Have you heard of selling accounts receivable? Sometimes known as factoring, this type of financing is increasingly popular due to its speed and efficiency. If you’ve faced rejection from lenders in the past, you should devote a long look at accounts receivable financing.
Selling accounts receivable (aka factoring) is a financial strategy where a business sells its outstanding invoices or accounts receivable to a third-party company, referred to as a 'factor'. The factor pays the business a significant portion of the amount due up front, then proceeds to collect the full amount from the indebted customer. This method of cash flow management enables businesses to obtain immediate funds and mitigate risks associated with delayed payments or bad debts, thus improving their financial stability.
The distinct structure of accounts receivable financing makes it stand out from most other types of small business financing. In some ways, it has more in common with the sale of an asset than it does with a traditional loan. But the result is the same, as you’re provided with the cash needed to run your business.
Let's consider a real-life scenario as an example. Imagine you own a business, ABC Manufacturing, and you have an outstanding invoice of $50,000 from XYZ Retailer, which is due 90 days from now. However, you need the funds immediately for operational expenses.
Here, you can approach a factoring company and sell your invoice. The factoring company may offer to pay 80% of the invoice value (i.e., $40,000) upfront. After collecting the full amount from XYZ Retailer at the end of the 90 days, the factoring company will then pay you the remaining balance of $10,000, minus their fees.
So, while you receive less than the full invoice amount, you get access to immediate cash that allows smoother running of your operations.
Let's delve into the advantages of this financial approach by discussing the seven core benefits of selling accounts receivable. These advantages can help businesses navigate tight cash flow situations and maintain steady business operations.
Nobody likes to track down those who owe them money. With accounts receivable, a factoring company does all the dirty work for you. They’re experts at collecting money and can do it faster than you ever would!
When a factoring company is deciding whether or not to approve your request, they’ll focus on the financial health of the customers who owe you money (since that’s the key to them getting paid). The credit score of your own business might not even enter the picture. This means that you probably won’t have your credit pulled, which can help keep your score healthy.
When you have a healthy cash flow, you’re better able to meet your financial obligations. This means more prompt payments to your suppliers, partners, and landlords. The ultimate result is a boost to your credit, which opens the door to more attainable and affordable financing in the future.
The lower risk associated with accounts receivable financing also means that you won’t need to put up your personal belongings as collateral. This can be a huge deal, as other types of small business financing often require you to provide collateral—which increases your personal liability.
There are times when your business requires expedited funding, meaning the weeks-long approval processes of SBA loans simply won’t cut it. With accounts receivable financing, you can access your money in as little as 24 hours to boost your cash flow.
Speaking of financial obligations, accounts receivable financing is nice because it doesn’t add to your list of monthly payments. The factoring company is compensated through their work tracking down your unpaid invoices, so you don’t need to worry about paying them a dime.
You’ll find a range of quality among factoring companies. Some factors to consider when evaluating a factoring company include:
As for which exact financing product is best, there are a few kinds of accounts receivable lending to consider. Let’s look at the key differences.
Which type of accounts receivable lending is right for you? That totally depends on your unique circumstances and strategies. Make sure to consider all the options and take the time to do your due diligence—then you’ll be in a position to make an informed decision that allows you to proceed with confidence.
Have you always dreamed of owning your own business, but don't want to start from scratch? One option is to buy an existing business. However, coming up with the funds to make such a purchase can be a major hurdle for many aspiring entrepreneurs. This is where a Small Business Administration (SBA) loan comes in handy.
In this blog post, we will discuss how to use an SBA loan to buy an existing business. Learn what an SBA loan is, why it's a great option for buying a business, and how to qualify and apply for one. Let's dive in.
First things first, let's define what an SBA loan is. The SBA offers various loan programs to help small businesses, including those looking to purchase existing businesses. These loans are partially guaranteed by the government, making it less risky for lenders to provide financing.
There are different types of SBA loans that can be used for buying a business, such as the 7(a) loan and the 504 loan. These loans have different eligibility requirements, interest rates, and terms, so it's important to research and understand which one is right for your specific situation.
The SBA 7(a) loan is arguably the most popular SBA loan option, primarily due to its versatility. You can use it for a broad range of business purposes, including buying an existing business. The SBA guarantees up to 85% of loans under $150,000, and 75% of loans greater than $150,000. The maximum loan amount is $5 million, although the average loan size is typically much smaller. Interest rates on 7(a) loans are typically close to prime rates and are influenced by a variety of factors, including the length of the loan and whether the rate is fixed or variable.
The SBA 504 loan is designed specifically for business expansion and major fixed-asset purchases, such as real estate or equipment. Unlike the 7(a) loan, the 504 loan involves a Certified Development Company (CDC)—a nonprofit corporation promoting economic development. Under the 504 loan program, a business owner will put down a minimum of 10%, a conventional lender (like a bank) will finance up to 50%, and the CDC will finance the remaining 40%. The maximum loan amount from the CDC is $5 million (or $5.5 million for manufacturing projects or those related to energy efficiency), making it an excellent choice if you're looking at purchasing a business with significant assets.
