, and late fees. It pays to speak to your lender before applying for a business line of credit to determine the full scope of fees you can be charged. Every lender has different criteria and every lender charges different fees, so be sure to compare options.
In contrast, business credit cards sometimes come with zero fees, whereas some could charge serious sums per year. Other fees can apply to your business credit card, including cash advance, over-limit, and foreign transaction fees and an annual fee for holding the card.
Payback Periods
The payback period is essentially another word for your billing cycle. The billing cycle determines how quickly you’ll need to make your initial repayments.
Most business credit cards have payback periods of 28-31 days, meaning you’ll need to repay what you borrowed before the end of the billing cycle to avoid being charged interest.
Lines of credit, on the other hand, can have repayment terms of daily, weekly, bi-weekly or monthly, depending on your agreement with your lender.
Added Perks
Credit card companies have become increasingly competitive in an attempt to pull in clients. This means that modern credit cards often come with a collection of incentive perks that, if used wisely, could become a big reason for choosing a business credit card over a line of credit. Some premium business cards tout their perks as a major bonus for becoming a client.
Some of the added extras available via your card could possibly include:
- An introductory APR
- Purchase protection
- Extended warranties
- Complimentary airport lounge access
- Reward points for cash back, gift cards and travel
Choosing a card based on perks alone doesn’t paint the full picture of what your experience with the card may be, of course. When choosing a credit card, think of perks as a bonus on top of terms that your company is already comfortable with.
Finding the Right Fit for Your Business
Finally, what if your business is looking to cut borrowing costs in the face of rising interest rates? With the right lender, a credit card may offer lower lending costs because of an introductory APR. However, you only stand to gain if you can pay off your outstanding debt before the end of the billing cycle. Further, introductory low APRs generally only last for the first year of using a card.
On the other hand, if you’re a more established business and need a revolving credit line to help cover larger unforeseen expenses or to cover some operating costs in a down period, a line of credit may be a better option for you.
It could also make sense, in some instances, for a business to have both a credit card for smaller everyday expenses and a line of credit as a “nest egg” or to cover those larger expenses.
WHAT ARE THE PROS AND CONS OF A BUSINESS LINE OF CREDIT?
Your business line of credit is a form of revolving credit that enables you to borrow generally larger amounts on demand for a defined drawing period.
Like all types of financing, there are pros and cons to your line of credit.
Pros of a Business Line of Credit
- Higher Credit Limits – Lines of credit enable you to borrow larger amounts over a specified period. It’s not inconceivable to borrow more than $10,000 as part of a single credit line.
- Repeated Access to Capital – Repay the outstanding balance, and you’ll have no problems continually borrowing large amounts against your credit line until it expires.
Cons of a Business Line of Credit
- Shorter Payback Period – Some credit lines have very short billing cycles, and you could be making payments on your balance daily or weekly.
- No Rewards – Unlike credit cards, there are usually no additional perks or earned points to getting approved for a line of credit.
- Potentially High Fees – Some lenders levy larger fees to maintain your line of credit. In some cases, the annual maintenance fees can outsize standard credit card fees.
WHAT ARE THE PROS AND CONS OF A BUSINESS CREDIT CARD?
While more than half of small business owners don’t have credit cards (meaning they often rely on long-term financing options), they shouldn’t be discounted as business credit cards can play a role in driving growth within your business.
To decide whether a credit card makes sense, here’s a rundown of the pros and cons of having one for your business.
Pros of a Business Credit Card
- Effective Credit Building – Regularly using your business credit card and paying the full monthly amount due will likely help improve your business credit.
- Rewards – Credit card rewards – like points – can be especially lucrative for businesses that regularly draw and restore large amounts of their credit. These rewards can sometimes be redeemed as direct cash back.
- Employee Cards – As the primary account holder, you can distribute secondary cards to your employees. This means that travel or other necessary expenses can be charged directly to your company card. This is both a big convenience for your employees and a good boost to your business image.
Cons of a Business Credit Card
- Qualification – Qualifying for a business credit card generally asks for a high credit score; this may be difficult for some newer businesses.
- Lower Credit Limit – Business credit cards often have lower limits compared to lines of credit. This means that if you plan on using your credit for larger purchases, you may find a credit card more difficult to manage.
- Personal Liability – Failure to repay could lead to personal liability, which could also damage your own credit history.
USE CASES FOR A BUSINESS CREDIT CARD VS. BUSINESS LINE OF CREDIT
Consider the following use cases to better understand whether a business credit card or line of credit may suit your needs.
Business Credit Card
| Use Case Example | |
| Build Credit | Building your business’s credit score enables you to improve your credit and qualify for additional financing. |
| Earn Rewards/Cashback | Credit card providers offer additional rewards and cashback, allowing you to cover other expenses, such as travel. |
| Everyday Purchases | Credit cards make simple transactions quick, easy, and simple to track through your accounting software. |
| Protection | Many credit cards offer purchase protection as standard plus other forms of protection, such as trip insurance. |
Business Line of Credit
| Use Case Example | |
| Cover Every Expense | Credit cards have limits on the type of purchase you can make with them, such as payroll and leases. Lines of credit have no such restrictions. |
| Make a Larger Purchase | Take advantage of the higher credit limit of a line of credit to make larger purchases, such as equipment and payroll. |
| Carry a Balance | Businesses that need to carry a balance because they can’t make the repayments immediately may prefer a line of credit to avoid incurring excessive credit card interest rates. |
| Put Up Collateral | With collateral, lines of credit enable far higher credit limits to fund larger purchases, including heavy equipment. |
Financing your business’s future requires choosing the right financing option at the right time. Credit cards and lines of credit may seem like similar products, but the two have massive differences in terms of how much you can borrow and how much you can expect to pay.
