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Suppose for a moment that you wanted to install a fence in your backyard. As you obtain project bids from various businesses in your area, you begin to realize that the cost for the fence would exceed your budget. Then you have a brilliant idea—you call five of your neighbors and ask if they’d also be interested in getting fences in their yards. Two of your neighbors say they are interested.

When you call your favorite fence company and explain that there will be three neighboring homes getting fences, they lower the cost substantially for each of you. After all, they will already have all their equipment and installers on site, and they’ll get a discounted price on the vinyl fence pieces because they’ll be buying it in bulk for this project.

If you’ve ever experienced a scenario like the one described above, you have successfully leveraged group buying power and secured a better price for yourself and others. A group purchasing organization (GPO) uses the same approach to empower doctor’s offices, hospitals, and other healthcare facilities to work together to get better prices for the products they need.

What is a GPO?

A group purchasing organization (GPO) is a collective of like-minded businesses that come together to leverage their combined purchasing power. This collective approach allows these businesses to negotiate from suppliers better prices, terms, and conditions than they would be able to individually. 

In the healthcare sector, GPOs are primarily composed of hospitals, clinics, and doctor's offices. They band together to purchase necessary supplies, from medical equipment and pharmaceuticals to office supplies and services. By doing so, they save not only on costs but also streamline their procurement processes, allowing them to focus more on their primary goal: providing quality healthcare.

How do GPOs work?

A group purchasing organization operates on the simple yet powerful principle of collective bargaining. When businesses unite and pool their purchasing power, they become a significant customer for suppliers, thereby gaining the ability to negotiate lower prices and better terms. Here's the breakdown of how it works:

1. Membership - A healthcare provider (Ex: a hospital or clinic) joins a GPO. There might be a membership fee, or sometimes the GPO operates on a cost-sharing model.
2. Catalog access - Once a member, the healthcare provider gets access to the GPO's catalog of products and services, which includes everything from medical supplies and pharmaceuticals to office essentials.
3. Ordering - Members place orders through the GPO, specifying their needs. The GPO then communicates these orders to the suppliers.
4. Delivery and billing - Suppliers deliver the orders directly to the members. However, billing is often handled through the GPO, simplifying the process for members.
5. Cost savings - The discounted prices negotiated by the GPO translate into substantial cost savings for the members. These savings can then be redirected to enhance patient care and services.

Remember, the strength of a GPO lies in its numbers—the more members it has, the greater its negotiating power. So, the next time you're looking to make a significant purchase for your healthcare facility, consider the potential benefits a GPO could bring.

Types of group purchasing organizations.

There are primarily two types of GPOs—horizontal and vertical—and they differ in their structure and the benefits they offer.

1. Horizontal GPOs - These are organizations where members are from the same industry or sector, such as healthcare. Within the healthcare industry, for example, a horizontal GPO might include a group of hospitals, clinics, or nursing homes. Members of horizontal GPOs usually purchase the same types of products and services, allowing for greater purchasing power and more significant cost savings.
2. Vertical GPOs - In contrast, vertical GPOs comprise members from various industries. While this might mean a more diverse product and service catalog, the cost savings may not be as substantial as in a horizontal GPO, given the varying needs and purchase volumes of different industry members.

However, be it horizontal or vertical, the core objective of a GPO remains the same—to leverage collective purchasing power to secure better prices, terms, and services for its members. Therefore, choosing the right type of GPO depends largely on your specific business needs and purchasing requirements.

Reasons to join a GPO.

Joining a group purchasing organization (GPO) can bring manifold benefits for your healthcare business.

Cost savings.

One of the most compelling reasons to join a GPO is the substantial cost savings it can provide. GPOs leverage the collective purchasing power of their members to negotiate better deals, discounts, and terms with suppliers. This negotiating power can secure lower prices than individual healthcare providers could obtain on their own. 

These cost savings can be significant, especially for healthcare providers who need to make frequent and substantial purchases. According to research from the Healthcare Supply Chain Association (HSCA), a trade association for purchasing organizations, the strength-in-numbers effect of GPOs helps save the healthcare system about $55 billion a year.

Efficient procurement.

Another significant advantage of joining a GPO is the efficiency it brings to procurement processes. Healthcare providers, particularly those running on tight schedules, may not have the luxury of time to negotiate with multiple suppliers or sift through countless product catalogs. A GPO eliminates this hassle by providing a consolidated platform for accessing a wide variety of medical supplies, pharmaceuticals, and services from trusted suppliers. 

This streamlined process frees up valuable time and resources, allowing healthcare providers to focus more on their primary mission—patient care. The standardization of products across various providers through GPOs can lead to better consistency in service delivery and patient outcomes. It's like having a dedicated procurement team to handle your purchasing needs, without the overhead costs associated with managing such a team internally. 

In a field where efficiency can greatly impact life-saving services, this advantage of GPOs cannot be overstated.

Access to a broad range of products and services.

A GPO offers an extensive portfolio of products and services, adding another layer of benefit to its members. Healthcare providers need a vast array of supplies, from basic office equipment to specialized medical tools and pharmaceuticals. With a GPO, members gain access to diverse catalogs compiled from various trusted suppliers. This vast array simplifies the procurement process as healthcare providers can find most, if not all, of their supply needs met in one place.

Moreover, due to the extensive network of suppliers, GPOs often have the capacity to provide newer, innovative products in the healthcare field. This allows healthcare providers to stay up-to-date with the latest technology and industry standards, thereby enhancing their service quality and patient care. Hence, partnering with a GPO not only streamlines the procurement process, but also equips healthcare facilities with the tools necessary to provide top-tier care.

Leveraging collective bargaining power.

The advantage of collective bargaining power is one of the central benefits of a GPO. By aggregating the demands of numerous healthcare providers, a GPO can negotiate with suppliers on a scale that individual members cannot. This collective force means that suppliers are more likely to offer favorable terms and prices, due to the volume of business they receive from the GPO's membership.

This collaboration not only helps to reduce costs but also creates a dominant market presence that suppliers cannot afford to ignore. Consequently, the GPO members, even smaller healthcare providers, have a strong voice and influence in their dealings with suppliers. The power of collective bargaining garners the best deals, terms, and conditions for the members, ultimately leading to better financial control, and freeing up resources that can be used to enhance patient care and services.

On a broader scale, the collective bargaining power of GPOs can even influence industry trends and drive innovation, as suppliers strive to meet the demands of a critical mass of customers. Thus, GPOs not only facilitate cost savings, but also foster an environment that pushes for growth, innovation, and improved patient care in the healthcare industry.

Community and support.

Yet another considerable advantage of joining a GPO is the community and support it offers to its members. The healthcare industry can be complex and challenging, with constant advancements, regulatory changes, and the need for effective patient care practices. Being a part of a GPO community allows healthcare providers to navigate these challenges more effectively.

The GPO community is akin to an extensive network of peers facing similar operational and procurement challenges. This network can provide valuable insight, advice, and innovative solutions to common problems. Members can learn from each other's experiences, share best practices, and collaborate to overcome shared obstacles.