While the SBA 504 loan is an excellent resource for business expansion and asset acquisitions, it should be noted that it's not typically used for buying businesses in the traditional sense. The 504 loan program is primarily designed to aid in the purchase of tangible assets like real estate, buildings, and equipment, rather than for buying the entirety of an existing business.
Hence, if your objective is to acquire an entire business, the SBA 7(a) loan is likely a more suitable option. However, every business acquisition is unique, so it's crucial to consult with a finance professional or a loan officer to determine the best financing solution for your specific situation.
Now that we know what SBA loans are, let's explore why they're a great option for buying an existing business. Here are some of the top reasons to consider using an SBA loan:
Now that you know the benefits of using an SBA loan to buy a business, you may be wondering what it takes to qualify for one. While each individual lender may have their own specific requirements, here are some general factors that can impact your eligibility:
If you meet the eligibility requirements and have found a business you want to purchase, the next step is to apply for an SBA loan. Here's a general overview of the steps involved:
Buying an existing business can be a smart move for aspiring entrepreneurs who want to skip the initial stages of starting a business from scratch. With an SBA loan, the dream of owning your own business may be more attainable than you think. Remember to do your research, work on improving your eligibility factors, and carefully compare lenders before applying for a loan.
*The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (Nov 10, 2023). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.
Being unable to make payments on a business loan is not a new phenomenon. Scores of hard-working business owners have found themselves in situations where they couldn’t fulfill their financial obligations. In some cases, they were late on payments. Other times, the payments were missed altogether. Some lenders are more tolerant of delinquency than others, but at a certain point, late and missed payments result in a default.
Read to better understand how a default on a business loan typically plays out and how it could affect you.
Often, the terms ‘default’ and ‘delinquency’ are used interchangeably, but they represent two distinctly different stages of loan repayment trouble. Delinquency refers to missing a single scheduled payment. It’s a bit like stumbling, but you still have a chance to regain your balance. You usually have a grace period to make up the missed payment before the lender takes further action.
On the other hand, default is when multiple payments have been missed, typically over a period of 90 to 180 days. This is equivalent to falling flat on your face. At this stage, the lender assumes that the borrower is unable or unwilling to meet the loan obligations and may take legal action to recover the owed money.
So what happens if you default? That depends, as the consequences of business loan default vary depending on how you guaranteed the financing. Let’s look at three possibilities:
This type of loan doesn’t require any type of collateral from the borrower in order to secure the funds (hence the name). Lenders are understandably reluctant to offer these loans as they involve higher risk. To compensate for this lack of collateral, unsecured loans usually have lower dollar amounts, higher interest rates, and shorter repayment terms.
Additionally, lenders usually require you to make a personal guarantee to receive an unsecured loan. While this isn’t technically collateral, there’s a similar impact if you default on an unsecured loan. The lender will come after your personal assets to recoup the money involved with the financing.
While unsecured loans often need a personal guarantee, lenders take it to a more specific level with secured loans—you’ll be asked to provide collateral that meets or exceeds the value of the loan. Popular examples of collateral include homes, boats, vehicles, real estate, inventory, machinery, and accounts receivables.
In the case of a default, some lenders may be willing to work with you to find a solution. But if you’re ultimately unable to meet your payment obligations, the promised collateral will become the property of the lender. The lender will need to put time and effort into selling the asset before they actually get paid, which is why collateral must often be worth more than the actual value of the loan.
If you default on a SBA loan, your first interactions will be with the lender who funded the loan. They’ll begin the collection process outlined in the loan agreement, which usually includes the lender taking possession of any collateral attached to the loan.
At this point, the lender submits a claim to the SBA. Because the agency will have guaranteed a portion of your loan, they’ll pay the lender that amount.
The remaining debt is then transferred to the SBA. The agency will request payment from you to cover their expenses. If you’re financially able, you can resolve the situation immediately. You can also make an offer in compromise, where you explain any extenuating circumstances and request that the SBA let you settle the debt with a smaller payment than is officially required.
Assuming the SBA accepts your payment or offer, the case will be closed. When a resolution can’t be found, however, the agency submits your account to collections officials at the Treasury Department. This phase is where things can get serious, as the Treasury Department has the authority to garnish wages and take other actions to get the money they are owed.
The simple act of missing loan payments hurts your business credit score, so a default makes an even more substantial impact. Lenders will likely regard you as a higher risk in the future, leading to higher interest rates and shorter repayment terms on future financing.
Your personal credit score might also be affected, depending on how you set up your business. Some structures offer liability protection to owners. For example, a limited liability company (LLC) provides shelter from defaults. Sole proprietorships, on the other hand, leave the owner completely responsible for such failures.
While no small business owner ever applies for financing with the intent of defaulting, it’s wise to consider that possibility as you set up your business. Your strategy at the onset can potentially save a lot of headaches and financial losses down the road.
Avoiding a default on a business loan requires proactive planning, regular financial monitoring, and prudent business management. Here are some strategies you may want to consider:
Remember, business financial management requires consistent attention and action. By adopting these strategies, you can significantly reduce the risk of defaulting on your loan.
