What Makes the Best Small Business Line of Credit
If you type into your search engine “who offers the best small business line of credit” the results will be numerous. However, the articles written are often from authors who have never applied for any business loan, small business line of credit, or any other business financing whatsoever. I personally have applied for and secured almost every type of business financing a small business owner might be looking for and I am going to tell you everything I learned along the way.
By understanding business credit, regardless if you are looking for working capital, a small business term loan, a revolving credit line, or a cash advance, being educated about your options is the very first step to getting the best deal.
Through every phase of your small business, you will come across times when it is the right time to get business financing in place. Let’s talk about that first.
Why Do You Need Business Financing
“Why” is one of the most important questions a business owner can ask in any part of his business or personal life. Knowing your “why” forces you to then focus on the how. When it comes to business financing – what is your why?
If your why is because you sometimes have issues with low cash flow (also called working capital) when you need to make payroll or to get additional inventory to complete a job then a small business line of credit will be your business financing answer.
If you are looking to buy another company to grow larger then a small business term loan would be the answer.
If your credit score is too low or you don’t have enough collateral for bank financing and you need to make sure you can finance your business growth then invoice financing or Factoring might be the answer.
Understanding your why and running it past a financial expert like your accountant is a good first step to getting business financing in place.
What are the Various Business Financing Options
A small business line of credit
A small business line of credit can be set up through a traditional bank or through online lenders. Over the last decade businesses under $5 million in yearly revenue are working with more online lenders instead of traditional banks. Although banks MIGHT be the least expensive credit line, online lenders are offering the best business lines of credit because they often do not require collateral or personal guarantees. Banks also charge a large annual fee for a credit line whereas online lenders often have little to no annual fees.
An unsecured business line of credit is good for small business owners because a business owner often hasn’t had the time yet to build their wealth and collateral is one of the main factors that a traditional bank will look for to approve a business line of credit.
Lastly, a small business line of credit should only be used for short-term issues. If your problem isn’t a short-term issue then you really need to avoid getting the credit line in the first place and look closer at your business model to see if expenses can be cut or sales improved. All business lines of credit are unrestricted meaning that a business owner can use the line for whatever business need they like but if you are keeping your line out for months/years at a time a term loan might be a better option.
Business Term loan
A business term loan is a lump sum amount of money that is paid back over a few years. Most term loans for businesses are used to make a major capital investment in a growing business. The funds are often used to purchase equipment, invest in inventory, or to purchase another business. Term loans are most often applied to through a bank or through the SBA (small business administration). It is important to know that all term loans will require collateral.
The SBA does not actually approve small business term loans or small business lines of credit. The SBA approves certain banks to be lenders based on defined lending criteria. The SBA will assume some of the risks involved in a small business loan allowing the bank to lower their normal lending standards. Getting a credit line from the SBA is often the best small business line of credit available because the interest rates will be the lowest as compared to online lenders. However, be prepared for a very long application process and collateral/personal guarantees will still be required.
Just like if you get a mortgage for real estate, the bank and SBA will require points be paid once the loan closes.
Invoice Financing or Factoring
Invoice financing and Factoring have been around forever. These two types of business financing are actually the same thing. A Factor is a traditional lender who will have a contract with you to purchase your invoices. You will receive up to 90% of the invoice upfront and the remainder will come to you, minus the Factor’s fee, when the client pays the invoice.
Factoring is a good way of getting small businesses working capital because as you generate more business you will have the working capital you need without going through the tedious bank application process/renewal process. You can then reinvest that working capital into your business to help it grow.
Business owners who use Factoring are often unable to be approved for a business line of credit because they don’t have collateral. Factoring is not the best small business line of credit because it is the most expensive form of long term business financing. Factoring also requires that your clients agree to the terms of the Factors which sometimes cause some problems.
Cash Advance or Merchant Cash Advance (MCA)
Cash Advances are most often associated with an online lender who offers a term loan with a daily or weekly payment. Cash advances or MCA’s are extremely expensive and are often used by business owners when there is a business emergency.
Cash advances do not require collateral or a good credit score (550 minimum credit score). Unlike a small business line of credit, there is no advantage to paying off a cash advance early. Ondeck, Kabbage, bluevine and Fundbox are online lenders that offer cash advances but due to the covid-19 pandemic may not be lending at this time because they are struggling as a lender.
Business Credit Cards as a Business Line of Credit?
Business credit cards are often used to make business purchases but of course, credit cards also give you the capability to get a cash advance. There are often a few problems with using credit cards as a form of a business line of credit. First, credit cards only allow a very small amount of money to be advanced. Second, all small business credit cards are personally guaranteed, and therefore when used, are reported to credit bureaus. The use of your credit card will affect your personal credit score negatively regardless of whether you pay your bill off at the end of the month. Lastly, credit card advances begin accruing interest from day one and this is a very expensive form of credit.
