LenCred Helps Entrepreneurs Get Small Business Financing the Simple Way
LenCred offers small business financing options for entrepreneurs who need start-up or working capital. There are several ways we help entrepreneurs get capital. Yet, our specialty is unsecured business lines of credit. We believe that an unsecured business line of credit is the simplest way to fund a small business, especially start-ups! Start-up businesses have the most difficult time obtaining small business financing. LenCred simplifies the process by analyzing your credit and finances to determine your needs. Your credit history and business expenses enable our team of small business financing experts to recommend the best option.
While we would like all our clients to get unsecured business lines of credit, we know there may be more suitable options. If you’re interested in finding out whether unsecured business lines of credit are right for you, click the link below to pre-qualify. Don’t worry, it’s FREE to submit our pre-qualification application. If you pre-qualify, we’ll also conduct a FREE consultation. During the consultation we’ll go over our analysis of your personal credit history and how our unsecured business line of credit program works!
Need More Info About Small Business Financing Before Contacting Us? Here’s What You Need to Know.
According the U.S. Small Business Administration (SBA), entrepreneurs go after small business financing for several reasons. These reasons include starting a business, buying inventory or increasing our customer base. It’s important that we educate ourselves on the different small business financing options available. This will help us choose the financing solution that will meet our needs. We’ll be able to identify the financing option we qualify for. In this article, I will discuss several small business financing categories. This includes debt financing and equity financing. Additionally, I will discuss several alternative business financing options. These are the options entrepreneurs use when debt or equity financing isn’t an option.
Debt Financing Options for Entrepreneurs & Small Business Owners
According to the U.S. Small Business Administration (SBA), small businesses account for most of all business borrowing. Small businesses received $600 billion in bank loans during 2015. Entrepreneurs and small business owners also get small business funding from non-bank lenders. This includes friends and family, online lending platforms, home equity, and personal savings.
For a start-up business owner, there are several top sources of small business financing. This includes personal savings, personal credit cards, bank loans, other personal assets, home equity, and business credit cards. A bank loan can be the most difficult source of small business financing for a start-up company to get. Personal and business credit cards are easy to get for a business start-up. The business owner only needs to have a well established and maintained personal credit. A good personal credit score gives a small business owner a better chance of getting debt financing. Business owners with bad credit have limited access to debt financing for a start-up company.
For established small businesses, there are several top sources of small business financing. This includes personal savings, business profits/assets, personal credit cards, bank loans, home equity and other personal assets. A bank loan is less difficult for established businesses to get in comparison to a start-up business. A business start-up will have to rely on other sources of small business financing. Figures 2 and 3 below provide a look at the percentage of start-up and established businesses that use debt financing sources.
Debt Financing Has Its Advantages (and Disadvantages)
Debt financing has its advantages and disadvantages. The biggest advantage of debt financing is that you will not have to give up a percentage of ownership. A venture capitalist or angel investor requires an equity stake. Debt financing is the financial solution to use if you want to maintain full ownership. Giving up an equity stake to an angel investor or venture capitalist also gives you less power. You won’t be the only person making decisions. That may or may not pose a threat to some entrepreneurs or small business owners.
The biggest disadvantage of debt financing is that it’s limited (depending on several factors). Entrepreneurs with bad personal credit scores can’t get business funding from traditional financial institutions. This includes banks like Chase, Fifth Third and Bank of America, etc. This is especially true for business start-ups. A start-up company lacks the cash flow required to get small business financing from traditional banks.
Established businesses with business owners who have bad credit (regardless of cash flow) may also be unable to get funding from a traditional financial institution. In this case, an established business will need to seek funding through other avenues. This includes non-bank lending sources and alternative business financing sources. There’s one more disadvantage of debt financing. It can become a burden to pay back debt if the business begins to suffer. You risk ruining your personal credit score (or business credit score) if you can’t pay back what you borrow.
Understanding the Debt Financing Options Available to You
Determining what type of small business financing will work for you depends on knowing how to qualify. Below is a description of each type of debt financing along with the basic requirements for approval.
Small Business Loan– This type of small business financing is a term loan offered by traditional and non-bank lenders. The requirements for approval of a small business loan request can vary depending on the source. It is generally expected that the owner of the business have a good personal credit score. The business also needs a healthy cash flow. Small business lending institutions usually expect the business to be operating for at least one year. It should also generate at least $100,000 in revenue during the first year. Business owners may also have to submit a business plan with their small business loan application.