If your business loan has already gone into default, don't panic. There are still steps you can take to mitigate the situation:
Remember, defaulting on a loan is serious, but not the end of the world. There are always options available to get your business back on track.
While landing a big deal might sound amazing for your business, if you don’t have the funds available to support production, you’ll stretch yourself too thin. It’s not uncommon for companies to have large sums of accounts receivable invoices that aren’t accessible. The business must meet its obligations and collect the money from the business before that revenue is actually recognized.
Fortunately, there are options for businesses to access some of the money that’s wrapped up in unpaid invoices—and invoice factoring is one of these options. Learn more about invoice factoring below.
Invoice factoring is a process that enables businesses to get immediate cash by selling their outstanding invoices.
When a business issues an invoice to a customer, it may take up to 90 days for the customer to pay. With invoice factoring, a factoring business can purchase the invoice, pay the business for it, and then collect the payment from the customer. This way, the business gets the funds it needs without having to wait for the customer to pay, and only pays a small fee to the factoring company for the service.
Depending upon your customer base and the state of your account receivables, invoice factoring is usually much easier and faster than securing a conventional loan. What’s more, the factor is more interested in the creditworthiness of your customers than whether or not your credit is perfect. So even if your credit score is below average, you could still qualify for this type of financing, if the other aspects of your business are strong.
Some factoring companies specialize in specific industries and business types. Finding a factor that specializes in your industry could improve your chances of approval.
Let's delve into the nuts and bolts of how invoice factoring actually functions in the business world.
It's essential to note that the process can vary between different factoring companies. Always make sure to understand the terms and conditions before engaging in invoice factoring.
Let's consider a practical example to better understand the concept of invoice factoring:
Suppose you run a wholesale business, and you have issued an invoice of $10,000 to a supermarket. The payment terms are net 90 days, but you need the funds immediately to restock your inventory. Instead of waiting for the supermarket to pay the invoice, you decide to use a factoring company.
You approach a factoring company and sell them your invoice. The factoring company reviews the invoice and agrees to buy it. They pay you 80% of the invoice amount up front, which is $8,000. This allows you to restock your inventory and continue operating your business smoothly.
Once the supermarket pays the invoice, the factoring company receives the full $10,000. The factoring company then sends you the remaining 20% of the invoice ($2,000), but deducts a 3% factoring fee. So, you receive $1,700 ($2,000 - 3% of $10,000).
In the end, you received $9,700 of the $10,000 invoice and paid $300 for the factoring service, which enabled you to keep your business running without any cash flow problems during the 90 days you would have otherwise been waiting for payment.
An important consideration when deciding whether a factoring loan is a good choice is the lender fee. While some factoring companies will charge small fees to buy your invoice (around 3%) others can take out larger amounts, ranging from 10% to 15%. In high-risk cases or when you’re working with predatory firms, they might take out 30% of the total invoice as their processing fee.
As a business owner, you need to decide how much you can afford for invoice factoring. At what point will the fees related to the invoice purchase cut too deeply into your profit margins? By seeking the funds immediately instead of waiting for the invoice to get paid, you could end up losing more profits and limiting your growth.
Like all financial decisions, there are pros and cons of opting for invoice factoring. Some of the benefits or drawbacks might weigh heavier on your business, depending on your current situation.
The option to use an invoice factoring company depends on the business you use. There are ethical companies that are happy to work with businesses of all industries and predatory factoring agencies that charge high fees and go after invoices aggressively. Do your research before making your choice.
To qualify for invoice factoring, certain criteria must be met by businesses.
Remember, different factoring companies may have slightly different requirements, so it's essential to research and confirm the criteria for each prospective factoring company.
Evaluating factoring companies involves several steps to ensure that you're choosing the right partner for your business. Here are some key aspects to consider:
By taking these factors into account, you can better evaluate factoring companies and choose the one that best fits your business's needs.
It's easy to confuse invoice factoring with invoice financing as both methods involve using unpaid invoices to improve cash flow. However, there are key differences to understand.
As detailed above, invoice factoring involves a business selling its invoices to a factoring company at a discount. The factoring company then takes responsibility for collecting the invoice payments from the customers, freeing up the business from the time and effort of chasing these payments. The business receives immediate funds, which can be vital for maintaining smooth operational activities, especially for B2B companies.
On the other hand, invoice financing is essentially a loan where the unpaid invoices serve as collateral. With invoice financing, the business retains control and responsibility for collecting the debts from its customers. The lender provides an advance of a portion of the invoice value (usually between 80% and 90%), and the business repays this advance plus fees once the customer has paid the invoice.
While both methods provide quick access to cash, they differ in terms of responsibility and risk. With invoice factoring, you relinquish control of your customer relationships to the factoring company, but you also rid yourself of the risk of non-payment. In contrast, with invoice financing, you retain control of your customer relationships, but you also hold the risk of non-payment as you're responsible for repayment of the advance regardless of whether your customer pays their invoice. As with all financial decisions, it's crucial for businesses to understand these differences and evaluate which option aligns best with their needs and circumstances.
