4 Types of Debt Financing for Small Businesses and How to Apply for Them Online
There are a few different types of debt financing that small business owners can apply for online. Before you apply for debt financing online, you should understand what your financing options are and how to get approved for them. In this blog I’ll discuss a few different types of small business debt financing to help improve your understanding of what may be available to you (and what will work best for your business). The best way to approved for any type of financing is to understand what banks and lenders expect of you so you can do what needs to be done to meet those expectations. For example, if you want to apply for a business line of credit, a lender may expect you to have at least a 680 personal credit rating and full time job (for at least 6 months). When you know this, prepare yourself to get a 680 personal credit score and full time job (if you don’t already have them).
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Long Term Debt Financing for Small Businesses
Term loans such as unsecured business loans, secured business loans, equipment loans, and SBA loans are considered long term debt. Long term financing options like these can often have lower interest rates, stricter requirements for approval and/or stricter requirements in regards to how the funds are used. Established businesses are usually the best candidates for long-term financing. Most long-term financing programs require you to pledge collateral and/or own a business that’s currently generating revenue. The amount of revenue the business should be generating and the type of collateral that can be pledge will vary from lender to lender. Here are a few details about each type of long term financing that’s available to small businesses—
Unsecured Business Loans – This type of long term loan requires no collateral and a good personal credit score for approval. Depending on the lender, your business may also need to generate a minimum amount of revenue for a specific period of time for you to qualify for approval. Unsecured business loans can have interest rates of 6% to 20% with pay back terms of up to 6+ years. They can usually be used to pay for any business expenses (some lenders have restrictions on how you can use the funds).
Secured Business Loans – This type of small business financing does require you to pledge collateral to have your loan request considered for approval. You can sometimes get away with having a lower personal credit score (than you would with an unsecured business loans). Pledging collateral and owning a business that has been in operation for a while and has consistent cash flow is the key to getting approved for an unsecured business loan. Interest rates and terms are similar to unsecured business loans.
Equipment Loans – This type of financing can be used for purchasing equipment that has a long life (and doesn’t become obsolete quickly). You will need a good personal credit score to qualify for an equipment loan.
SBA Loans – The U.S. Small Business Administration works with a number of community banks and lenders that provide loans to small businesses in their area. You could obtain a microloan under $50,000, a working capital loans over $250,000, or even a line of credit through SBA financing. The SBA doesn’t lend money directly to small business, rather, they provide the funds to intermediaries (i.e. your local community banks and financial intuitions) and they lend the money to you. To find SBA loan intermediaries in your area, visit the SBA website to learn more about the SBA Linc Program. The SBA connects borrowers with approved lenders through the program.
Accounts Receivables Financing – If you have a steady stream of clients who you are billing on a 30, 60, or 90 day basis, you may qualify for accounts receivables financing. Accounts receivables financing consists of selling your receivables to the financing company in turn for them giving you a percentage of your total receivables immediately. That way you don’t have to wait 30 to 90 days to be paid. This type of financing works well for security companies, medical companies, service providers, staffing companies, and manufacturing companies, etc.
Short Term Debt Financing for Small Businesses
Credit cards, whether business for personal are considered short term debt. Short term debt usually has much higher interest rates than long term debt. Another major difference between short term financing and long term financing is that short term debt like lines of credit can be “ongoing.” Once you are approved for a credit line, you can have it for life as long as you make your monthly payments on time and the lender wants to keep you as a client. When you borrow and use a short term loan, you have to reapply for another loan (after you’ve used the first one). There’s no guarantee you will be able to get approved for another loan. This is why it’s a good idea for all business owners to have at least one or two credit lines for their business.
Depending on the lender, you may also be required to pledge collateral to get approved. In the case of credit cards or credit lines, if they are unsecured you will not be required to pledge collateral for approval. However, lenders will require you to have a good personal credit history. Obtaining unsecured debt (whether long term or short term) usually requires you to have a well-established personal credit history and good personal credit score.
Business Expenses You Can Pay for Using Short Term or Long Term Debt Options
Equipment, Supplies, and Inventory – Depending on your business industry, equipment, supplies, and inventory may be needed to fulfill sales requests. If that’s the case, purchasing these things with your unsecured business lines of credit may be a smart move.
Marketing & Advertising – Promoting your products or services to capture the attention of your target market is one of the best revenue generating activities you can implement after obtaining unsecured business lines of credit. Marketing and advertising done right will attract people that can turn into customers for your business.
Sales Team – Upon attracting potential customers to your business, you’ll need a sales team to help you close sales. Unsecured business lines of credit can be used to pay your sales team. Having a sales team is critical to be able to actually sell your products. Closed sales equal revenue generated.
