This post originally appeared on LoanSage.com
It’s no secret that local banks aren’t lending to small and medium businesses as frequently as they used to. Figuring out the right capital solution for your business depends on a variety of factors including amount needed, what you’re using the proceeds for, the industry your business is in and how quickly you need access to that capital. The following are several different types of solutions that may make sense to help you grow your business.
Business Term Loan A term loan is a specific amount of money that is borrowed for a certain period of time and follows a pre-specified repayment schedule and interest rate. Typically, most business term loans will mature in anywhere from six months to as long as 10 years. The benefits of a term loan are that you can plan budgeting easier with consistent repayment amounts. In addition, longer repayment periods associated with term loans minimize your total monthly payments. The slight downside to term loans are that they tend to require more documentation and can take 1-2 weeks to receive funding.
Your business should look to a term loan for long-term financing purposes and capital intensive purposes. Some examples are:
- When you need a large amount of money relative to your annual sales for expansion purposes
- When looking to buy equipment
- To make capital improvements on your store or business
Working Capital Facility / Line of Credit A working capital facility is an ongoing arrangement between a borrower and a lender in which a business is extended a line of credit. These funds can be drawn against in partial or fully at any time as long as they do not exceed the limit. Once the funds are drawn, they are repaid back at your convenience. The advantages to a line of credit are that you don’t pay interest on the unused portion of the line of credit, and you can adapt quicker to financial needs since funds can be drawn whenever necessary
Your business should look to a working capital / line of credit for short-term financing purposes and revenue generating activities. Some examples are:
- To make new hires or to cover payroll
- For purchases of inventory
- For marketing activities that will drive an increase in sales
Merchant Cash Advance In a merchant cash advance, a portion of a business’s future credit and/or debit card sales can be sold immediately for upfront capital. Repayment of this sum typically occurs as a set percentage of sales until the funding is paid back. The advantages to a merchant cash advance is that funding can be done very quickly and you are evaluated based on business performance instead of personal credit. Merchant cash advances are available to businesses with high credit card sales.
Your business should look to a merchant cash advance for extremely quick capital needs (and when you don’t have access to a line of credit) that will benefit revenue-generating activities. Some examples are:
- To cover payroll
- To manage seasonality with your business
- If you have a last minute ability to purchase inventory at a deep discount.
Invoice Factoring In invoice factoring arrangements, the factoring firm will purchase a portion of a business’s accounts receivable or outstanding invoices. The business is provided with a percentage of the invoice for upfront cash, and the remaining balance less a factoring fee when the invoice is collected in full. The advantages to an invoice factoring arrangement is that you can get access to your revenue before your client pays.
Your business should look to invoice factoring in the following scenarios:
- You have sold goods or services, but your payment terms with your customer are longer than usual
- You need to pay for cost of goods or payroll before your customers ultimately pay you.
To see whether your business qualifies for any of these capital solutions, you can try out a free service like LoanSage that simplifies how you identify the right loans or capital solutions that you could qualify for and allows you to compare the costs and structures of the various different lending solutions above.
They also provide a complimentary business analysis report that provides an overall measure of the creditworthiness of your business as compared to your industry peers. It serves as a good indication of your business’s ability to take on and repay debt.