There are three types of factoring options you should be aware of:
When looking for a factor, be aware that they are not all alike. Interest rates and terms can vary greatly. It’s easy to find this type of financing online. Lendio‘s network partners with multiple factoring and other financing companies to compare multiple offers so you’re sure you get the best deal on your next business move.
There are many ways to become an entrepreneur. You can launch your own business from the ground up, you can partner with someone else, or you can even buy a small business outright.
Buying a small business can create a unique stream of income and help you to launch your new career—you just need to know where to find them and how to invest.
Buying a business, as opposed to starting something from scratch, can streamline your path to profitability. It can also be less risky, in some cases, if the brand is already successful and established.
If you’re considering purchasing an existing small business, this guide will help. Learn where to buy a small business, as well as the pros and cons of different business types.
Not all businesses are created equal. In fact, each one is unique and has its own value proposition and business model. The type of business you buy should align with your particular experience, skills, passions, and interests.
If you’re passionate and knowledgeable about real estate, for example, a business in the real estate industry should be on your radar. You’ll be less likely to succeed if you’re new to real estate, unfamiliar with industry jargon, and what it takes to thrive. In addition, it’s essential that you agree with the business goals and be willing to work hard to achieve them. Otherwise you may be unmotivated to steer the venture toward success.
There are many ways to find small businesses to buy in your area or industry. You may want to try multiple methods to discover businesses so you can find the best option for your investing goals.
You might also want to keep a lawyer on retainer to help negotiate the sale and handle various contracts related to the transition. This extra assurance can give you peace of mind and help you to protect your investment.
You don’t only have to look for small or local businesses to buy—it’s also possible to buy a franchise of an existing business and operate under that brand. Companies like McDonald’s, ACE Hardware, and Massage Envy rely on franchisees to buy into their businesses and operate companies on their own.
Buying a franchise has its pros and cons, as explained by the Small Business Administration. One of the main benefits: support. There will be less decision-making because the brand and its processes are established and set. For example, if you decide to open an ACE Hardware, you’ll already know the brand’s color choices and the employees’ uniforms. You’ll also gain access to the company’s internal systems and marketing materials.
While some people embrace the structure of opening a franchise, there are also limitations to what you can do. You can’t get creative with new products and must stick to established guidelines. This might not be ideal if you want to build a unique business or want more influence on the systems within the organization.
You can find franchises for sale across almost any industry or company size. Different franchises have different license fees and varying startup costs. For example, it costs more to build an Anytime Fitness than a PJ’s Coffee stand. Some franchises require $250,000 or more to get started, but others require much less. To explore different franchise opportunities and costs, look at sites like Franchise Direct or Franchise Gator to learn more. These sites can help you to find the best franchises to own based on your budget and goals.
You may be tempted to buy your favorite bar that can’t afford to stay open or invest in a bakery based on your passion for cake design—however, it’s important to be realistic about what you know and what you can handle. There are a few key factors to consider with your business choices:
You don't have to have an MBA or 10+ years of experience in a field to buy a business. However, you will need a plan to manage your finances, operations, and marketing as soon as the business becomes yours.
The right time to acquire an existing business is when you find one with a good labor pool, a strong customer base, established procedures, growing sales, and most importantly, positive cash flow. It should also be the type of business where you can leverage your strengths and your experience. Once you find what you’re looking for, get in contact with your attorney and your banker to thrash out the details.
Existing cash flow and a proven track record will make it easier for you to secure financing for the venture of your choice. You’ll have better access to cash flow once your customer base is good, and you have strong distributor and supplier relationships in place. All of these factors save you a lot of time and money. You may also be able to draw on the experience of the previous owners if they are willing to guide you as you take over the business.
Before you sign on the dotted line and purchase a business, determine why it’s on the market in the first place. Maybe the owner is ready to retire. Or perhaps there are serious issues with the business, like a damaged reputation or poor product line. Don’t be afraid to ask the current owners why they’re selling their venture and what challenges they’ve encountered over the years.
You should feel confident that you can solve these challenges or can find resources that can help you do so. Some of the most common challenges you might come across include a poor business plan, excessive business debt, location issues, branding confusion, outdated equipment, and staffing shortages.
Take the time to learn as much as possible about the successes, failures, challenges, and opportunities of the business. In addition to the owner, consult current and former customers, employees, and competing businesses. They’ll provide you with an unbiased opinion of how the business is performing and why it’s for sale.
After you shop around and consider all your options, it’s time to make a decision. The right business will line up with your budget, goals, and resources. Once you hone in on the ideal venture, do the math and figure out the best size, location, sales strategy, and staffing needs.
If you know you’d like to make drastic changes, determine what resources you’ll need to implement them and how much they’ll cost you. Remember to think about the time and energy you’ll need to invest in addition to the monetary cost.
The money, time, and energy you’ll have to invest will depend on the business type and your particular experience and connections. For example, if you’ve worked in real estate in the past and are purchasing a real estate business, you’ll have to invest less than you would if the industry is entirely new to you.