In addition, many GPOs offer educational resources, training, and assistance to their members, helping them stay updated on the latest industry advancements, regulatory changes, and procurement strategies. This supportive environment empowers healthcare providers to improve their operations, enhance patient care, and ultimately succeed in their mission.

The support does not stop at learning and collaboration. GPOs often advocate for their members, representing their interests in discussions with suppliers and helping to resolve any issues that arise. The backing of a strong and sizable organization can provide peace of mind, knowing there is a dedicated team ready to assist when needed. In sum, the community and support provided by GPOs can be just as valuable as the cost savings they deliver, contributing significantly to the success of healthcare providers.  

In a nutshell, being part of a GPO can lead to substantial cost savings, greater efficiency, access to a wider range of products and services, and a supportive community of like-minded businesses.

Is a GPO right for my business?

So is a GPO right for your healthcare facility? Probably. There is an undeniable benefit from buying in bulk. Otherwise, why would any of us have Costco memberships? (Obviously not for the beautiful ambiance in those cavernous warehouses.)

How to find the right GPO for your healthcare facility.

Just know that not all GPOs operate on the same level. The experts from Healthcare Finance recommend that you re-evaluate your GPO relationship about once every five years. This practice allows you to confirm that the supply chain spend is still relevant and the GPO is connecting you with the right products. The most effective way to get a bead on your savings is with a “market basket.”

“In healthcare, a market basket measures the pure price change of inputs used by a provider in supplying healthcare services by using price data from the Bureau of Labor Statistics,” explains Healthcare Finance. “If the market basket tops 50% of an organization’s spend, it’s helpful to look through each item to see if the GPO is effectively covering those items under contract. If it isn’t, a healthcare organization may want to look at other GPOs that potentially offer better deals.”

Perhaps your analysis will reveal essential values that you’re not currently receiving from your GPO. Truth is, the best fit for your facility might not be a large GPO. Smaller facilities sometimes find that they get more bang for their buck by working with a channel partner, which is a smaller company that belongs to a nationwide GPO.

When a hospital matches up with the right GPO or channel partner, they will likely see 8% to 10% savings for their supply chain. The potential to save this much money certainly makes it imperative that your healthcare facility considers the GPO model and carefully reviews its options before signing up with any given organization.

On the flip side, some experts in the healthcare industry have concerns with the GPO model. Research shared by Modern Healthcare reveals that GPOs can contribute to:

• Higher prices
• Drug shortages
• Stifled innovation in medicine

At the heart of these issues is the fact that GPOs generally receive kickbacks and incentives from manufacturers. Just as there’s no such thing as a free lunch, there’s no such thing as a free product placement in a GPO catalog. With manufacturers paying fees to the GPO, the costs of supplies can go up. Ultimately, hospitals could end footing that bill.

Also, the contracting practices used by GPO exclude some suppliers from participating. This practice can limit the supplies available and keep some excellent products from reaching hospitals. This situation is especially true if GPOs make a manufacturer the sole supplier, essentially shutting the door on innovation and quality from other companies.

Despite these concerns, the GPO model still has a lot to offer the healthcare industry. You’ll just need to exercise caution before signing on the dotted line and make sure you understand how the GPO operates and what their supply chain looks like.

Even after you’ve joined an organization, remember to reassess your membership every five years. This clear-eyed approach will prevent you from getting stuck in a relationship that mainly benefits the other party.

The bottom line.

Group purchasing organizations play a substantial role in the healthcare industry. They present a cost-effective, efficient, and community-driven approach to procurement, which can be a boon for healthcare providers striving to balance financial constraints with the need for high-quality patient care.

While there are concerns regarding pricing and stifled innovation, these can be mitigated by adopting a vigilant approach towards GPO participation. Regular re-evaluation of your GPO relationship ensures your organization continues to gain value from the partnership. Ultimately, the decision to join a GPO should be a strategic one, based on a comprehensive understanding of your organization's unique needs and the offerings of the GPO.

Thinking about solutions to manage your medical practice’s finances? Check out medical practice loan options and find the one that suits your needs best.

Did your small business keep employees on your payroll through the pandemic? Congratulations! You may be eligible for a tax credit from the Internal Revenue Service.

The Employee Retention Credit, referred to as the ERTC or the ERC, was first launched in the early days of the COVID-19 pandemic as part of the CARES Act relief package. It was intended as an extra incentive for smaller businesses to retain their employees, although the Payment Protection Program widely overshadowed it.

The ERC is still available retroactively for both 2020 and 2021, but 2024 deadlines are quickly approaching.

Key Points:

• The ERC is a pandemic relief tax credit that gives qualifying businesses up to $26,000 per W-2 employee.
• Even though it is termed a tax credit, you can get paid in excess of what you’ve paid in taxes.
• Businesses that received PPP loans are eligiblefor the ERC too.
• Businesses have until April 2024 to amend their 2020 tax filing and until April 2025 to amend their 2021 filing to apply for the ERC.
• Given the time it takes to gather the necessary documentation and process a claim, businesses looking to meet the April 2024 deadline should start the application process in Q1 of 2024.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit intended to encourage businesses to continue to pay employees throughout government shutdowns during the COVID-19 pandemic.

CARES Act - 2020

The Employee Retention Credit was first introduced as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) in 2020. The act permitted qualifying businesses to claim 50% of qualifying wages up to $10,000 per employee paid from March 13 through Dec. 31.

Consolidated Appropriations Act - 2021

The Employee Retention Credit was updated in 2021 to allow qualifying employers to claim 70% of qualifying wages up to $10,000 per quarter in 2021.

American Rescue Plan Act - 2021

This act added recovery startup businesses who started their business on or after Feb. 15, 2020, as eligible businesses if their annual gross receipts didn’t exceed $1 million in 2020 or 2021 and they had more than one or more W-2 employees excluding family members.

Infrastructure Investment And Jobs Act - 2021

This act terminated the ERC credit for the 4th quarter of 2021 except for recovery startup businesses.

How the ERC works.

The Employee Retention Credit is a refundable tax credit for qualifying employee wages. The credit is based on payroll taxes rather than income taxes, so you can still receive the credit even if you paid no income taxes in 2020 or 2021.

The best part is because it is refundable, it’s possible to receive money back beyond what you originally paid in payroll taxes. So if you qualify for $50,000 under the ERC, but only paid $10,000 in payroll taxes, you would still receive the full $50,000 refund from the IRS. Bear in mind there is a small non-refundable portion of the ERC that is limited to the amount you actually paid in employee Social Security and Medicare taxes.

How much money will my small business get from the ERC?

For tax year 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee through the Employee Retention Credit. This adds up to a maximum of $5,000 per worker, and you can apply for this credit now in 2023.

For the first 3 quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This amounts to $21,000 per employee.

In total, a small business could potentially receive $26,000 in credits per employee kept employed through 2020 and 2021. Keep in mind that the IRS defines certain health care expenses as part of an employee’s wages.

