When your business needs funding, your first step is identifying the right type of loan for your situation. Cost is what matters most, but beyond that, the structure of the loan itself will come into play.
If you need a lump sum of money for expansion purposes or a new piece of equipment, you might be interested in a traditional loan. However, if your financing requirements are more related to lulls in cash flow or a need for more spending flexibility, you may be more interested in getting a business line of credit. In fact, we find that a line of credit is one of the most sought after types of loans.
A business line of credit is similar to a business credit card, A business line of credit is similar to a business credit card but tends to come with lower rates and easier to access cash. If this type of flexible credit appeals to you, here are a few different kinds of credit lines your business should explore.
"Short-Term" Alternative Lines of Credit
Although a business line of credit doesn't technically come with terms in the same sense a term loan does, the qualification criteria encompasses similar factors such your revenue, credit score, time in business, etc.
A "short-term" alternative line of credit is a great fit for younger businesses or those that may still be building their revenue or credit. It is also a great fit if you need access to cash quickly. These lines are relatively easier to qualify for than a longer-term credit line, so look into getting a short-term line of credit if your business is relatively new, lacks credit history, you have a low personal credit score, or you simply need a little bit of cash fast.
OnDeck and Kabbage are the lenders to look at if you'd like a short-term line of credit. Keep in mind, however, you pay for this speed and convenience with higher APRs. Short-term lines of credit can get expensive, so make sure you understand the true cost of pulling on the line.
Longer-Term Alternative Lines of Credit
Longer-term alternative lines of credit are products offered through alternative lenders but are less expensive (and harder to qualify for) than short-term lines of credit. With longer-term products, borrowers need to have a higher credit score, more revenue, and more business credit history than with a shorter-term line.
Overall, the application process may take a bit longer (although still much easier than a bank's application)--but if you meet the qualifications and don't need the money right away, a longer-term line of credit has a few added benefits.
A longer-term line of credit has higher maximum amounts, which means you'll have access to more cash. Of course, the line of credit available to you will depend on your own business financials and the lender you're working with, but the difference between a short and long-term line of credit can be substantial.
The biggest benefit, however, is a lower APR, meaning you'll save your business a ton across the board.
Check out Lending Club for more specifics on longer-term lines of credit.
Bank Lines of Credit
If you're looking for a line of credit and have excellent credit history and a great business, your local bank will be the most affordable option. I like to reiterate this point: if you can get a line of credit from your bank, you should.
But, bank financing for small businesses isn't readily available. In fact, four out of every five small business owners get turned away when they apply. The other downside is that the application process can be time-consuming and take some time to process. If you have an immediate need, you may need to look online.
Asset-Backed Credit Lines
While asset-based lenders still look into your credit score, qualifying for an asset-backed credit line doesn't necessarily revolve around the typical lending criteria. Instead, asset-based lenders are just as concerned with what collateral you have to offer.
Depending on your business model, you could either qualify for an equipment-backed line of credit or an invoice-backed line of credit.
If you're interested in an equipment-backed line of credit, be aware that a lien will be put on the asset you choose to use as collateral. So if you're borrowing money for a new piece of equipment, lenders will claim ownership of that equipment if you're unable to pay back your loan.
With an invoice-backed line of credit, your outstanding accounts receivable are the collateral your offering to lenders, helping you bridge cash flow gaps presented from the invoices themselves... Or anything else in your business.
Overall, an asset-based line of credit is more focused on what you can bring to the table with your investment, as opposed to what your credit history looks like. Check out Dealstruck or the Credit Junction for more information.
Don't wait until you need the money to apply for a business line of credit. Unlike traditional business loans, since you only pay for what you use, it's great to apply before you need it, and then have it there in case of emergency.