There’s no way to proceed confidently with a business purchase unless you have a plan. And the process of creating your plan will make it possible to determine whether or not the timing is right for you.
The best way to build your business plan is to answer questions related to your motivations and goals. Here are some possible questions to think about:
You won’t have all the answers up front—research and review will be required for clear answers. But you should start the process now in order to proceed when you feel the time is right.
“Research and analyze your product, your market, and your objective expertise,” explains a business report from the Houston Chronicle. “Consider spending twice as much time researching, evaluating, and thinking as you spend actually writing the business plan. To write the perfect plan, you must know your company, your product, your competition, and the market intimately.”
Once you’ve compiled your business plan, you’ll be able to confirm your choices regarding timing and whether you should buy a business or take the franchise route. A business plan is a living, breathing thing—you’ll want to revisit it regularly to make sure it reflects your current situation and aligns with your future goals.
Due diligence is when you collect as much information as you can before you go ahead and purchase a business. It’s a good idea to work with professionals, like a lawyer and an accountant to make sure you have all your ducks in a row before you move forward.
While the accountant can help you with financials, an attorney may support you with negotiations and all the legalities of the purchase. Be prepared to sign a nondisclosure or confidentiality agreement and agree that you won’t reveal any confidential information you learn as you do your due diligence. In the event you decide to back out of the deal, this agreement will protect the seller.
There is no shortage of documents and statements you’ll want to gather during the due diligence process. Several of the most important ones include:
Most small businesses close their doors for one reason or another within a few years of starting up. An existing company gives you the advantage of business systems that have been honed over time.
If you have the funds to make a 10-20 percent down payment, industry experience or business management skills, and good credit scores, an SBA loan would be ideal. If yours is a large business, you can apply to the big banks (this is one of the toughest sources of financing for small businesses to tap into).
On the plus side, it can be easier to get financing for an existing business than for one that has not yet proven itself profitable. Take the case of a reputable business with an asking price of $500,000, and steady yearly cash flows of $200,000. Match that with taking out a $300,000 loan to bankroll a startup, where forecasts may or may not be realized. A bank may be more prepared to fund the half-million deal if you have a realistic down payment, and if the company you're purchasing has historic income and adequate cash flow to service the debt.
Last but not least, you’ll close the deal. After you’ve found the right business, performed your due diligence, agreed on a price, and collected all the capital you need, you can officially purchase the business. Here’s what’s involved in the closing process:
While you can start a business from scratch, investing in an already established venture comes with many benefits, including:
On the downside, purchasing a business is often more expensive than starting from scratch. Think long and hard about the kinds of establishments you’re attracted to and which best match your experience and skills. You can find great ventures for sale if you contact a business broker. If you’d like to go it alone, you’ll need to take several things into consideration, such as business size, geographical area, and industry.
You also have to consider that the owner may try to downplay any business problems. These problems may be inherent, and may not become apparent until after the sale. Existing staff can offer valuable insight into areas that can be upgraded and how the business runs, and they can give you an active perspective of the business as opposed to the theoretical one you’re likely to get from the boss.
Another problem is that equipment and inventories may be obsolete. In addition, customers may owe the business, and these bills may be virtually uncollectable, making them worthless.
There are other disadvantages to purchasing a business, and you must obviously consider them seriously versus the advantages. When you’re negotiating a business acquisition loan, you must assess the existing operations of the venture thoroughly and diligently, which can be an overwhelming task.
If a business is doing badly, scrutinize it to find out what the reasons are. Inadequate resources and poor management are two common causes. Your investment may turn out to be lucrative if you can turn the business around and make it profitable; on the other hand, you’re taking a huge gamble if it doesn’t work out.
See your funding options for a business acquisition loan. Lendio will ask you a few basic questions, and will narrow down the lenders that are right for your purposes. Doing business this way saves you a lot of time, and it will help you take over your business and start making a profit much sooner than if you take the traditional route.
If you’re thinking about expanding your business, you’re probably considering financing. In this case, you also need to consider collateral to secure these loans. Banks and other lenders decide on interest rates, loan amounts, and other terms based on the amount and type of collateral you have to offer them.
Collateral is an asset, such as cash or real estate, that a loan applicant offers to secure a loan as a guarantee that the loan will be repaid. The applicant agrees that the lender can claim ownership of the collateral if the applicant defaults on the loan.
The lender gains ownership of your collateral if you default on payment, whether you pledge your car, house, or equipment. Since it gives the lender peace of mind, collateral can allow people with less-than-stellar credit to qualify for a small business loan.
Lenders want to lend money to people who have skin in the game for pretty obvious reasons—they want some way to get their money back in case you stop repaying your loan. Commonly, banks want small business loans to be fully collateralized, meaning you need to offer enough collateral to cover 100% of the proposed loan amount.
Different types of lenders accept various forms of collateral, so there are several routes you can take. It’s important to remember that there’s always a risk that you’ll lose the collateral if you default on your loan.
