According to a U.S. Bank study, over 80% of small business failures can be attributed to improper cash flow management. And it makes sense: if a company doesn’t have sufficient working capital to support daily operations, business continuity will halt. On the other hand, hoarding working capital can hinder growth as there won’t be enough available funds to seize growth opportunities as they arise. The key to success is finding this balance.
Matching businesses with the right-sized capital for their unique needs and coaching them throughout the entire funding process is critical. After all, if a company under-borrows it’s going to have a difficult time reaching its goals, and if they borrow too much, they’ll be stuck paying interest on funds they didn’t need.
Choosing the right amount to borrow is the first step—the best financing product for each case is entirely situational. Below, we’ll outline a few of the most popular financing options Credibly offers and some of the benefits and drawbacks of each.
Working Capital Loan
A working capital loan is built for healthy businesses with steadier revenues that need some help stabilizing their working capital. Money is automatically deducted from your bank account on a daily or weekly basis so that you can focus on running your business, and there are no checks to write, no payments to figure out, and absolutely no surprises.
Unlike a traditional short-term bank loan (which also typically requires that you borrow more than $250,000), a working capital loan has less paperwork and does not require the borrower to tie any collateral to the loan.
Pros: Working capital loans provide immediate relief for companies that need to inject some extra cushion into their working capital. However, the funds do not need to be used specifically as working capital. It’s a great solution for any business with urgent capital needs as traditional bank loans tend to be too slow and invasive.
Cons: When choosing a short-term loan from an online lender you’re sacrificing cost for speed, simplicity, and flexibility. While the process is quick and frictionless, you will be paying more than you would through a bank.
Business Expansion Loan
Designed for business owners with a certain level of success and financial security, a business expansion loan provides larger-scale investment for growth at competitive rates. It has advantages in speed, simplicity, and flexibility that traditional small business loans cannot match.
Pros: This product operates similarly to a traditional term loan with specified interest rates and a fixed-term. However, unlike a bank loan (which could take up to 120 days), this product allows you to tackle new growth initiatives when the opportunity arises. Instead of waiting on the approval process, you can focus on supporting new projects and managing your business.
Cons: It can be difficult to keep up with the fixed payments associated with a term loan, especially if your business is susceptible to seasonality. You will also typically see a higher interest rate than you would through more traditional financial institutions.
Merchant Cash Advance
Unlike a loan, we provide you with business capital by purchasing a portion of your future receivables. Daily remittances are an agreed-upon percentage of your sales and are automatically deducted from your credit processor or bank account. Perfect for businesses with fluctuating revenue, the merchant cash advance ensures that your remittances are always based on what you can afford.
Pros: Because payments are remitted as a percentage of future receivables, you’ll always be able to keep up with payments. Fixed-term loans can put extra pressure on a business during slow seasons, and a cash advance ensures that your payments reflect what you can afford.
Cons: Because repayment amounts are dynamic, it isn’t as easy to plan and forecast.
Line of Credit
Unlike a loan or advance, a line of credit provides access to a specified amount of on-demand credit that the borrower can use at any time. This solution tends to be greatly appreciated for its flexibility as businesses are often unsure of how much they should borrow, and a line of credit makes this amount a flexible range.
Pros: A line of credit provides cash-on-demand when you need it. The level of flexibility and immediacy are great for small businesses who are unsure whether they have enough working capital and growth capital to properly support daily operations and growth initiatives.
Cons: While the flexibility is nice, businesses shouldn’t choose a line of credit just because they are unsure of how much to borrow. Success is compromised when a business does not know what the funds will be used for or how much will be needed.
Choosing the Best Financing Solution
Online lenders have been gaining popularity over the last few years because of their speed, flexibility, and ability to accommodate the needs of small businesses. Most online lenders do not restrict the way you choose to use the capital, so almost any small business loan can be utilized for any situation. The best choice depends entirely on the unique situation.
For example, if a restaurant needs new kitchen equipment but does not want to pledge the asset as collateral, they may be better off with a business expansion loan. But if this business experiences extreme seasonality coupled with its high overhead costs, it may be better off with cash advance or line of credit.
Making the right decision requires a thorough understanding of your business and goals; answer the following questions before looking into financing options:
That way, when you start applying for loans and comparing the options you qualify for, you’ll be choosing from solutions that best accommodate your needs.