Personal Credit Card – This type of financing is offered by traditional financial institutions such as banks. Good personal credit is a requirement to get a personal credit card. I suggest that business owners do not use personal credit cards to fund their businesses. Personal credit and business credit should be separate to preserve the personal credit score of the business owner.
Business Credit Card – This type of small business financing is also offered by traditional financial institutions. Companies like LenCred can assist entrepreneurs and small business owners with obtaining [unsecured] business credit cards. To get a business credit card, you need an established personal credit history. Before applying for a business credit card, a business owner should have at least one personal credit card in their name for at least 4 years. The limits on the business owner’s personal credit card(s) will dictate how much a lender will approve for a business credit card. As a rule of thumb, a business owner have at least $5,000 in available personal credit card limits before applying for a business credit card. Derogatory or delinquent accounts like bankruptcies, unpaid collections, public records and many recent late payments will disqualify you for a business credit card. Many hard inquiries (in the last six months) on your credit report will also disqualify you. If you have an interest in obtaining a business credit card (or line of credit), contact LenCred for help.
Asset-Based Lending – This type of small business financing is usually in the form a term loan (i.e. small business loan) or line of credit. With asset-based lending, business owners are usually required to have a good personal credit score. The business should be operating for at least one year. It should also generate at least $100,000 in revenue during the first year. Collateral will also need to be pledged. Acceptable collateral usually includes assets such as real estate (residential or commercial, and vacant land). Other titled objects such as cars, trucks, boats, farm equipment, airplanes, trailers, doublewides, and industrial equipment can also serve as collateral. Real estate is a popular form of collateral amongst business owners considering asset-based lending. A business plan may or may not be needed for this type of small business financing.
Business Cash Advance (aka Merchant Cash Advance)– This type of small business financing is usually offered by a non-bank lender. In recent years it has become a popular alternative business financing solution for small businesses. To qualify for a business cash advance, your business needs to be operating for at least one year. Additionally, it should have generated at least $5,000 per month (in revenue) for the last 6 months. A business owner is not required to have a good personal credit score to qualify for a business cash advance. This is the biggest reason why this type of financing is so popular amongst small business owners. The major problem with business cash advances is that they are expensive. Business owners are charged high fees with this type of small business financing. Business cash advance companies require business owners to pay back what they borrowed by debiting their business account daily. This can amount to as much as 45% interest paid over a period of one year. This type of small business financing is suitable for companies that have a high volume of daily deposits or credit card sales. It should not be used as a last resort for established businesses that need funding. It can hurt the sustainability of a business if the business is already in a financial bind.
Accounts Receivables Financing – This type of small business financing is for established businesses that have been in business for at least one year. The business should also have outstanding invoices. Financial institutions that offer this type of financing buy the outstanding invoices from the business at a discounted rate. They then bill the company’s clients for the full amount. For example, if your business has $50,000 in outstanding invoices (for any given month), the financial institution will provide your business with $45,000 and bill your clients for the full $50,000. This is how accounts receivables financing companies make their money. In this case, the financing company would make $5,000 on the transaction. (The total amount earned by the financing company varies). It’s important to know that this type of small business financing usually requires the clients of the business to have a good business credit score and history. It may be difficult to get accounts receivables financing if your clients do not have a good track record of paying on time.
Purchase Order Financing– This type of small business financing is for manufacturers, distributors, wholesalers/resellers, and importers/exporters. Companies should be operating for at least one year before applying. They should also have a need to buy supplies to fulfill a large order from a customer that will not be pay their invoice for 30 to 90 days. Businesses are required to have a verified purchase order from a supplier to get purchase order financing. Financial institutions that offer this type of small business financing will pay suppliers after reviewing a verified purchase order. Once the supplier is paid, the business will receive the supplies to fulfill the order. After the customer pays their invoice, the business will pay back the purchase order financing company (plus fees) for paying for the supplies needed to fulfill the order.
SBA Loans– The Small Business Administration has many financing programs available to small business owners. Yet, they don’t lend to small business owners. The SBA partners with lenders by creating guidelines for their financing programs. Their lending partners issue the loans to borrowers. The SBA provides a guarantee to the lenders, which eliminates some risks for them. This encourages them to issue loans to small business owners. The guarantee promises to pay back the lenders a percentage of the loan if the borrower defaults. The loan programs offered by the SBA include—the (7a) program, microloan program, CDC/504 loan program, and the disaster loan program. These SBA programs usually consist of offering borrowers low-interest loans in comparison to traditional lending institutions. Business owners that will not qualify for small business financing from traditional banks can usually get a low-interest loan through one of the SBA financing programs. By offering these programs, the SBA helps stimulate economic development in struggling communities. In fact, the SBA microloan program is a popular program in communities lacking significant economic development. The microloan program gives microenterprises (i.e. businesses with less than five employees) the opportunity to build a successful small business and create jobs.
