Small Business Loan, Equipment Financing, and Credit Card Factoring
Business loans do come in all shapes and sizes. Which, if you are a small business owner, is a fortunate thing. No two businesses are exactly alike, which means that every company has different needs when comes to business loan financing. Some opt for a short term loan. Other companies may need to purchase new equipment and are thus looking for funding to help in that respect. And still, others may be considering credit card factoring.
Qualifying for business loan financing can be difficult for some. Especially if working with a traditional bank, criteria are often quite stringent. That said, there are opportunities out there—even for smaller, newer companies that may not meet all of a bank's standards. Alternative and online lenders specialize in business loan financing for those who perhaps might fall short in terms of a bank's approval process. So even if your credit score is lower than you'd like, there are options available.
That said, in this article, we will review three of the most popular types of small business financing opportunities: a traditional small business loan, equipment financing, and credit card factoring. One of the most important parts of applying for any type of commercial financing is first understanding which product might best suit you. This guide is meant to help break down some of the key differences between these three products.
A Small Business Loan: The Pros and Cons
First off, let's define what a small business loan is. Essentially, a small business loan is a loan given to a borrower based upon a set amount, an established interest rate, and a predetermined payback period. It can be short term (generally a 1 to 5 year repayment period/) or longer-term (5 to 10 years/). The amounts vary. Some, depending on the lender, can get loans for as little as 5k. While others require a million-plus in financing. Interest rates will also vary—anywhere usually from 6% to 90%. This will depend on the lending institution and their evaluation of your application.
Some of the Pros of a Small Business Loan:
- Fast and flexible. Because more and more online lenders are offering this type of business loan financing, many companies are finding the process easier and faster than ever.
- A Variety of Loans Available. Within this umbrella term of small business loans, there are a few different types. This means that numerous business needs can be helped by such loans. SBA backed loans for example are extremely popular and have helped many companies. As mentioned, you can go with a short or long term loan. Some microloans could benefit some businesses.
- Can Access A Lot of Capital. With the prevalence of small business loans growing, more and more capital is made available to those companies who need it. Entrepreneurs now can access hundreds of thousands if need be to keep business operations up and running smoothly.
Some of the Cons:
- Higher Interest Rates May be Associated. This will ultimately depend on several factors. But for instance, if you do have a lower credit score and/or haven't been in business for that long, your rates may tend toward the higher side.
- You May Have to Offer Collateral. Depending on who you choose to work with for your business loan financing, you might have to put down collateral to secure the loan. This means if you default, they can then seize your assets.
Equipment Financing: What Are The Benefits?
Another extremely popular form of business loan financing is equipment financing. Simply put, equipment financing is when you borrow money specifically for the purchase of equipment to be used within the context of your business operations. Much like a short term loan, the repayment period on this type of lending product is anywhere from a few months to five years—in some cases, it may be longer. Because the equipment itself is the collateral, some lenders will do 100% financing without requiring a deposit.
Some Equipment Financing Pros:
- The equipment is collateral. Therefore you do not have to come up with any additional collateral to secure the loan. If you default, they will likely take the equipment back.
- Making on-time payments boosts credit. Especially, if yours is a newer company, this is a great way to build credit. Just make sure you make those monthly payments on time!
- Spreading payments over some time. You may not necessarily have the cash on hand to purchase a major piece of equipment outright. Equipment loans allow you to spread out payments and yet still have the equipment in your possession ready to use.
A Few Cons:
- The equipment is yours. While this may not sound like a con, it could be. You are stuck with that piece of equipment until the payment period is over. So if during that time it becomes outdated, there's not much you can do.
- Could be looking at higher rates. Sometimes equipment loans versus other types of business loan financing do have higher rates attached. This is why it is critical to shop around and discuss your options with lenders before pulling the trigger on the loan.
Credit Card Factoring: An Innovative Business Loan Financing Solution
So what exactly is credit card factoring…Basically, this is a commercial lending option that allows you to generate some cash flow by using future credit card sales—also called a merchant cash advance. So let's say for example that you require 10k in financing. A lender will extend you that lump sum and then your company, in turn, will pay a percentage of credit card sales until that 10k plus interest is paid off. If you do therefore deal in credit card payments and the lender can see that you have enough activity to be able to pay off an advance, this may potentially be an ideal funding solution.
Some of the Pros of an MCA:
- They are easier to qualify for. Credit is not necessarily as much of a factor. Rather, the lender is more interested in your credit card sales. As the sales secure the loan, you also do not need collateral.
- Repayment is more flexible. The repayment is based upon sales. So if you are going through a slower period, you are not paying back as much as you are when sales numbers are up.
- Funding is fast. Versus weeks or potentially months you might have to wait for a bank loan, an MCA can take as little as two days. Meaning, within 48 hours you will have the cash in your account.
- Higher interest rate. These can come with a higher rate. That is why you want to do your due diligence and shop around.
- Could hurt your cash flow overall. If money is taken out of every credit card sale, you could feel the pinch down the road. Be sure you are comfortable with this form of repayment before committing.
First Union Lending offers a variety of business loan financing options—from traditional small business loans to MCAs. The question is, which one is right for your company and your immediate needs? Especially now, given the economic climate, you want to ensure that you are making smart money moves. We would love to discuss all options available to you. And consequently, custom tailor a loan product for your business. Call today!