Is my small business eligible for the ERC?

While businesses of all sizes can benefit from ERC, the program favors small businesses over larger employers.

Number of full-time employees

For tax year 2020, a small business is defined as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, the definition is expanded to include businesses that averaged 500 or fewer full-time monthly employees in 2019.

Larger employers can claim the ERC but only for wages and some healthcare costs paid to employees who did not work.

For small businesses, you can claim the credit for all employees whether they worked or not.  

Government-mandated full or partial suspension

Now, to be eligible for the ERC, your business must have been impacted by either a government-mandated lockdown or a decrease in revenue.  

If your business was impacted by a full or partial suspension of operations because of a government COVID-19 order during any quarter, you can qualify. This includes restrictions on hours or capacity. This area of eligibility criteria is complex, so work with a vendor who is familiar with government orders, their impact, and the timeframe they were enacted.

A few examples of a qualifying business include:

• A business that was ordered to fully suspend operations
• An essential business that remained open but had government-mandated limited hours or capacity, such as a restaurant that could use fewer tables.
• A business whose suppliers experienced shutdowns and were unable to make deliveries
• A business that had to shut down a portion of the business due to government mandates

Significant decline in gross receipts

Your business can also qualify if it experienced a “significant decline” in gross receipts as defined by the IRS. For tax year 2020, a significant decline means gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, it means quarterly gross receipts are less than 80% compared to the same period in 2019.

For the first 3 quarters of 2021, if your business did not see a 20% decline in gross receipts compared to 2019, businesses can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, it can instead use Q1 of 2021 and compare it to Q1 of 2019 to meet eligibility.

Recovery startup business

If you have a newer business, the ERC was amended in 2021 by The American Rescue Plan to even let you gain access. So-called “recovery startup businesses” can apply for the credit for Q3 and Q4 of 2021. Recovery startup businesses are defined as ones that opened after February 15, 2020, and have annual gross receipts under $1 million for 2018, 2019 and 2020. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. The maximum a recovery startup business can receive is $50,000 in ERC per quarter.  

How to apply for the Employee Retention Credit.

First, before filling out any forms, consult your accountant or tax professional. They will help guide your business through this process. Because eligibility might be tricky to sus out, especially if you applied for PPP loan forgiveness, a tax professional who specializes in ERC will be well worth the cost.     

Since you will need to claim the ERC retroactively, you can file Form 941-X to amend your previous return.

What is considered qualified wages?

Qualified wages vary based on the year and size of your business.

In the following situations, all wages qualify regardless of whether employees worked or not:

• In 2020: 100 or fewer full-time employees
• In 2021: Fewer than 500 full-time employees

If you had more than 100 full-time employees in 2020 or more than 500 full-time employees in 2021, qualifying wages are wages paid to an employee while they were unable to work due to suspended operations or a substantial decline in revenue.

A full-time employee is defined as any employee who worked more than 30 hours/week on average. In general, the wages of the owner or family members of the company owner do not qualify.

Cash tips greater than $20/month would be included as qualified wages.

Can I still apply for the ERC during the moratorium?

Quick Answer: Yes, small businesses can still apply for the ERC during the moratorium announced by the IRS.

On September 14, 2023, the IRS announced a pause on processing new Employee Retention Credit claims. The moratorium will last at least through the end of 2023.

What this means

• Applications received prior to the moratorium will continue to be processed.
• Processing times will be longer — potentially expanding from a 90-day turnaround to 180 days or more.
• Payouts for previously filed claims will continue through the moratorium.
• The IRS will begin a more scrutinous compliance review period to protect businesses from bad claims.
• New claims can still be filed, but they will not be reviewed until after January 1, 2024.

Note: The IRS has also announced an ERC withdrawal process for those who are concerned about the accuracy of their claim and have not yet received a refund. Businesses also have the option to amend their ERC claim. Learn more about ERC scams to avoid here.

Understanding the nuances of financial transactions can be intimidating, with credit card factoring being a prime example. Despite its appealing facade of quick money, it's a practice that often lands businesses in hot water. 

In this article, we'll dissect the concept of credit card factoring, delve into why it's illegal, explore common examples, and examine the potential consequences of engaging in such activities. Awareness is the first line of defense against scams, so we will also share some cautionary tales to keep you vigilant. Let's dive in and unravel the complexities of credit card factoring.

What is credit card factoring?

Credit card factoring is a practice where a business uses a merchant account of another business to process credit card transactions.

This could include the following scenarios:

1. A business owner uses a friend's merchant account to process their transactions. Despite appearing to be a practical solution for businesses struggling with cash flow, this method is considered illegal due to its close resemblance to money laundering.
2. A fraudster with stolen credit card information asks a legitimate business to process credit card transactions for them in exchange for a portion of the proceeds. The business processes the credit card charge and sends the proceeds to the fraudulent company. When the credit card owner identifies the credit card charges as fraudulent, the legitimate business is on the hook for paying the credit card owner back.

Consequences of credit card factoring.

Engaging in credit card factoring can have far-reaching consequences for businesses, both legally and financially. On the legal front, credit card factoring is considered illegal due to its resemblance to money laundering. Businesses found guilty of this practice may face hefty fines and legal ramifications. In severe cases, business owners may even face criminal charges such as fraud, which can lead to imprisonment.

From a financial perspective, if a business falls victim to a scammer, it could be on the hook for thousands of dollars of chargebacks.

To make matters worse, your processor could place you on the Terminated Math File. After this, you would find it almost impossible to acquire a merchant account.

Merchant cash advances vs. credit card factoring.

Credit card factoring is sometimes confused with merchant cash advances, but they are two different things.

A merchant cash advance (MCA) is a legal type of business financing where a company sells a portion of its future credit card sales in exchange for a lump sum of cash up front. This is typically a quick and easy way for businesses—especially those with poor credit or those unable to secure traditional loans—to access needed capital. However, MCAs often come with high factor rates and fees, making them a costly solution over time.

On the other hand, credit card factoring, as previously discussed, is a practice where a business uses another business' merchant account to process credit card transactions. This is often seen as a workaround for businesses unable to secure their own merchant accounts, but it's a risky and illegal practice closely resembling money laundering.

Merchant cash advance vs. invoice factoring.

In invoice factoring, you sell your business’ invoices to a third party called a factor. It is then up to the factor to collect the payment from the customer. The factor typically advances 80% to 90% of the value and then provides the rest (minus processing fees) upon receiving payment from the customer.Merchant cash advances, on the other hand, are cash advances secured by your business’ future credit card sales. To do this, a merchant cash advance company gives you upfront cash and then deducts a percentage of your credit card sales each day until the amount is fully paid.

Benefits of a merchant cash advance.

The greatest benefit of a merchant cash advance is the speed and ease with which you can get financed. Many companies can fund your advance in as little as 24 hours and will work with business owners with a credit score of 500 or higher.To learn what works best for your business, you can weigh your cash advance options with other business loan options through Lendio’s free loan match tool.

