If your small business is in need of additional capital, deciding what type of loan best fits your company’s needs can be an overwhelming process as there are several options to choose from, each of which having their own advantages. Some financing options that are commonly utilized by small businesses are detailed below.
Term Loans
A term loan is when is a fixed amount of money is advanced to the borrower with a pre-agreed cost and term length. “Term” refers to its solid, pre-agreed repayment schedule that could range from daily, weekly or monthly payments, depending on a client’s credit worthiness and deposit health. Terms loans are often called traditional loans due to the simplicity and lack of amortization.
Lines of Credit
A line of credit is a revolving loan that provides the borrower a fixed amount of capital which can be accessed at any time and in specific amounts. The business owner only pays interest on the money drawn, and when they have paid back the principal, it is available again for use.
Merchant Cash Advances (MCA)
A merchant cash advance (MCA) involves the sale of a client’s (or merchant’s) future credit card transactions in return for immediate cash financing. The MCA collects repayments each day by taking a percentage of small business’s credit card transactions.
Bridge Loans
This type of financing is used to help a business meet its obligations while waiting on permanent equity or debt financing, or while waiting for receivables to clear. Bridge loans can be used for working capital or real estate, among others.
Equipment Financing
This provides small businesses a way to obtain business equipment by leasing rather than having to pay the full cost of the equipment. This process involves the leasing company purchasing equipment, and then leasing it to the business.
SBA Loans
These types of loans are provided by banks and conventional lenders in which the Small Business Administration (SBA) participates by agreeing to cover an SBA lender’s losses should the borrower fail to repay the loan. Due to the federal guarantee, some SBA loans could potentially have a lower interest rate compared to other types of business loans; however, It should be noted that the requirements and application process for SBA loans is considered more rigorous than other types of funding.
Factoring
This allows a business owner to sell an outstanding invoice to a business creditor in order to access a cash advance for the invoice amount. The business creditor is then responsible for collecting on the invoice (in addition to interest and/or fees applicable).
Business Qualifications for Financing
When a small business owner decides which loan type to apply for, the next step is determining if their company will qualify. The requirements may vary from lender to lender, however, most sources generally address the same criteria:
Minimum credit scores: Business lenders may require the business owner to have minimum personal and business credit scores in order to qualify for a loan. Most lenders in the Penhurst Capital network require a minimum FICO score of 600 or above.
Time in business: Lenders may also require the business to be operating for a minimum period of time to be considered for a loan. Most of Penhurst Capital’s network of sources require a minimum time in business of at least one year.
Annual revenue: A small business owner’s revenue can impact its ability to repay the loan, so lenders may require them to meet a minimum annual revenue in order to qualify for credit. Most of Penhurst Capital’s network of sources require a minimum annual revenue of $250,000 or more and average daily balances of $10,000 or more.
If you are curious to explore what types of financing options are available to your and your business, Penhurst Capital’s Account Specialist are here to help you navigate through all of your choices.