Congratulations to Cafe de Stir it Up, an Alaskan-based small coffee shop and eatery that offers dietary-restriction-friendly fare, for receiving one of five third-place prizes in Kapitus’ inaugural Building Resilient Businesses (BRB) contest! Cafe de Stir it Up has received $20,000 to help grow their business
The world at large has undergone a dietary revolution in recent years. As nutritional choices and restrictions become more commonplace, eating at restaurants and cafes harbors much less anxiety for all those with limitations. Cities like New York, London, and even gastronomically-traditional Paris have numerous vegan, gluten-free, and other restriction-conscious spaces. But under Alaskan skies, such great expectations ought to be adjusted … or should they? Enter Café de Stir it Up, owned and operated by Michaella Perez, the premiere locale for dietary restriction-friendly fare in Fairbanks, Alaska.
“Some people wonder why we withstand -25-degree plus temperatures, but there is just something about the Golden Heart City that keeps us here,” said Perez. And the voters of Kapitus’s Building Resilient Businesses Contest agreed, giving Perez and Stir it Up enough votes to earn them a $20,000 grant.
After capturing minds and hearts in the BRB contest, now is our chance to learn more about the soul behind Stir it Up and what inspired a mom, entrepreneur, and visionary to bring dietary freedom to Fairbanks.
Authentic Inspiration
Stir It Up is a business born from inspiration rather than cold data. While a Starbucks or McDonald’s will go up on a corner because analysts calculated that area has the most foot traffic and potential for sales, Stir It Up came to be because a determined and business-savvy mother wanted to heighten the lives and experiences of those in her community. Dietary restrictions exist in a complex space where – until you, or someone you know well are faced with one – it can be hard to visualize how hard getting a good meal can be. Gluten-free, lactose mal-absorbent, vegetarian, vegan, keto, egg-free – it may sound like a fantasy to meaningfully serve these incrementally demanding restrictions, but according to Perez, it’s just part of the job.
After seeing one of her children deal with the unending blandness of most allergy-safe meals – white rice and salads can only last so long – Perez knew she could make dietary restrictions not just manageable but delicious and fun. “To survive in this market, you have to have a niche,” explains Perez. Café Stir it Up isn’t simply prepared for dietary restrictions; they are up to the challenge. “I realized that my community had a need: a place that truly understood dietary challenges,” Perez said about her business. With a gluten-free bakery and a collection of dairy substitutes on-hand, it is near-inconceivable for someone not to find the proper fix for their dietary lifestyle.
Power to the People, Power to Grow
In 2015, Perez and her team expanded to a brick-and-mortar location in Fairbanks, making the “café” in their namesake true to its merits. Now with increased capacity for customers and service, Café Stir it Up quickly became a community gathering spot for the Fairbanks community and everyone else willing to brave the cold.
“Little did we know that we would be negatively impacted by a pandemic, major road construction, and shortages of revenue, supplies and employees,” Perez explained when talking about the challenges of maintaining Stir it Up. Cafés especially faced a share of hardships during the pandemic, and hiring troubles can quickly become hiring crises when the applicant pool only includes the greater Fairbanks area.
Keeping Cafe Stir it Up alive during the most challenging moments didn’t happen by chance or coincidence; Perez and her team put in the hours. Through engagement with their local community and a commitment to serve Fairbanks as best they could, Perez and her team got creative and survived as a result. Especially for those with dietary restrictions, Stir it Up stands for much more than a place to get good coffee and service. By having a business serve your needs, that business further justifies the legitimacy of your needs. Stir it Up gives a voice to a community that is usually restricted to much larger urban areas. While a dietary-restriction-friendly café may be a drop in the bucket in New York City, the people of Fairbanks know how lucky they are to have Stir it Up.
BRB for Growth
After submitting her video to the Kapitus Building Resilient Businesses Contest, Perez, and Stir It Up, found lots of love during the public voting phase. She and her team took home one of the five third-place prizes of $20,000. “We are ecstatic to win this prize,” Perez said. “So, to think…little old me in little ol’ Fairbanks won something and took third. This is huge for us. We are honored. $20k is going to help SO much.”
One of the many goals of the BRB contest is to enable small businesses to strengthen their communities. There are few better examples than Stir it Up and Perez when it comes to community empowerment. With these resources from BRB, Perez doesn’t just improve her business. With every coffee and meal served, Stir it Up fosters a home for dietary freedom.
Learn the stories of all of our small business winners:
BRB Stories: After Devastating Setback, Play Pits Takes First Place in Kapitus’ BRB Contest!
BRB Stories: Relying on Faith and Passion for Business Success
BRB Stories: Creating Libraries-worth of Unforgettable Memories!
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