Collateral in the form of cash, as a deposit or in savings, will always be the gold standard for banks. It’s low risk for banks because it’s very easy to get their money back in case you default. While you’ll get the most favorable terms if you offer cash as collateral, you might want to shield your money from banks. Although it’s important to note that, as long as it’s being used as collateral, you also won’t be able to touch the cash.
Real estate and home equity are the most commonly offered collateral for small businesses because a house is typically the most valuable asset an individual possesses. However, most banks will only take a small fraction of equity accrued on a house as collateral because they follow stringent debt-to-income ratios.
Along with homes, cars are common options for collateral. It’s best if you own your vehicle or if the total amount you owe on your car note is significantly less than its Kelley Blue Book value. Often, credit unions will offer loans for close to 100% of the value of your car. However, before offering your car as collateral, you should check with your lender to ensure that the terms of the small business loan you’re seeking will allow this.
Like residential real estate, you can use commercial property as collateral. If you plan to buy commercial property with a loan, you can actually use the property in question as collateral. However, banks tend to lend less against commercial property since it is considered a less secure investment than residential property. Banks usually lend up to 50% of the value of commercial property. The same sort of financing is also available for expensive equipment.
Product-based businesses commonly use unsold inventory as collateral. Keep in mind that your lender may value your inventory differently than you do. If you choose to take this route, remember to periodically provide updated inventory lists to your lender to ensure that your loan is properly collateralized.
You can leverage your 401(k) as collateral, but you might get hit with a large tax bill. Many 401(k) plans allow you to take a loan out at prime interest plus one to two points. Other investments can be used as collateral, but you will typically get worse rates than if you had offered cash.
Another way you can use your 401(k) to finance a business is to execute a Rollover as Business Startups (ROBS). It’s an arrangement that lets you access your funds without incurring taxes, penalties, or interest charges, even if you have bad credit.
A ROBS involves forming a C corporation and starting a retirement plan for the business entity, then rolling over the funds from your old 401(k) into the new account. That allows you to purchase stock in your own company with the rolled-over funds and use the proceeds from the sale to fund your business.
While it can be effective, a ROBS is a highly complex and risky strategy that can cost you your business and retirement funds. It should generally be a last resort, and you should always consult a tax professional before attempting one.
Some lenders have options called asset-based loans that accept a small business’ inventory and accounts receivable as collateral. These loans will typically be smaller than when other assets are offered as collateral because it’s difficult for banks to determine the value of your inventory or accounts receivable. However, these can be good options if you don’t have a lot of valuable assets like real estate.
As a small business, you can apply for merchant cash advances, where you trade a portion of your daily credit card sales for a lump sum loan. There is no personal guarantee with this type of payment: it applies to your company only, and it will not affect your personal credit score if, for some reason, you cannot repay the loan. While merchant cash advances are flexible, the interest rates are often high.
Before applying for any loans, think hard about the size of the loan your business requires and what you’re willing to put up as collateral. Traditional banks want their loans to be fully collateralized, but other lenders might be less strict. In those cases, though, the interest rates will usually be higher, and the loan amounts will be smaller.
The amount of collateral required for a small business loan can vary widely, based on several factors. This includes the type of loan, your credit history, and the lender's policies. Typically, lenders may want the collateral to match or exceed the value of the loan. However, it’s important to bear in mind that some lenders could require collateral worth up to 150% of the loan amount due to the inherent riskiness in business ventures.
Always ensure that you have a comprehensive understanding of your lender's collateral requirements before agreeing to a loan. Remember, the collateral serves as a safety net for the lender, but it could mean a significant loss to your business if you're unable to pay back the loan.
Don’t be afraid to negotiate with a lender based on alternative lending options, your credit history, and the value of your assets.
Like any business decision, using your assets as collateral comes with its own set of advantages and disadvantages.
It's essential to weigh these pros and cons carefully before deciding to use your assets as collateral for a business loan. If you're unsure, consider seeking advice from a trusted financial advisor.
If you’re like many Americans without valuable assets—or just don’t want to risk putting anything on the line—there are other alternative lending options:
Each of these options has its pros and cons, so it's important to carefully consider your business' needs and financial situation before deciding.
Collateral serves as a safety net for lenders, giving them something to fall back on if a borrower defaults on their loan. While the idea of putting your assets on the line can be daunting, it can also open doors to larger loan amounts, lower interest rates, and improved loan terms. The key is to thoroughly understand your business' financial needs, the risks involved, and the value of your potential collateral.
Remember, while using collateral can be an effective way to secure financing, there are numerous alternatives that don't require you to risk your assets. Ultimately, the best choice depends on your unique business circumstances and financial goals. As always, seeking advice from a trusted financial advisor can provide valuable guidance as you navigate these decisions. Knowledge is your best ally in the world of business finance.
We ranked states based on the veteran labor market and entrepreneurship.
America’s military members are an industrious group once they enter civilian life. Veterans tend to out-earn their nonveteran peers—and indeed, the median income for veterans reached a record-high of $50,476 in 2022, compared with $38,254 among nonveterans.