Are you a small business owner looking to buy new equipment? If so, then you may already know that purchasing equipment can be a costly endeavor. Fortunately, the Small Business Administration (SBA) offers loan programs specifically designed to help small businesses purchase necessary equipment. 

In this blog post, we’ll discuss how to get an SBA loan for equipment purchases, as well as the benefits of using these loans and where you can go to apply.

Reasons to use an SBA loan to buy equipment.

Small businesses are the backbone of our economy, but they often struggle with limited resources and cash flow. This is especially true when it comes to purchasing expensive equipment. Traditional loans from banks or other financial institutions can be difficult to obtain, and they may come with high interest rates and strict repayment terms. In contrast, SBA loans offer favorable terms and lower interest rates, making them an attractive option for small businesses in need of equipment financing.

SBA loans are backed by the government, which means that lenders are more willing to take on the risk of lending to small businesses. This increased accessibility makes it easier for small business owners to secure the financing they need. Additionally, SBA loans typically have longer repayment terms and lower down payments compared to traditional loans, making them more manageable for small businesses with limited cash flow.

Types of SBA loans you can use to buy equipment.

The SBA offers several loan programs that can be used for equipment purchases. These include the 7(a) loan program, the CDC/504 loan program, and the Microloan program.

SBA 7(a) loan program

The 7(a) loan program is the most popular SBA loan and can be used for a variety of business purposes, including equipment purchases. The maximum loan amount is $5 million, and repayment terms can range from 10 to 25 years. The interest rates for an SBA 7(a) loan range from 3% to 8% above the base rate. The process of obtaining an SBA 7(a) loan can take between 60 to 90 days, depending on the complexity of the application and the responsiveness of the applicant in providing necessary information.

The SBA 7(a) loan program also includes the SBA Express Loan option. This subset of the program offers expedited loan approval and funding, typically within 36 hours of application submission. While the maximum loan amount is lower, capped at $500,000, the accelerated timeline can be especially beneficial for small businesses requiring immediate access to funds for equipment purchase.

Qualifications for an SBA 7(a) loan:

• The borrower must be a for-profit business operating in the United States or its territories.
• The business needs to have invested equity, meaning the owner has contributed their own time and money into the business.
• The business must have sought and used other financial resources, including personal assets, before applying for an SBA loan.
• The borrower must demonstrate a need for the desired credit.
• The borrower needs to provide a sound business plan, showcasing the purpose of the loan and a plan for repayment.
• Personal and business credit history of the borrower will be considered (generally a credit score of 650 or higher).
• The borrower must have the ability to repay the loan on time with the projected operating cash flow.

SBA CDC/504 loan program

The CDC/504 loan program is specifically designed for fixed asset financing, such as equipment purchases. This program allows businesses to borrow up to $5 million and has a longer repayment term of 10, 20 or 25 years. The interest rate typically totals 3% of the loan amount. The CDC/504 loan program is particularly beneficial for businesses looking to purchase long-term equipment, as it provides financing options that cater to the extended lifespan and usage of such assets.

The CDC in the name stands for Certified Development Companies, which are nonprofit corporations certified and regulated by the SBA, that work with participating lenders to provide financing to small businesses. This unique partnership between the CDC, the SBA, and lenders allows small businesses to access large amounts of capital with more favorable terms and conditions than traditional loans.

Qualifications for an SBA CDC/504 loan:

• The business must be a for-profit entity operating within the United States or its territories.
• The business' net worth should not exceed $15 million, and it should have an average net income of less than $5 million after federal income taxes for the preceding two years.
• The funds obtained must be used for eligible business expenses, such as the purchase of long-term equipment.
• The borrower must not have access to other sources of financing on reasonable terms.
• The business must have a feasible business plan and the potential to create or retain jobs.
• The borrower's personal and business credit history will be considered (generally a credit score of 650 or higher).
• The borrower must demonstrate the ability to repay the loan on time based on the projected operating cash flow.

SBA microloan program

The microloan program is ideal for small businesses looking to purchase smaller equipment with a maximum loan amount of $50,000. The terms vary depending on the lender, but typically range from five to seven years, and interest rates typically range from 8% to 13%. SBA Microloans are available through a network of intermediary lenders, typically nonprofit organizations with a mission to promote economic development within their local communities.

Qualifications for an SBA microloan:

• The business must be a for-profit enterprise operating within the United States or its territories.
• The borrower must demonstrate a need for the loan proceeds.
• The borrower must show a sound business purpose for the funds.
• A strong business plan is required, detailing how the funds will be used and the plan for repayment.
• The borrower's personal and business credit history will be examined (generally a credit score of 620 or higher).
• The borrower must not have access to other sources of financing on reasonable terms.
• The borrower must demonstrate the ability to repay the loan from the business’ operating cash flow.

It's important to remember that each lender will have its own specific qualification guidelines, in addition to the general SBA criteria, when determining loan eligibility. Therefore, the exact requirements may vary from one lender to another. Also, you should note that eligibility requirements for microloans can be less strict than other SBA loan programs, making them an attractive option for small businesses that might not qualify for larger loan amounts.

Where to get an SBA loan to buy equipment.

SBA loans are not directly provided by the government. Instead, they are administered through partnering banks and financial institutions. This means that you can apply for an SBA loan at any bank or credit union that participates in the program.

It’s important to note that the application process for an SBA loan may be more involved compared to traditional loans. The lender will require detailed financial information and may also ask for a business plan, personal credit score, and collateral. However, with the right documentation and a solid business plan, you can increase your chances of getting approved for an SBA equipment loan.

The first step is to research and find SBA participating lenders in your area. You can also use the SBA website to search for lenders based on your location and preferred loan program. Once you’ve identified potential lenders, it’s important to compare their rates, terms, and requirements before deciding on the best option for your business.

In conclusion, if you’re a small business owner looking to purchase equipment, an SBA loan can be a great financing option. With favorable terms and increased accessibility, these loans can help small businesses overcome the financial barriers of purchasing necessary equipment. Just remember to do your research, gather all necessary documentation, and choose the right lender for your business’ needs.

As a small business owner, you may have heard of the Small Business Administration (SBA) loans as a potential funding source for your business. These loans are backed by the SBA, providing lenders with a guarantee in case of default. However, one aspect that often raises questions and concerns is collateral requirements. 

In this blog post, we'll break down everything you need to know about SBA collateral requirements, including common misconceptions and personal guarantees.

Is collateral required for SBA loans?

The short answer is yes, collateral is typically required for SBA loans. This means that the borrower must provide assets or property to secure the loan in case of default. However, the type and amount of collateral may vary depending on the specific SBA loan program and lender.

Some things that may count as collateral for an SBA loan include:

• Commercial real estate or land
• Machinery and equipment
• Inventory
• Accounts receivable
• Cash savings or deposits
• Personal assets (e.g., a home or car)
• Investment properties
• Financial instruments such as stocks or bonds

What are some common misconceptions about SBA loan collateral requirements?

