Overview of three popular SMB funding options
Small company owners sometimes need money, but they also value their time – and working out the best way to access funding can be time-consuming.
To help you, this summary of merchant cash advances, SBA loans, and business lines of credit can help you navigate the SMB working capital informational haze.
One or more of these choices may be perfect for you to finance your developing small company.
What are merchant cash advances?
Merchant cash advances (MCAs) are lump-sum loans from lenders to businesses in return for a percentage of future credit card or debit card sales.
How do MCAs work?
Business cash advance loans are meant for restaurants, ecommerce, and retail enterprises that operate mostly on credit and debit cards. Merchant cash advances are now offered to non-credit card companies. You get cash upfront from an MCA provider in return for a portion of your future sales.
Two MCA repayment structures exist:
- One sort of MCA gives you cash upfront in return for a portion of your future credit and debit card sales.
- The second typical situation is getting a lump payment and paying it back in daily or weekly bank account debits. These are ACH withdrawals.
This second alternative, ACH merchant cash advances, is the most frequent MCA and allows suppliers to promote to firms that don’t sell credit and debit cards.
How can MCAs help?
A poor credit score is okay. Application is simple, and operating money is available quickly if granted.
What are the cons of MCAs?
Merchant Cash Advances (MCAs) can sometimes become a financial burden for small business owners. While they offer a quick influx of capital, their high-interest rates and repayment terms based on future sales can lead to difficulties in managing cash flow. This often necessitates seeking MCA debt reliefservices to renegotiate terms or settle debts, which can be a complex and stressful process.
What is an SBA loan?
SBA loans (https://www.gofundshop.com/blog/sba/construction-business-loans/) are long-term, low-interest, and partly insured by the government.
How do SBA loans work?
The SBA guarantees loans from participating lenders to small businesses. Eligibility requires 2+ years in business, a 620+ credit score, and over $100,000 in yearly revenue.
They cover 85% of loans under $150,000 and 75% over this amount. In 2016, the average loan was $375,000, with a max of $5 million.
SBA loans are great for expansions, hiring, or refinancing, offering better terms than other options.
Interest rates depend on the prime rate. For loans over $50,000 and under seven years, the maximum spread is 2.25%. As of December 2017, this meant a 6.75% interest rate. For loans of the same amount but over seven years, the spread is 2.75%, or a 7.25% rate in December 2017.
Remember, APR (which includes all loan costs) differs from the interest rate. Some online lenders might charge high APRs, but SBA loans generally offer lower APRs and longer repayment periods.
Loan terms vary: Seven years for working capital, 10 years for equipment, and 25 years for real estate.
What is a business line of credit?
If you make payments on time and don’t over your credit limit, a business line of credit (BLC) lets you borrow and return cash as frequently as you like. Most lenders let you pay off your loan early to save interest. Business lines of credit typically vary from $5,000 to $150,000. Use our line of credit cost calculator to determine price.
Unsecured BLCs with lesser credit limits do not need collateral like real estate or merchandise.
BLCs provide more flexibility than company loans. With a business line of credit, you may borrow up to $100,000 and pay interest solely on what you borrow.
How does a business line of credit work?
Most conventional lenders, including banks, demand firms with significant revenue and many years of experience to apply for a line of credit. Larger lines of credit may demand property or other collateral. If you don’t pay, your lender may take your collateral.
Loan applications often involve personal and business tax records, bank account details, and company financial documents including profit-and-loss statements and balance sheets.
Online business loans have softer requirements than banks. These lenders may charge higher rates and have smaller loan limits than banks.
At least six months in operation and $25,000 in yearly income are required for a business line of credit. Some lenders don’t have a minimum credit score, but most want 500 or more.
Why a business line of credit may be right for you
After BLC approval, you won’t pay interest until you use your credit. (Watch for lender set-up fees. (Your lender may impose an annual fee to hold credit until you utilize it.) BLCs provide small company owners flexibility and control over application timing and quantity. In contrast to other small business loans, business lines of credit may be simpler to get.