Click here to see the top states.
Part of that may be due to their entrepreneurial spirit. There’s no shortage of notable veteran business owners, such as Nike co-founder Phil Knight, FedEx founder Frederick Smith, and Bob Parsons, who founded GoDaddy. Warren Buffett, one of America’s wealthiest people, has even said that the military taught him how to take orders, learn from others, and have fun doing it.
And while the number of veteran-owned businesses has been falling over time, research indicates that veterans are more likely to be self-employed than nonveterans, and that veterans with small businesses have higher average net worths than non-entrepreneurial veterans.
Veterans have unique skill sets and discipline that may prime them perfectly to lead. In surveys, veterans tend to say that their military service helped prepare them to run a small business. But even so, they're more likely than nonveterans to be concerned about business regulations, lack of connections, financing, and getting customers—which could point to a lack of support for veteran entrepreneurs in parts of the country.
Lendio analyzed six metrics to determine the best states for veterans to succeed in business, including veterans’ income, employment, and business ownership, as well as startup survival, patent innovation, and new business growth. Those metrics were split into two subcategories: veteran labor market and entrepreneurship.
The results indicate that the best states for veteran entrepreneurs are scattered across the country, with no one region dominating the list. Support for veterans can be found everywhere—but some states offer softer landing pads for veterans as they decide where to set up shop or expand their businesses.
Some Key Findings:
No. 1: Virginia
Virginia is a great state for veterans in the labor market, given that 58.7% of veterans there are employed and their average earnings are 1.6 times higher than nonveterans—better rates than anywhere else in the U.S.
No. 2: Wyoming
Wyoming scores well for both subcategories (8th for the veteran labor market and 6th for entrepreneurship), helping drive it up to the No. 2 spot overall. The state saw a 42.7% increase in new business applications year over year, the highest rate in the country, plus the median income for veterans is 1.4 times higher than that of nonveterans.
No. 3: Oregon
Oregon lands in the middle of the pack for the veteran labor market, but its strong environment for entrepreneurs helped propel it to the No. 3 ranking. The state reports 96.4 patents per 100,000 population, while 58.4% of startups survive at least five years, the highest rate in the U.S.
No. 4: West Virginia
In West Virginia, 7.3% of businesses are owned by veterans, whose median earnings are 1.4 times as high as those of nonveterans. Further, its startup survival rate is 55%, and it saw 25.9% yearly growth in new businesses.
No. 5: South Dakota
In 2022, 58.5% of South Dakota’s veterans were employed, while 6.1% of businesses are veteran-owned. Meanwhile, 55.7% of startups survive at least five years, the second-highest rate after Oregon.
No. 6: Massachusetts
Massachusetts has a high rate of patents (125.6 per 100,000) and a high startup survival rate (55%), driving it to the best state in the entrepreneurship subcategory. Its veteran workers perform fairly well, with 5.2% of businesses owned by veterans and 46.2% of veterans being employed.
No. 7: Alaska
Alaska’s veterans earn 1.5 times as much as nonveterans, based on median income in 2022. It also has one of the highest employment rates for veterans, at 57.5%.
No. 8: New Hampshire
New Hampshire has one of the highest rates of veteran-owned businesses, at 7.7%, and it saw 80 patents filed per 100,000 population in 2020.
No. 9: New Mexico
Veterans in New Mexico out-earn nonveterans by a ratio of 1.6—the third-highest ratio in the U.S. after Virginia and Alabama. The state also saw 32.8% year-over-year growth in new business applications, behind only Wyoming.
No. 10: Maryland
Maryland was propelled to the top 10 by its high level of veteran employment (54.3%) and strong income ratio, given veterans’ median income is 1.4 times higher than nonveterans’.
The runner-up states tend to excel for either their veteran labor markets or for their entrepreneurship more broadly. For example, 6.8% of businesses in Alabama are owned by veterans, whose median income is 1.6 times higher than nonveterans—a higher rate than almost anywhere else. Texas and South Carolina also scored especially well for their veteran labor markets, driven by their high income ratios (each 1.5).
Meanwhile, states like California, Washington, and Kentucky scored well due to the force of their entrepreneurial communities, with California reporting more patents per 100,000 population than any other state (127.8) and Kentucky seeing 30.5% year-over-year new business growth. Washington also has a high patent rate at 118 per 100,000.
Veterans have valuable skills and experiences to translate to the private sector. But while it can be highly rewarding to run your own business, getting your firm started is a major endeavor that takes time, planning, and effort. These tips will help you get going:
The success of veterans as entrepreneurs underscores their impressive contributions to the American economy. Our findings emphasize the need for continued efforts to empower veteran entrepreneurs, allowing them to harness their full potential to lead and excel in the business world.