One common misconception is that only physical assets (Ex: real estate or equipment) can be used as collateral. While these are common forms of collateral, lenders may also consider other assets such as accounts receivable or inventory.

It's also important to note that the SBA has specific guidelines for the type and value of collateral required for their loan programs. Lenders must follow these guidelines when determining collateral requirements.

Another misconception is that the SBA itself provides the loan. In reality, the SBA guarantees a portion of the loan provided by an approved lender, reducing the lender's risk and making it easier for small businesses to access funding.

Many business owners believe that the SBA provides collateral for SBA loans. This is not the case. The SBA guarantees a portion of the loan, but it's still up to the lender to determine collateral requirements.

Do SBA loans require a personal guarantee?

Yes, it is SBA policy that every SBA loan must be backed by a guarantee. A personal guarantee is a promise from the business owner to personally repay the loan in case of default. This means that even if your business fails, you will still be responsible for repaying the loan with your personal assets.

What to know about personal guarantees.

It's important to understand the implications of a personal guarantee before signing on the dotted line. While providing a personal guarantee may increase your chances of getting approved, it also puts your personal assets at risk. It's crucial to carefully consider your ability to repay the loan and any potential risks before agreeing to a personal guarantee.

Additionally, some lenders may require multiple guarantors, which means that multiple individuals, such as business partners or investors, will be responsible for repaying the loan if the business is unable to do so.

The SBA does allow third parties to assume the liability of a personal guaranty.

Will I be able to get an SBA loan without collateral or a personal guarantee?

It's possible but rare. Some SBA loans, such as the 7(a) program, may provide financing without collateral for loans of $50,000 or less. However, in these cases, the lender will still require a personal guarantee.

As a small business owner, understanding SBA collateral requirements is crucial when considering financing options for your business. While collateral and personal guarantees may seem daunting, they are necessary measures to protect lenders and make loans more accessible for small businesses. With the right information and preparation, you can confidently navigate SBA collateral requirements and secure the funding your business needs to thrive.

Remember, the SBA is here to support and assist small business owners like you in achieving their goals, so don't let the concept of collateral discourage you from exploring the option of an SBA loan. So, do your research and find the best fit for you and your business.

Opening a food truck can be easier, faster, and cheaper than launching a brick-and-mortar restaurant. Food truck entrepreneurs are drawn to the industry because of its ease of entry and relatively low overhead. This complete guide will walk you through each step of the process—from nascent idea to knowing when it’s time to expand—and answer some of the most common questions about starting a food truck. 

How to start a food truck.

Starting a food truck business indeed has its charm, with the freedom of the open road and the joy of crafting delicious food for your community. But there's more to it than just cooking up a storm and finding a parking spot—let's dive into the essential steps to successfully launching your own food truck venture.

How to start a food truck.

1. Conduct market research.

2. Choose a concept for your food truck.

3. Write a business plan for your food truck.

4. Secure financing.

5. Get your truck (or car).

6. Get food truck licenses and permits.

7. Purchase your supplies and equipment for your food truck.

8. Select a POS system.

9. Protect your business.

10. Find a place to park.

11. Forge strategic partnerships.

12. Market yourself.

1. Conduct market research.

If you want your food truck to be profitable (and we assume you do), market research is the best place to start. Market research will help you understand your customers, your competition, and the food truck business on the whole. Here are some things to research to start your food truck business right:

• Existing food truck businesses and their concepts (in your market and outside of it)
• Existing restaurant concepts (in your market and outside of it)
• Government data
• Population demographics
• Local food truck associations
• Culinary schools
• Trade publications
• Trade organizations
• Spaces where food trucks can park and sell their products
• Times when streets/parking lots are busy

2. Choose a concept for your food truck.

After you've conducted your market research, it's time to decide on a concept for your food truck. This is a critical stage in the planning process because it not only determines the type of food you'll serve, but also sets the tone for your entire brand. Your concept should be unique enough to differentiate you from the competition, yet appealing to your target demographic. In other words, you'll want to find your niche. Some questions you can ask yourself that can help you find your niche include:

• Did you grow up with a specific cuisine tradition that you could introduce to your market? (If so, you’ll want to revert to market research to ensure the market is ready for it.)
• Can you use your family or cultural cuisine traditions to put a fresh spin on something familiar?
• Do people in your network know you as the person who makes a killer X food?
• Are you passionate about a particular cuisine or have a unique recipe that you think will be a hit?
• Do you know how to take something complicated and simplify it, so that it works in a food truck?
• When you performed your market research, were there any “no brainer” holes in the market, where you thought, “How do we not have a ______ food truck?”
• Do you have an idea for a food truck that could complement an established food truck in your market? If so, would that food truck owner be interested in collaborating and/or selling in the same location?
• Do you have an exceptional, attention-grabbing way to market something that people already know? The Big Gay Ice Cream truck in New York is a standout example. Their marketing made the ice cream truck a sensation that eventually led to a brick-and-mortar store. 
• Have you checked social media to see what foods trend well in your area? More and more people are sharing their food on social media. Getting a sense of the pulse might give you an idea for what people get excited about in your area—or what they might be likely to share.
• Following up on the previous question, do you have an idea for really cute food (that also tastes good) that people would want to photograph?

Remember that consistency is key. Everything—from your truck's design, menu offerings, to the way you interact with customers—should be aligned with your chosen concept. This helps to create a memorable brand that people will recognize and return to. For instance, if you've decided to run an Italian-themed food truck, your menu might feature pizza and pasta, your truck might be decorated with the colors of the Italian flag, and you might play Italian music to set the mood.

Choosing your food truck's concept is not just about the food. It's about creating an experience that resonates with your customers. So take your time with this step. Brainstorm ideas, seek feedback, and refine your concept until you're confident it's the right one. And always remember, as trends change, be ready to adapt and evolve your concept to meet your customers' shifting tastes.

3. Write a business plan for your food truck.

After you've nailed down your food truck concept, it's time to create a business plan. This document is an essential blueprint for your business that outlines your goals, strategies for achieving them, and the resources required. The business plan will not only help you stay organized and on track, but also be critical when seeking financing or investors. Here's what your food truck’s business plan should cover:

• Executive summary - This is a brief overview of your business, summarizing your food truck concept, target market, and unique selling points.
• Company description - Provide detailed information about your food truck, including the type of food you'll serve, your location, and your hours of operation.
• Market analysis - This section should include the findings from your market research. Discuss your understanding of your target market, competition, and any gaps or opportunities you've identified.
• Organizational structure - Detail the structure of your business. Are you a sole proprietor, or do you have partners? If hiring staff, what roles will they fill?
• Services and products - Describe in detail what you'll be selling. Be sure to highlight any unique dishes or services you'll be providing.
• Marketing and sales strategy - Outline the strategies you'll use to attract and retain customers. This could include social media marketing, partnerships with local businesses, attendance at community events, and more.
• Financial projections - Provide a forecast of your anticipated revenue and expenses. This section should show that your business will be profitable and sustainable.

Remember, your business plan is not set in stone. It should be a living document that you revisit and revise as your business grows and evolves.