Apply for Debt Financing Online – LenCred Can Help
The LenCred team will work with you to get a better understanding of your business needs, financial situation and creditworthiness. They will use this information to determine what type of debt financing you will qualify for at this stage in business. Once they determine what type of financing will work best for the business, they will help you apply. You could have up to $50,000 or more in funding for your business in as little as 30 days with LenCred’s help. Whether your business is a startup or established company, LenCred may be able to help you get the financing you need to take your business to the next level. Click here to complete a prequalification application and get a FREE consultation from an experienced LenCred Advisor.
3 Reasons to Apply for Debt Financing Online
Preserve Your Cash Flow – This is by far the most important. As a small business financing consultant, I’ve worked with many business owners who experience cash flow issues and come to me looking to borrow money after their cash reserves have been depleted. Waiting to borrow (or raise) money when you have run out of cash is a big mistake. For example, most of the lenders I work with will ask to see your bank statements for the last 6 months to be sure you have revenue coming in consistently (as well as a decent amount of cash reserves in your cases). This is why it’s important to start borrowing (or using other people’s money) when your business is growing. This will be the easiest time for you to raise capital (and preserve your cash flow in the process). Waiting until the last minute can definitely cause your business to collapse.
Build Your Credibility – Building the credibility of your business is important if you want to be able to consistently borrow (or raise) money for your business. It’s virtually impossible to build business credit when you only use cash. A good way to build business credit is by obtaining unsecured business lines of credit and vendor lines of credit (such as those issued by suppliers like Quill and Office Depot, etc). Depending on the unsecured business line of credit lender and vendor trade line suppliers, they may report your payment history to the business credit bureaus (Experian Business, Equifax Commercial, Dun & Bradstreet). Reporting your business credit accounts and payment history will increase your business credit score over time and enable you to qualify for a wider range of business financing options (e.g SBA 7a Loans).
Faster Growth than Your Competitors – Having access to outside capital will enable you to grow at a much faster pace than your competitors (who may not have that same access). If you borrow (or raise) money, use it effectively and manage it properly, you stand to gain market share at a rapid pace and become the top leader in your industry.
What to Do if You Are Denied for a Loan or Line of Credit
Ask Questions – First things first, ask your banker why your application was denied. Just about all banks and lenders have what’s called a “restricted industries” list. It good to find out whether or not your industry is on that list. Your small business loan request will be automatically denied if it is. If it’s not, it may have something to do with your personal credit, business credit, and/or any financial statements you submitted. The bank may have felt that you didn’t meet their credit criteria or generate enough revenue (and profits) to qualify for a bank loan. It could also be that you have a high debt to income ratio (i.e. too much personal debt in comparison to your personal income). Whatever the case may be, confirm it with your banker first so you will know what you need to work on to get approved in the future.
Reapply (Elsewhere) – Your small business loan broker will assist you with applying for funding with an alternative lender (alternative lenders are just lenders other than a traditional bank). Alternative lenders typically have less stringent and/or different approval criteria than traditional banks. It can be easier to get approved through an alternative lender than a traditional bank. Companies like LenCred are a good source of information if you want to try alternative lenders.
Tips on Borrowing Money to Fund Your Business
Tip #1: Avoid borrowing when you are in a bind – In my professional experience, it’s never wise to borrow when you are in a bind. All businesses have cash flow issues at some point but if your cash flow issues are causing your business to be on the brink of closing down, borrowing money to save it may not be the best solution. I’ve dealt with many business owners who have borrowed money when they were in a bind, hoping those funds would yield a high return in a relatively short period of time to help the business get back on its feet. And when that doesn’t happen, they find themselves over-extended. So now, not only do they have to pay for the business expenses they had before they borrowed the money, they have an additional expense to cover – loan repayment. That loan repayment usually puts them over the edge and causes them to do what they wanted to avoid in the first place – closing down.
Tip #2: Borrow before you need it not when you need it – This goes back to avoiding borrowing when you are in a bind. The best way to avoid borrowing when you are in a bind is to borrow before you need it. If you have a well thought out business plan in place, more than likely you know how much money you need to operate. If your business is bringing in revenue and doing pretty well, why not preserve your cash flow and take out an unsecured business line of credit to cover some of your operating expenses? With an unsecured business line of credit you will not have any monthly payments unless you actually use it. Therefore you can have access to additional capital (to use whenever you need it) and you will not have to worry about an additional expense (in this case a loan repayment), until you use the funds (unlike with a small business loan).