We used the most recent federal data for six metrics across two categories to determine the best states for veterans to start a business. We used a Z-score distribution to scale each metric relative to the mean across all 50 states and Washington, D.C., and capped outliers at 3. A state’s overall ranking was calculated using its average Z-score across the six metrics, while its subcategory ranking was calculated using its average Z-score across the three relevant metrics. Three states were missing data for veteran business ownership (Virginia, Wyoming, and Oregon) so their scores were calculated across the remaining five metrics. Here’s a closer look at the metrics we used:
New small business owners often need funding to meet their goals. However, they frequently struggle to qualify for debt and equity financing because of a bad credit score or a limited operating history.
Revenue-based financing is an alternative method of raising capital that’s often more accessible. If you’re interested in the arrangement, here’s what you should know before you apply, including how it works and when it’s worth using.
Revenue-based financing is another name for a business cash advance. Like a business loan, it provides a lump sum you can use to grow your company. You then repay the original amount plus a fee with daily or weekly bank account withdrawals based on a percentage of your monthly deposits.
Revenue-based financing arrangements are relatively accessible and can provide funding quickly, but they’re also expensive. As a result, they’re usually best for business owners who can’t access traditional sources of capital.
Revenue-based financing arrangements serve a similar purpose to business loans, but their structure and terms are significantly different. Here’s how they work.
Revenue-based financing is much easier to access than traditional forms of business funding. You typically only need to meet minimal personal credit score, time-in-business, and monthly bank deposit requirements to qualify for an account.
For example, Credibly’s business cash advance has the following eligibility criteria:
Applying for revenue-based financing is also much faster than requesting other forms of funding. You can often complete your application in minutes, receive a response within a day, and have your funds in around 48 hours.
Terms vary between providers, but revenue-based financing can generate significant capital. Your proceeds primarily depend on your average monthly deposits. The more you earn, the more you can borrow.
For example, Kapitus offers advances between $10,000 and $750,000, and Backd may offer up to $2 million. Your actual amount is typically between three and six times your gross monthly revenue.
Despite the high borrowing potential, revenue-based financing follows a much shorter repayment term than a small business loan. Most arrangements are between 3 and 18 months, though some can be as long as 36 months.
Meanwhile, financing charges are usually higher than with traditional funding options. In addition, they’re presented as a factor rate rather than an interest rate, and you can expect them to range from around 1.2 to 1.5.
In other words, if you borrow $100,000, you’ll usually repay between $120,000 and $150,000.
Another notable difference between revenue-based financing and a business loan is the repayment process. Instead of making fixed monthly principal and interest payments, you let your funder take a portion of your sales.
Typically, they’ll withdraw a fixed percentage of your average monthly revenue directly from your bank account, either daily or weekly.
For example, your business earns $30,000 monthly, and you take out a $100,000 business cash advance. Your funder takes 10% per month, which equals $3,000. Assuming each month has 20 business days, they withdraw $150 daily.
Revenue-based financing is worth considering when traditional business financing options are unsuitable for your situation. Typically, that's because you can’t qualify for them due to your credit scores or time in business.
New small business owners and startup founders often face this issue because traditional financial institutions usually want to see at least two years of business history. They may check your business credit score too, which also takes time to establish.
As a result, a business cash advance is often an attractive funding option in the early years. However, because revenue-based financing is expensive, consider all your other options first.
If you can’t get a business loan from a bank or credit union, an online lender may still be willing to work with you. They have less rigorous qualification requirements that are closer to those of revenue-based funders.
Alternatively, you can consider equity financing options, such as angel investors and venture capitalists. These require that you give up a portion of your company ownership, but they also provide you with valuable allies who can help you grow.
Like all financing options, revenue-based financing comes with its own set of advantages and disadvantages. Understanding these can help you make a more informed decision about whether it's the right choice for your business.
When it comes to raising capital, business owners have a plethora of options, each with its own merits and demerits. Here, we'll delve into a comparison of revenue-based financing, debt financing, and equity financing.
As discussed, revenue-based financing is a method where business owners receive an upfront capital injection, repaying with a percentage of future revenues. It's relatively accessible, quick to secure, and provides flexible repayment terms correlated with your sales. However, it's often a steeply-priced option with short repayment terms and regular withdrawals that may disrupt cash flow.
Debt financing involves borrowing money, typically from a lender such as a bank, with an agreement to repay the principal along with interest over a predetermined timeframe. The advantage of debt financing is that you maintain total ownership of your business. However, it requires a good credit score, stable business history, and collateral, making it less accessible for new or struggling businesses. You're also obligated to repay the loan regardless of whether your business is profitable or not.
Equity financing includes raising capital by selling shares of your company to investors, like angel investors and venture capitalists. The primary advantage is that there's no obligation to repay investors; they make money when the company is successful. Furthermore, you can benefit from their expertise and networks. On the downside, you will have to share your profits with your investors and may lose some control over the business as they will have voting rights.
When choosing a financing option, it's crucial to carefully consider your business's financial situation, growth stage, and long-term goals.
Revenue-based financing can be an effective alternative to traditional debt and equity options, especially for new small business owners with bad credit scores. You can quickly access a significant amount of capital and use it to grow your business.If you’re a good fit for revenue-based financing, use Lendio to find the best cash advance provider for your needs. Sign up to compare offers from multiple funders and apply for financing today!