4. Secure financing.

When you’re just starting out, you might not yet qualify for a business term loan, but there are a variety of financing options to help you get your food truck up and running. Here are some of your best bets:

Equipment financing

You can use an equipment loan to help purchase the truck or car you’ll use for your food truck business and any commercial cooking equipment that you need. Even your point-of-sale (POS) system can be paid for with equipment financing. Because an equipment loan is secured by the equipment itself, the loan offers lower risk to lenders. In turn, it’s easier for borrowers to qualify. 

Line of credit

A line of credit allows you to borrow against a predetermined sum of money. You can borrow as much as you want (up to the total amount), repay, and repeat as many times as you need. A line of credit can be a key asset for new food trucks, as they often have changing capital needs. This financing option keeps you protected from unexpected financial hurdles, so you can keep your business finances as flexible as the location of your food truck. 

Business credit card

Napkins, plastic silverware, ingredients, cleaning supplies—running a food truck means making necessary purchases. With a business credit card, those purchases work in your favor. Many business credit cards allow you to earn rewards on business spending, and if you don’t yet qualify for other forms of financing, there are ways to leverage business credit cards to meet your capital needs. 

ACH loan

Unlike other forms of funding, ACH loan decisions are based on your daily bank balances instead of your credit, making an ACH loan an option for borrowers with less-than-ideal credit. Often referred to as a “cash flow loan,” an ACH loan provides rapid funding when you need to increase working capital. 

Bootstrapping 

Most businesses rely on bootstrapping, the practice of relying on your own resources, to grow at some point or another. Depending on how much you have saved, you may be able to self-finance and get your food truck up and running through bootstrapping. Once your food truck starts cooking with gas (metaphorically or literally), find ways to maximize your profits while minimizing your costs. This strategy will give you a cushion that you can reinvest in the business. 

Crowdfunding

Crowdfunding allows you to secure capital for your business from a large number of people. Crowdfunding also allows you to acquire funding without giving up equity or traditional repayment terms. Instead, supporters can earn different rewards depending on the price tier of their investment. Popular crowdfunding sites like Kickstarter and GoFundMe can bring your business to a larger audience, but with the growing number of projects on the platforms, it can be difficult to stand out. And remember, if you go the crowdfunding route, it’s imperative that you can follow through on the rewards as promised.

5. Get your truck (or car).

You can’t run a food truck without a truck, car, or vehicle/food trailer combo. You can purchase your food truck through several different avenues. 

• Your network - The first place to start is always within your network. If you can purchase a used truck or car from a friend or family member, you’re probably going to get the best deal, lowering the startup cost for your food truck. 
• Used car dealerships - At a used car dealership, you may be able to find used vans, cars, or trucks that can be paired with a food trailer. 
• Food truck manufacturers - You can avoid the need for any truck modifications or labor-intensive build-outs by purchasing from a food truck manufacturer. These companies specialize in food trucks and often build custom models. The flip side of getting exactly what you need when you need it is that this will be one of the more expensive routes. 
• Auctions - Sometimes, a food truck goes out of business. When it does, you have the opportunity to make someone else’s misfortune your well-priced gain. Look into the auctions in your area. You may be able to secure your food truck below market value. Be sure to decide what your maximum price is before you go in, so you can avoid getting swept up in the moment and inadvertently overpaying. 
• Kitchen food trailer sellers - If the car or truck you already own is powerful enough to tow a food trailer, you can consider purchasing one from a kitchen food trailer seller. This choice will give you the customization options of a food truck manufacturer and can sometimes come at a lower cost. 

6. Get food truck licenses and permits.

Securing the proper licenses and permits is a critical step in starting your food truck business. While specific requirements will vary depending on your location, there are a few common licenses and permits that most food trucks will need:

• Business license - This license is required for all businesses and can usually be obtained through your local city or county government office.
• Employment Identification Number (EIN) - This is a unique number assigned by the IRS to identify your business for tax purposes. If you're planning on hiring employees, this number is crucial. You can apply for an EIN through the IRS website.
• Food service license - In most jurisdictions, you'll need a food service license (or health department permit) to prepare and sell food. This often involves a health inspection of your food truck.
• Employee health permit - Many jurisdictions require an employee health permit to ensure that your staff understand and follow proper food handling and sanitation practices. This typically involves training and certification for all your food truck employees.
• Fire certificates - If you're cooking on your truck, you may need a fire certificate. This generally involves a fire department inspection to ensure your cooking equipment is safe.
• Commercial driver's license - If your food truck is over a certain size, you (and any other drivers) may need a commercial driver's license. Check with your local Department of Motor Vehicles for specifics.
• Mobile food facility permit - Depending on your location, you may require a mobile food facility (MFF) permit. This permit allows you to operate a food truck or cart in public spaces, following the local health department's guidelines. It often involves an inspection to ensure your mobile facility meets all food safety regulations.
• Parking permits - Depending on where you plan to park and sell, you may need special parking permits. Check local regulations regarding parking on public and private property.

Before starting your food truck business, consult with your local government to ensure you understand all of the licensing and permit requirements. It's also a good idea to consult with a lawyer or business advisor, who can provide guidance based on your specific circumstances. Violating local regulations can result in hefty fines or even the closure of your business, so it's essential to get this step right.

7. Purchase your supplies and equipment for your food truck.

After getting your food truck and securing all necessary licenses and permits, the next step is to purchase your supplies and equipment. This phase is critical as the tools and resources you choose will directly impact your operations, quality of food, and the overall customer experience. Here are some things you'll need:

• Cooking equipment - Depending on your menu, this could include grills, deep fryers, ovens, and stovetops. When selecting your kitchen equipment, consider both the amount of space available on your food truck and the volume of food you'll need to prepare during peak times.
• Refrigeration - To keep your ingredients fresh, you'll need a refrigeration or cooling system. This could be under-counter fridges, freezers, or sandwich prep tables with refrigerated bases.
• Small wares - These are your utensils, pans, pots, knives, and other tools needed for cooking. Ensure these are high-quality and durable, able to withstand heavy use.
• Serving supplies - This includes napkins, utensils, plates, cups, and straws. You might want to consider eco-friendly options here as a way to reduce your environmental impact.
• Cleaning supplies - Maintain cleanliness with items like brooms, mops, cleaning chemicals, and sanitizing solutions. Remember, a clean food truck is not only a legal requirement, but also more appealing to customers.

Remember, investing in the right equipment and supplies will have a significant impact on your food truck's success. Make sure to do your research, compare prices, and read reviews before making any major purchases.

8. Select a POS system.

Choosing the right point-of-sale (POS) system is a critical decision for your food truck business. The POS system you choose will help you not only process sales, but also manage inventory, track revenue, analyze sales data, and maintain customer relationships. Here are some factors to consider when choosing a POS system for your food truck.

