Running a business can present many challenges. You must understand how your company operates to ensure there are no snags in its day to day work. Keeping track of everything is difficult. Yet, operating costs are one of the most critical factors for any business. Sometimes, your company may hit a rough patch due to unfortunate factors. These factors can hurt your operating costs.
You may also want to expand your business. You may want to offer new products and services or open a new location. If you do not have the funds available to see these expansions happen, it can feel frustrating. This is especially true when you have a clear picture of your business’s future. Regardless of your situation, you must know the best loan options available to meet these challenges.
Fortunately, there are several amazing options for your business. There are several loan options you can use to help your business succeed, whether it’s a simple business loan, or something more complicated, such as a merchant cash advance for your small business.
As with any financial decision, it is best to understand the different options. With so many loans available, it is difficult to make a decision that will best satisfy your business needs. This includes any risks that may occur when using a business loan.
That’s where this article comes in. It covers the five best available business loans, and helps you decide which one is the best for your business and its needs.
Merchant Cash Advance
Large businesses have the advantage of good credit and collateral when they apply for a loan. If you’re the owner of a small business, you might not have access to these options. You may also not feel confident about paying back a traditional loan on time, or you may have bad credit. In which case, a standard loan may have higher interest rates according to your credit history.
This is where a merchant cash advance can help. While many merchant cash advance providers may ask for your credit score, most view it as a minor factor in getting an MCA. Others offer programs with poor credit in mind, so there are options for merchant cash advance financing.
A merchant cash advance is when an MCA provider gives you a sum of money. They then ask you to pay it back using a percentage of your business revenue. For example, if you own an e-commerce shop, the MCA provider takes a small part of each sale with interest. The interest repays the lump sum of the merchant cash advance funding that your business uses to achieve its current goals. The same can apply to a restaurant, where every customer’s bill plays a role in paying back the MCA amount.
This makes MCAs ideal for small businesses with a steady income. There are also few risks to you, the company owner, and the lender. So long as your company maintains a steady and consistent revenue, there is little to worry about.
The repayment process happens through the natural course of business. You may not notice any significant change in your revenue. You also don’t need to stress about meeting a monthly payment. Merchant cash advance applications are also simple as lenders are quick to approve you once you reach an agreement.
But, it is crucial to remember that your business must have a steady income. Forbes warns potential MCA seekers that MCAs can hurt businesses by taking away their necessary income. Therefore, it’s always best to know the state of your business before considering an MCA.
If you want a more traditional loan, a term loan is the ideal choice. This is the type of business loan that operates similar to structured loans. You borrow a set amount of money for your business, receive a lump sum, and then repay it with interest in intervals until you pay back the full amount.
You can choose between a secured or an unsecured term loan, depending on your current situation. If your credit is good, an unsecured loan may be the better option, as you may not need to put anything up for collateral. If you want to borrow more, or have bad credit, a secured loan may be a good choice for you as it requires you to put up collateral.
Term loans come in one of three different categories:
Short-term loans: These loans are best for seasonal funds or for a small project. They also have the shortest contracts, lasting up to the maximum time of a year. Depending on the contract, you may have to repay a short-term loan’s amount every day, so it’s best to keep an eye on your payments, and ensure you’re doing so on time to avoid higher interest rates and debt.
Intermediate-term loans: These loans are best for expansions of all types, such as your team, your locations, or your inventory. These loans can have contracts that can last up to six years.
Long-term loans: These loans are for large projects for your business, such as buying a new property, or preparing to purchase another business and incorporate it into your own. These loan contracts can last up to 20 years, and as such, they are exclusive to companies with large revenue and an excellent history of credit.
Term loans are ideal for businesses that have a clear view of their goals and current needs. They are also suitable for all business sizes.
Invoice factoring is when you sell invoices that your customers have yet to pay to a factoring company who will then collect the money from the invoices. Usually, the invoices you sell to the company must be due in no longer than two months, although there are different contracts depending on the amount you need and when you need it.
The benefit of this particular loan is that there is nothing to pay back once you sell your invoices to the factoring company, and it’s a great way to get money fast because the approval process is quick. You are also no longer responsible for collecting the money from the invoices, as the factoring company assumes responsibility.
However, it does come with some detriments. Invoice factoring is expensive, and it could disrupt your cash flow if your customers are paying their invoices on time. Some invoice factoring services will also take control of your financial ledger as part of the terms of the contract for a set amount of time, giving you less control over your income.
Invoice factoring is a great option for short-term goals and projects, but for longer-term projects, there are better loan options available.
Invoice financing is similar to invoice factoring, but rather than selling your invoices, you put them up as collateral for a secured loan. This option is great for businesses who want a secured loan, or have poor credit and need to take out a loan without offering collateral that could threaten the future of the business.
However, you are still responsible for collecting the money from the invoices in this option. Like invoice factoring, this option is also more expensive than other loans, so it’s not ideal for a long-term loan.
This option is ideal if you want to maintain control over your finances and need cash in the short-term.
Business Credit Cards
A business credit card opens a new line of credit for your business and allows you to make purchases with it the moment the account is open and the card is in your hands. Depending on the business credit card you get, and the amount of credit the bank approves you for, you can potentially receive a large line of credit to support your business and its needs.
Another great benefit of business credit cards is that they allow your business to start building a credit score. So long as the business keeps up with the card’s payments and pays in full on time, the company’s credit will increase, thus giving it the opportunity to receive larger loans in the future at lower interest rates.
As it is a credit card, you must keep up with the payments of the card if you want to avoid higher interest rates and debt. This option is not ideal for businesses who may need more than what a line of credit can currently offer.
Frequently Asked Questions
Are Merchant Cash Advances Loans?
Yes, MCAs are loans, but they are not loans in the traditional sense, as they do not need monthly payments. Instead, you pay back the money you receive from an MCA provider through a percentage of your business’s revenue. The MCA provider may take the amount from each purchase directly from your account or through manual payments from you at agreed-upon intervals depending on your contract.
Are there any risks to MCAs?
The risks of MCAs are few. Still, the interest rates and limitations of the agreement can feel overwhelming. If your business is struggling, it can also hurt your income to pay back the MCA. It’s best to understand the contract before signing it. This will save you frustration. If you breach the MCA provider’s contract, you may be subject to an increase in interest rates.
What is the difference between Invoice Factoring and Invoice Financing?
Invoice factoring is when you sell your invoices to a factoring company in exchange for a lump sum of cash. They then take control of your invoices and receive repayment through your customer’s invoices. Invoice Financing is when you take a secured loan and use your invoices as collateral. While you must still handle your invoices, you have full control of your ledger.
Your business is something that you put your heart and soul into creating. As such, it is frustrating when it reaches a rough patch. It can also feel exciting to see your business grow by expanding it, as well as the products and services you offer.
That’s why it’s crucial to understand the different loan options available, and see what they can do for your business. With the information in this article, you should feel confident in making the best decision about what loan to seek for your business. The sky is the limit with these loan options, and once you pick the best one for your business, you can reach new heights with ease.
We hope you found this blog post on The Top Five Business Loans Explained useful. Be sure to check out our post on What Is a Commercial Loan? for more great tips!
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