Running a small business can be one of the most rewarding experiences you ever have. It demands harder work than almost any job, but in return you have much more control over what you do and whether you succeed. One piece of the puzzle that inevitably comes into play, though, is financing. You need money to get started, to market, and to grow, and many small business owners do not have enough cash on hand to fund it all. If you need small business financing, here are your basic options:
Obtaining a traditional small business loan depends on a number of factors. A lender will usually look at your credit history, your cash flow, and your business plan. If you're just launching your business, the lender may instead look at your personal finances and credit. A more mature business looking to grow can rely on current revenue streams, but will still need to make a solid business case for being able to cover increased expenses and qualify for new financing.
If your personal credit is low and your business is not yet generating revenue, your choices are going to be limited. Some micro-lending options can give you loans of $5,000-$10,000 to help get started, but these often are not enough to open a storefront and cover payroll and other expenses. Depending on your financial condition and needs, you may need to look at other kinds of loans to really get you up and running.
Equipment loans sometimes give you the opportunity to procure more financing because the value of your purchase secures the loan. Whenever a lender offers funds, it bases the decision on the likelihood of your being able to repay what you've borrowed, with interest. Any time you borrow against collateral, you are giving your lender the option of taking that collateral to cover any losses.
Similarly, a lender can use your invoices or purchase orders to secure the value of their loans. You agree to pay back on a schedule that depends on the value of those orders and invoices. This can give you access to financing up front against money that you will receive once orders are filled and paid. Your risk here as the borrower is that, if you are not able to repay those loans, the lender can obtain a lien and claim the value of those orders or invoices until you have repaid the loan. Generally, this means your customers will be sending their payments directly to your lender and that can create customer relation issues.
Revolving Credit Lines
One option for businesses that need regular access to funds is a revolving line of credit. This operates much like--and can even consist of--a corporate credit card. You have a credit limit in place and can borrow up to that limit, paying down what you can on a monthly basis. Instead of paying off and completing a loan, it remains open and available for you to borrow against the credit line.
This kind of credit can be very attractive for a growing business. As needs emerge, it gives you access to the funds you need without your having to reapply for credit and obtain a new loan. However, it tends not to make as much sense for startup funding or other one-time, large financial needs. Further, the more you depend on this kind of financing, the more your interest compounds and the more expensive it becomes.
Merchant Cash Advances
A merchant cash advance is a product that gives you ready access to meet an immediate, short-term need. The money is provided up-front, and you pay it back with a portion of your receipts until you have fully repaid the advance. Funds are usually available much more quickly than with traditional lending, typically within one or two days, helping you meet true emergency needs with far less hassle and red tape.
Merchant cash advances often charge higher interest than other kinds of loans, so they should be used with caution. A key advantage, though, comes with the repayment terms. Instead of a set monthly payment based entirely on the amount you borrow and without regard to your cash flow, your payment is based on a percentage of your actual revenue. This generally results in more manageable and flexible payments.
Finally, a consolidation loan gives you a way to better manage multiple business loans. Instead of making several payments every month, you make one payment, often for substantially less than the combined total of your other loans. It can give you a powerful tool as your business matures and you look to streamline your financial picture.
A consolidation loan does not immediately reduce your debt, and may in fact increase the total of what you owe. But, it usually comes with a lower interest rate and better terms, relieving the stress on your cash flow by allowing you to strategically spread your payments over time.
The right loan for you depends on multiple factors. Analyzing each client's specific circumstances and formulating a financing plan that provides the funding needed at the lowest possible cost takes time and a great deal of expertise. At Kenmore Capital we pride ourselves on designing creative financing plans custom tailored for each of our clients. If you need funds for your business, or if your current financing plan isn't working, contact Kenmore Capital today.