• Mobility - Given the on-the-go nature of a food truck, your POS system should be mobile-friendly. A system that functions on a tablet or smartphone can offer the flexibility and convenience that a traditional cash register cannot.
• Speed - During peak hours, you'll want to serve your customers as quickly as possible. A POS system that processes transactions quickly can significantly increase your operation's efficiency.
• Reliability - Your POS system should be reliable even in areas with weak or no internet connection. Look for a system with offline capabilities to ensure you can still process sales without a network connection.
• Integration - If you plan on using other business software (Ex: accounting or email marketing tools) make sure your POS system can integrate with these applications for seamless data management.
• Customer support - Technical issues can arise unexpectedly, and when they do, you'll want immediate support. A POS provider with round-the-clock customer service can be an invaluable resource in these situations.

Remember, investing in the right POS system can contribute significantly to the smooth operation of your food truck business, so consider your options carefully.

9. Protect your business.

Prepare for the unexpected by protecting your food truck business with the proper insurance. There are a few different insurance policies that every food truck should have.

Food truck insurance

• General commercial liability insurance - Often referred to as business liability insurance, general commercial liability insurance protects your business from a variety of claims that can be made against the food truck. It covers instances like bodily harm and property damage. 
• Commercial property insurance - A food truck is an equipment-dependent business. Commercial property insurance protects what’s inside your food truck like stoves, food, and computer equipment in the occurrence of fire, theft, or natural disaster. 
• Workers’ compensation insurance - There’s a chance that one of your employees may be injured on the job, and you’ll want workers’ compensation insurance if they are. Workers comp covers medical costs and a portion of compensation if one of your employees suffers an injury or becomes ill at work. 
• Commercial auto insurance - Don’t forget to insure the truck. Commercial auto insurance protects you against vehicle- and collision-related claims, including damage to your vehicle, driver injury, injury to someone else, and damage to someone else’s property. 

Food truck insurance costs

Basic food truck insurance, including each of the elements outlined above, starts around $2,000 per month. Costs go up for more comprehensive coverage. 

10. Find a place to park.

All you need to do is drive around and find somewhere with an open spot in a well-trafficked area, right? We wish. Because a food truck is a commercial entity, parking is a bit more complicated than that, and food truck locations can be incredibly important to the success of a business. 

Restrictions on where you can park a food truck.

Research any local government restrictions or ordinances before you roll up to your new spot. Some cities may require you to procure a specific permit to park your food truck, and there may be some streets or areas that are off-limits to food truck entrepreneurs. 

The second, softer restriction is a social one. Before you swipe another food truck’s regular spot, assess the costs and benefits of doing so. Sure, that may be a hot spot where you’ll sell out of your desert tamales in an hour, but it may come with a heavy social cost. You don’t want to make enemies as the new truck on the block. 

Solid food truck locations.

According to Restaurant Engine, these are some of the best food truck locations:

• Street parking
• Food truck parks
• Business districts
• Large office buildings
• Farmers markets
• Bars/nightclubs
• Festivals
• Events
• Sporting venues
• Gas stations
• College campuses

11. Forge strategic partnerships.

Strategic partnerships can benefit every business—from the Instagram micro-influencer to the Fortune 500 company. Forging a strategic partnership with another food truck (or better yet a group of food trucks) can benefit all parties involved. 

Strategic partnerships offer an opportunity to expose food trucks to each other’s loyal customer bases and provide a more robust culinary experience, which can draw more customers. If your food truck already has an existing fan base, then you have value to offer to your potential partners, but there are ways to form these beneficial partnerships for new food trucks, too. 

Remember when we asked if there were any existing food trucks in your market that your cuisine could compliment? (It’s okay, you can scroll up if you want a refresher.) Now is the time to revisit that question. If there’s a hamburger food truck in your area, and you plan to specialize in milkshakes, parking together offers your customers the opportunity to have a decadent hamburger and milkshake lunch or dinner, merging the classic American diner experience with the modern convenience of two food trucks parked side by side. 

12. Market yourself.

Now that you’re ready to rock ‘n’ roll, it’s time to focus on marketing your business. Every successful food truck relies on marketing. Social media is going to be your best friend. You can announce your upcoming locations, specials, partnerships, and any other exciting news on Twitter, Facebook, or Instagram. As you build your business, you may find that your customers tend to engage with your food truck on one of these platforms more than others, but as you start out, it’s advisable to use a combination of the three. How else are you going to figure out which one they use the most?

Prominently display your social media accounts and whatever hashtag you’ve chosen for your business (Side note: You should choose a hashtag so people can ‘gram their lovely food truck eats.) so that customers know how to find you and who to tag. 

It’s pretty simple to list your business with Google and well worth doing. Follow the instructions for how to add your food truck to Google My Business, so your customers can find you via Google search—a likely first step many will take after hearing about a business. It also allows you to start collecting reviews, so you can build that word of mouth. Many regional publications, like Time Out, also have directories where businesses can apply to be listed, increasing their reach. 

Don’t forget to let local news outlets know you’re coming to town. Drafting a press release for your new business can be pretty simple, and it allows you to generate buzz. Try connecting with local publications, influential bloggers, Instagram influencers, and industry publications. 

Discuss possible co-marketing strategies with your strategic partners. Posting together, tagging each other, or even doing the occasional Instagram takeover can help you market to each other’s audiences. 

Starting and running a successful food truck business is a complex but rewarding endeavor. It involves careful planning, strategic decision-making, and proactive marketing. From investing in the right equipment and supplies, choosing a reliable POS system, and ensuring adequate insurance coverage, to identifying the perfect parking spots and forging beneficial strategic partnerships, every step is crucial. Marketing yourself effectively, particularly through the use of social media platforms, is also key to your food truck business's success.

Despite the considerable startup costs, the potential for high gross annual returns makes the food-truck business a lucrative option for aspiring entrepreneurs. As your business grows, don't shy away from expansion opportunities that may come your way. Whether it's opening additional trucks or transitioning into a brick-and-mortar establishment, there are numerous ways to take your successful food truck venture to the next level.

Small businesses know the importance of staying flexible and agile. It’s not unusual for expensive challenges and unexpected opportunities to appear without much notice, especially in the early days of a new business. As a result, a revolving line of credit is a popular financing solution among many business owners. 

Just as the seasons change, so businesses evolve over time. Costs expand and contract. Growth often happens in spurts. With a revolving line of credit, entrepreneurs have the freedom to access financing as they need it. 

Read on to learn more about revolving lines of credit and how they work. You’ll also discover the pros and cons of this flexible form of business financing, along with tips on how to apply for this type of account if you determine that it’s a good fit for your business.

What is a revolving line of credit?

A revolving line of credit is a form of financing that offers business owners the flexibility to borrow money on an as-needed basis. Also known as a business line of credit, a revolving line of credit is similar to a credit card in several ways. 

There’s no lump sum disbursement of funds like you would receive with a business loan. Instead, with a business line of credit you are able to request funds as your company needs them.

How does a revolving line of credit work?

When your business qualifies for a new revolving line of credit, the lender will set a cap on the amount of money your company can borrow at any given time. This cap is more commonly known as the credit limit. 