Why Have Online Lenders Become The Best Small Business Line of Credit
Online leaders have become the best small business lines of credit because traditional banks still require collateral and are in the dark ages when it comes to approving small business applications quickly. Online lenders are looking at the cash flow, credit history, and financial statement data to determine approval amounts. Traditional banks look at your small business the same way it will look at a very large corporation and the two businesses are very different.
Online lenders can tell quickly through data science who to approve using the huge amount of data they collect through all industries to create. It is the new way of business lending that traditional banks haven’t or can’t adopt. As a result, because online lender look at your credit limits, bank accounts, repayment terms, annual revenue, and credit scores it is much easier to be approved for a credit line with an online lender for many small businesses.
How a Business Line of Credit Works?
The first thing a small business owner will need to do is fill out an application. If you are filling out an application with a traditional bank be prepared that it might take a week or more to get all the personal and business information required. It will also take a month or two to get an approved answer from the banks underwriters. It isn’t an easy process.
Online lenders will often ask a few questions through an online application and might require some recent bank statements and financial statements. An online lender will often provide you an approval answer on the same day with the credit line being set up in 72 hours.
Once your business line of credit is set up from a bank or online lender you will be able to draw upon it on request by logging into a secured web portal from your computer or phone. You do not have to use the funds but when you do request your funds, it will be wired into your bank account. You are typically charged an agreed-upon interest rate or some fixed fees for each day you have the credit line outstanding.
Since most business credit lines are used to solve short-term business cash flow problems, the total fees are not expensive especially as compared to the business problem the money solves. Every business owner should have a line of credit as a cash backup plan.
What Makes Financing Solutions Small Business Line of Credit the Best?
Financing Solutions is an A+ and 5 stars rated BBB financing company that provides a small business line of credit to businesses that have at least $400,000 in yearly revenue. The business owner must have a 650 or greater credit score. This is an unsecured business line of credit meaning that there is no collateral or personal guarantees required.
Financing Solutions combines the speed of an online lender along with the personal touch of a bank. Our online application takes 2-minutes to fill out and requires no documentation to get an offer letter. The offer letter is sent on the same day.
After the business owner fills out the application one of our Relationship Managers will call you to better understand your business and to go over the offer letter. The offer letter is simple to understand and you can also talk to one of our business owners at any time.
One of the big differences with Financing Solutions is that the owners themselves have built small businesses and are not from wall street or the banking industries. Keith and Stephen both truly understand that there are a lot of really good small businesses and that having a line of credit for your business is a necessity.
The FS small business line of credit costs nothing to set up and nothing until used making it a great cash back up plan. You are not required to use the credit line but if you do, our repayment terms allow you to payoff the line at any time. There is a small weekly payment that must be made to start paying down your balance if you do keep the funds out. Our credit line product is inexpensive when used and in many cases is cheaper than a traditional bank.
If you decide to move forward with setting up the line of credit we will ask for a recent tax return, 4 months of recent bank statements, a driver’s license and a voided check.
The credit line is renewed annually with the same simple documents and there is no obligation to use the line.
The Importance of Building Your Business With Existing Cash Flow
Getting financing for your business isn’t always the right solution. Business financing can sometimes mask a problem with your business model. However, don’t let the idea of getting a business loan or line of credit scare you. There really are times when it makes sense.
Getting a line of credit is often the first thing a business wants because as you are building your company missing payroll can often be the worst thing to affect moral. You haven’t been a business owner yet until you have had an “oh Sh*t” moment and you have to tell your staff that they may not be paid on time.
Many business owners also don’t know that missing payroll is actually illegal and you can get into a lot of trouble with penalties and fines. You can also be shut down and you also don’t want the focus from the government. It is at these times when a business owner most often starts to investigate setting up a line of credit.
As your business continues to grow your business credit line will often come in handy and will make life a little bit less nerve-racking.
What is Your Creditworthiness
The creditworthiness or loan amount that your business will be approved for is based on 7 factors:
- Total yearly revenue
- Gross and net profit margins
- Business debt
- Personal credit score
- Amount of business and personal collateral (if working with a commercial bank)
- Your industry
- The state of the economy
Dun and Bradstreet Business Credit Reports
As a small business, your business credit rating hasn’t really been developed or reported on yet so firms like Dun and Bradstreet will not have any details about your business that will help or hurt your business.
Yearly Maintenance Fees
Traditional banks will charge you a yearly maintenance fee regardless of whether you use your credit line or not, interest payments will be charged monthly. An online lender will usually have no yearly maintenance fees but could charge interest/fees on your business credit lines weekly or monthly.
UCC (uniform commercial code)
Some business lenders, especially banks and Factors, will want to be in the “first position” when it comes to liens on your assets. This is referred to when a bank talks about a UCC (uniform commercial code). The Uniform Commercial Code (UCC) is a comprehensive set of laws governing all commercial transactions in the United States. Because the UCC has been universally adopted, businesses can enter into contracts with confidence that the terms will be enforced in the same way by the courts of every American jurisdiction. If you have any other lenders like equipment leasing the bank is going to want the other lenders in the second position which could cause some problems.