Like it or not, the business world is rife with opportunities for small business owners to take on business loans that hurt their company in the long run.
This happens because cash flow management is one of the most difficult parts of owning a small business. One client doesn’t pay their invoice on time, and suddenly you’re having trouble making payroll, or fulfilling obligations to vendors.
Complicating things further, some business owners don’t have excellent personal credit, or haven’t been in business long enough to establish a business credit history to help them receive affordable funding.
Suddenly, a loan with a high interest rate looks more like a lifeboat than an anchor.
Loans from predatory lenders or merchant cash advances seem attractive, but they often lead to a cycle of taking on debt to repay other debt. Before you resort to a bad business loan that requires refinancing, or worse, look into some of these options:
Business credit cards
You may not think of them this way, but business credit cards are a form of revolving credit, similar to a line of credit. The main difference is that your spending limit on a credit card will be much lower than what you might get from a business line of credit.
There are, however, unique benefits to using a credit card to finance your business purchases— mainly in the form of the perks and rewards you can accrue by using your card. Some business credit cards provide points and cash back that you’ll use to pay for travel expenses, office supplies, and other common purchases, and many provide insurance and purchase protections.
Credit cards also have the advantage of being fast (you can sometimes be approved for a card in as little as one business day) and flexible—you can use them for virtually any business expense.
If your personal credit score is weak, you may have to spend some time using a secured credit card to build up your score. If your personal credit is strong, however, and your main issue is business credit, you may qualify for a business credit card with a 0% introductory APR. This is essentially an interest-free loan for the life of your offer—and no traditional business loan can beat that.
Invoice financing or factoring
One of the most common hindrances to business cash flow is waiting for clients to pay their invoices. If this is the source of your issues, two similar types of funding—invoice financing and invoice factoring—are solid options.
Invoice financing is when a lender advances you a large portion of the invoice you’re owed — typically around 85%—and funds the remaining portion once you receive full payment from your customer (minus fees, which vary depending on how long it takes for you to repay the loan).
Financing your invoices is an excellent option because these types of loans are self-secured: The invoice itself acts as collateral. Because of this, invoice financing is typically available to business owners with any credit score.
Invoice factoring is when a lender essentially buys your invoice from you for a sizeable percentage of the total. The lender then becomes responsible for collecting the debt. You’ll receive less than you would for simply financing the invoice, but you’ll also no longer have to spend time and resources seeking payment.
Similar to invoice financing, equipment financing is financing a very specific need—in this case, the purchase of expensive equipment that would otherwise be unobtainable.
Heavy machinery, vehicles, and other equipment, whether new or used, are pricey investments that can tie up a lot of your capital. With equipment financing, a lender—sometimes the seller of the equipment, sometimes traditional lenders—extend you the money to buy the equipment, to be repaid in installments.
Once again, this financing is self-secured: If you default on your payments, the equipment can be seized. Therefore, business owners at any personal credit level are likely eligible for equipment financing.
Often, a business lender will refuse to offer financing, or only offer a loan at unaffordable terms, to new business owners. This isn’t out of spite, but because a lack of detailed business credit history creates risk factors for lenders.
Therefore, new business owners with strong personal credit (700 or above) should know that you can use personal loans for business purposes.
Though personal loans typically max out at $50,000, if your capital needs fall within that range, a personal loan could be an affordable option. If your needs are greater, you can also combine a personal loan with other sources of funding.
There are other ways to utilize your personal finances for business purposes, such as a home equity loan or ROBS (Rollovers for Small Business) which allows you to tap into your IRA or 401(k) penalty-free.
Governmental or non-profit loans
Typically, loans from governmental organizations like the SBA, or nonprofits, are difficult to acquire. There are certain situations where your odds are better than most, however.
If you’re seeking an SBA loan, know that the qualifications are stringent. For an SBA 7(a), for example, you’ll need excellent personal credit, strong business financials, and adequate collateral, among other factors.
New business owners, though, can apply for SBA Microloans, which are loans of up to $50,000 available to new small business owners. The SBA looks to lend to business owners from underserved communities, such as women, minorities, and veterans.
Loans from nonprofit organizations, such as Accion and Opportunity Fund, also offer affordable microloans, with interest rates that handily beat options from predatory lenders.
Again, because of the somewhat-limited capital limit of microloans, you may have to combine them with other avenues of funding, depending on your needs.
The world of small business lending has proliferated in recent years. Now, there are more financing options than ever for small business owners to use to their advantage. The trick is figuring out which form of financing works best in each situation.
In many situations, a predatory lender may seem as though they’re offering a quality product—but the true cost may be hidden in reams of paperwork and behind “interest rate” rather than “APR” (the annual percentage rate, which represents the true annual cost of a loan). Do your research and see if one of the above options is a better fit for you.