Depending on your borrowing terms, your business may be able to borrow money against its credit line (up to the credit limit on the account) on a repeated basis. Of course, you will need to make timely payments. You’ll pay interest only on the amount borrowed. Use our revolving line of credit calculator to estimate payments.

If your account has a draw period, once that expires you would no longer be able to borrow against the credit line. However, your business would remain responsible for repaying the funds it borrowed, plus any interest and fees that apply to the debt. 

While you are able to borrow up to the credit limit, remember that a high credit utilization ratio can impact your credit score. In general, you want to keep your credit utilization to 30% or less.

Line of credit vs. business loan vs. credit card

A revolving line of credit is more similar to a business credit card than it is to a small business loan. Unlike most small business loans, such as term loans, line of credit borrowers do not receive a large disbursement of funds up front that requires regular repayments. You only receive funds as needed, and your monthly repayment schedule may vary according to how much you borrow and the APR and fees on your account.

Another similarity between revolving lines of credit and credit cards is the fact that both are often unsecured. This means they don’t require collateral. Some larger lines of credit (such as those over $100,000), however, may require borrowers to offer cash or assets as collateral. On the other hand, you can often use revolving lines of credit for purchases that you cannot pay for with a business credit card, like rent or bulk inventory. 

A revolving line of credit can give you access to cash like a business loan might do. You may be able to access cash via a small business credit card as well, but you’ll typically have to pay cash advance fees and a higher APR for this privilege.

Types of revolving credit.

The term revolving credit refers to a type of account that allows a customer to borrow and repay money on a repeated basis. The most common examples of revolving credit are as follows. 

• Credit cards are perhaps the most recognizable form of revolving credit. Both consumers and businesses may qualify for credit card accounts. In general, better credit scores lead to better interest rates and borrowing terms. 
• A business line of credit is a type of revolving credit that’s available for business purposes. This borrowing option can be secured or unsecured, with varying credit limits, loan terms, and interest rates based on the creditworthiness of the business and other factors. 
• A commercial building equity line of credit is a type of financing where the borrower receives a line of credit based on the amount of equity that’s available in their commercial property. The property serves as collateral.

A home equity line of creditor HELOC is another type of revolving credit in which a borrower’s property serves as collateral to secure the account. However, in this scenario, the borrower is an individual consumer, not a business.

Pros and cons of revolving line of credit.

As with any type of financing, there are benefits and drawbacks to using a revolving line of credit to fund your business. Here are some of the pros and cons you should consider if you’re thinking about applying for a revolving line of credit. 

Why choose a revolving line of credit?

There are numerous reasons your business may want to consider opening a revolving line of credit. Here are a few signs that this type of account might work well for your company. 

Your business needs: 

• Access to a flexible source of funding. 
• Working capital on a periodic or seasonal basis. 
• A non-specific amount of funding for an upcoming project or investment.
• The ability to borrow money quickly in an emergency.
• A way to build better business credit history and credit scores for the future.

Revolving lines of credit for people with bad credit.

In terms of credit requirements, revolving lines of credit occupy a space between small business loans and business credit cards. Your credit score may not need to be as high as it does to qualify for some traditional forms of small business lending, like a term loan from a bank. The application process for revolving lines of credit also tends to be less demanding, depending on the lender.

On the other hand, revolving lines of credit usually have higher credit limits and lower interest rates than credit cards do. That often makes them harder to qualify for than a business credit card account.

Depending on the lender, you might be able to qualify for a revolving line of credit with:

• A personal credit score of at least 600 
• At least 6 months in business
• $50,000 or more in annual revenue

Revolving line of credit alternatives.

If your credit is suboptimal or your business is very new, you can seek other types of business loans for bad credit. Many people can get approved for business credit cards within minutes. 

You might also seek out a startup loan if your company has been around for at least a few months. 

Other entrepreneurs may opt to make use of personal funds or investors to get a business going in its first few weeks.

In conclusion, a revolving line of credit can be a valuable financial tool for small businesses that need flexible access to financing. It offers the ability to borrow funds as needed and repay them on a schedule that works best for your business. Additionally, it can help to improve your credit score and build a relationship with a lender that can provide additional financial support in the future. However, it's important to carefully consider the pros and cons before applying for a revolving line of credit and to ensure that you have a solid plan for managing your debt and using the funds responsibly.

If you're a business owner, you may have considered applying for a revolving line of credit. This type of financing can be a flexible and accessible way to access funds when you need them. However, before committing to a revolving line of credit, it's important to do the math and understand the terms of the loan. In this article, we'll explore how to calculate the interest and payment on a revolving line of credit and provide tips for applying for this type of financing.

Revolving line of credit calculator.

Interest rates for revolving lines can range widely. The interest rate a lender offers you will depend on multiple factors, including your personal credit score, business revenue, and the amount of credit you request. Whatever terms a lender offers you, it’s important to do the math before you commit to a revolving line of credit. You want to make sure that payments on the account won’t put your business in a financial bind. A free online calculator can help you crunch the numbers.

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Terms and explanation

Here are the essential pieces of information you’ll need to enter and notice as outputs on our revolving line of credit calculator.

Amount seeking

This refers to the borrowing limit or the maximum amount of money a lender will allow you to borrow. You can withdraw funds as needed, so you don’t have to borrow the entire approved amount.

Loan term

The loan term is the amount of time you’ll take to pay back the money you withdraw. A longer term will lower your monthly payments, but be more expensive in the long run.

Interest rate

The amount you’ll pay to be able to pull funds from a business line of credit is your interest rate. The better your credit score, the lower your interest rate will be.

Estimated daily repayment

This is what you’ll pay on a daily basis to repay your business line of credit.

Total repayment

Total repayment is your overall cost of borrowing. It includes principal and interest and can give you an idea of the total cost of your line of credit.

How to calculate interest on a line of credit.

In general, you pay interest only on a revolving line of credit if you carry a balance on the account. But there may be fees associated with the account that apply on a monthly or annual basis as well. So be sure to add that cost into your budget calculations. 

Depending on your terms, a lender may calculate revolving line of credit interest based on your principal balance—aka the amount of balance outstanding for the previous billing cycle (often 30 days). You’ll usually only pay interest on the funds you withdraw from the revolving line of credit account. Unlike credit cards, you likely won’t pay interest on interest.

The lender may calculate your interest based on a whole year and display it as a percentage. From there, the revolving line of credit interest formula is the principal balance multiplied by the interest rate, multiplied by the number of days in a given month. This number is then divided by 365 to determine the interest you’ll pay on your revolving line of credit.

When you know the basic figures, calculating the interest for a revolving line of credit is straightforward. Business lines of credit are built to be simple due to their flexibility and accessibility. They remain a great option for many types of small businesses.

How to apply for a revolving line of credit.

If you’re interested in a revolving line of credit, it’s easy to see what sort of revolving line of credit your business can be approved for online. Looking over your financing options through Lendio is simple and fast, and the process often doesn’t require a hard credit check.