Peer to Peer Lending – This type of small business financing is offered through online lending platforms that match borrowers with [individual] lenders. Business owners can use peer-to-peer lending platforms to apply for low-interest loans. The requirements for approval for this type of small business financing depends on the online lending platform used.
Equity Financing Options for Entrepreneurs & Small Business Owners
Equity financing is the alternative to small business lending. According to the U.S. Small Business Administration (SBA), business owners obtained $593 billion dollars in financing from other sources in 2015. This includes venture capitalists, angel investors and other financial institutions (such as non-bank lenders). Both small businesses and mid-sized business received funding from these sources. It is unclear of the number of small businesses that received venture capital or funding from angel investors. Business owners seeking venture capital should understand what it takes to get this type of financing.
Venture Capitalists are specific about the types of businesses they want to invest in. Many of them have a penchant for investing in tech companies that they expect to grow fast. Venture capitalists also desire to invest in fast growth businesses that need at least $2 million in venture capital. If you need less than that, an angel investor may be more suitable for your business. Angel investors may be harder to find (than venture capitalists). However, they can invest lower amounts into high growth small businesses.
The Pros and Cons of Equity Financing
The great thing about equity financing is that you not only get the business funding (i.e. cash) you need to grow your business, you also get human capital. Human capital is the people who will help you grow your business. Venture capitalists and angel investors will also provide advice and other resources to help grow the business. The only “downsides” of equity financing is giving up a percentage of ownership in your company. Furthermore, final decisions cannot solely be made by you. This may not be a downside for some business owners though. Some business owners prefer to have the human capital that comes along with accepting funds from a venture capitalist or angel investor. So giving up a percentage of ownership is viewed as a good thing.
Mezzanine financing is a combination of debt and equity financing. It gives lenders the right to take on an equity stake in a company, should the company default on a loan. This type of financing is high risk (for a lender). It is also only available to established small businesses (or mid-sized business) with a significant track record.
Business owners like this type of financing because the interest on the loan is tax-deductible. Equity investors like this type of financing because it takes some of the risk out of investing in a company. If the company needs $200 million, $100 million can be provided by the lender and the other $100 million can be provided by the equity investor. This way the risk is spread out between the lender and equity investor. The biggest downside to mezzanine financing is that the business owner(s) don’t have full control over the business. Equity investors and the lenders have a “say-so” in how the business operates.
Your Retirement Fund Can Finance Your Business
Using money from your retirement fund (like a 401k or IRA) is another way to fund your business. It can be as simple as forming a C corporation and attaching a corporate retirement account to it. The funds from your existing retirement fund can roll over into the new corporate retirement account under the new corporation (that you own). While it’s a simple process, it’s best to work with an expert who is familiar with the process so no mistakes happen.
Crowdfunding is Another Alternative Business Financing Option
Crowdfunding platforms like KickStarter and Indiegogo have become popular amongst entrepreneurs in recent years. It is a good alternative when you don’t qualify for debt financing. It’s also good if you don’t want to give up a percentage of ownership in your company in return for equity financing. With crowdfunding, entrepreneurs ask the public for the financing they need. In return, they offer to send the public their new product as soon as it releases. Crowdfunding can work, yet it requires an aggressive marketing campaign. Without an aggressive marketing campaign, no one will ever know about your business or product. Many entrepreneurs fail at crowdfunding because they don’t execute an effective marketing campaign.
Consult with an Expert Before You Go After Small Business Financing
This article is designed to educate you on all the different ways you can finance a start-up business or established small business. Yet, it’s still a wise idea to consult with an expert before you go after small business financing on your own. The best small business financing experts will listen to your business goals and needs and provide you with advice on the best route to take. This is why companies like LenCred exist. As I stated before, LenCred specializes in helping start-ups and existing small businesses get unsecured business lines of credit. However, the LenCred team is familiar with the different small business financing options available. They can point you in the right direction if unsecured business lines of credit are not for you. If you’re ready to fund your business, contact the LenCred team today for help.