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In the fast-paced world of business, maintaining a steady cash flow is crucial for survival and growth. However, even the most well-run businesses can hit a rough patch or find themselves in need of quick capital to seize a growth opportunity. This is where cash flow loans come into play. Think of them as a financial lifeline, designed specifically to keep your business afloat during precarious moments, helping you navigate temporary cash crunches or seize golden opportunities. Whether you're looking to cover operational costs, invest in new equipment, or simply need a cushion during a slow season, understanding how cash flow loans work could be the key to unlocking your business's potential.

What are cash flow loans?

Cash flow loans, in simple terms, are based on the future cash flows of a business. Rather than focusing on the hard assets of the company, lenders evaluate the projected revenue and cash generation capabilities when deciding to fund. This makes cash flow loans particularly appealing for businesses that may not have substantial physical assets, but have strong revenues and profit margins. Essentially, it’s about borrowing from your future self—using tomorrow’s earnings to fuel today’s growth and operations. These loans can be flexible, offering businesses the necessary breathing room to manage expenses, invest in new projects, or expand operations without the immediate burden of traditional asset-based lending requirements.

How do cash flow loans work?

Cash flow loans typically work by allowing businesses to borrow based on their projected cash flows. This is calculated using the business's current financial situation, including income and expenses, to estimate future earnings. Lenders utilize this forecast to determine how much money they can safely lend, ensuring that the business can repay the loan from future income. The process usually involves detailed financial analysis, including a review of the business’s sales history, profit margins, and cash flow statements.

The repayment terms for cash flow loans can vary significantly depending on the lender and the financial health of the business. Generally, these terms include a fixed interest rate and a repayment schedule that may span months or a year. Importantly, because the loan is unsecured, lenders may charge a higher interest rate than traditional secured loans. This higher cost reflects the increased risk the lender takes on by not requiring collateral.

For businesses, managing a cash flow loan responsibly means closely monitoring cash flow projections and making adjustments as needed to ensure the loan does not become a financial burden. It's essential for businesses to consider their ability to manage the loan's repayment schedule, especially during periods where income is lower than expected.

Cash flow loans vs. traditional loans.

When comparing cash flow loans to traditional loans, the key difference lies in the collateral. Traditional loans typically require physical assets as collateral, such as real estate or equipment, making it a challenge for businesses that lack substantial assets but are cash-rich.

Another notable difference lies in the application and approval process. Cash flow loans often boast a faster approval process since the evaluation is heavily based on financial projections and revenue performance, not the valuation of physical assets. This can be particularly beneficial for businesses needing quick funding to capitalize on immediate opportunities or to address sudden financial shortfalls.

However, the trade-off for the convenience and accessibility of cash flow loans is usually a higher interest rate compared to traditional loans, due to the higher risk lenders assume by not requiring collateral. Businesses should weigh these costs against the benefits, considering their cash flow stability, growth prospects, and ability to manage the loan repayment under varying economic conditions.

Ultimately, the choice between a cash flow loan and a traditional loan depends on the specific needs, circumstances, and financial health of the business. Each financing option offers unique advantages and challenges, making it crucial for business owners to carefully assess their situations and future financial projections before making a decision.

Types of cash flow loans.

Cash flow loans come in several types, making them a flexible financing option for many businesses. The types include:

1. Merchant cash advances: Merchant cash advances are a form of financing where a lender provides a lump sum payment to a business in exchange for a percentage of the business’ daily credit card sales.
2. Business cash advances: A business cash advance is another type of financing where a company receives a lump sum of cash from a lender. This amount is then repaid over time via a fixed percentage of the business’ daily sales.
3. Unsecured line of credit: An unsecured line of credit allows businesses to access funds as needed, without putting up any collateral. These credit lines can be helpful for managing cash flow fluctuations or unexpected expenses.
4. Invoice financing: Invoice financing is a form of funding where businesses can borrow money against the amounts due from customers. This option provides immediate cash flow by allowing businesses to turn their outstanding invoices into immediate capital. It’s particularly useful for businesses with long invoice payment cycles, enabling them to maintain operations and growth without waiting for clients to pay.

Pros and cons of cash flow loans.

Before we delve into the advantages and disadvantages of cash flow loans, let’s remember that every business is unique. What works best for one may not necessarily be the right choice for another. It’s crucial to understand your own business needs and circumstances to make an informed decision. Now, let’s get started with the pros and cons.

Pros of cash flow loans

• Fast access to cash. Unlike traditional lending, which can take weeks or months due to the requirement of extensive documentation and collateral valuation, cash flow loans allow businesses to access needed funds in a matter of days. This rapid turnaround can be crucial for covering immediate expenses or capitalizing on timely opportunities.
• Lower credit score requirements on some loans. Since lenders focus more on the projected revenue and cash flows rather than the creditworthiness of the borrower, businesses with less-than-perfect credit can often still qualify. This makes cash flow loans an attractive option for newer businesses or those that have encountered financial difficulties in the past.
• No collateral required in the traditional sense. Cash flow loans do not necessitate physical assets as security, making them more accessible to businesses without significant tangible assets. This characteristic is particularly useful for service-oriented or tech companies, which might not have the equipment or real estate typically required for traditional loans.

Cons of cash flow loans

• Can be more expensive than other forms of financing. Because cash flow loans often come with higher interest rates and fees due to the lack of physical collateral and the perceived higher risk by lenders, they can be more costly over time compared to traditional loans.
• Relies on business generating enough cash flow to repay the loan. A critical consideration for cash flow loans is the dependency on the business's ability to generate sufficient cash flow to meet repayment obligations. Since these loans are based on future earnings projections, any shortfall in revenue can pose a significant repayment challenge, potentially leading to financial strain or impacting the business's credit.
• Riskier for businesses with unstable or unpredictable revenue streams. Businesses that experience significant fluctuations in sales or operate in highly volatile markets may find cash flow loans especially risky. Since repayment depends largely on consistent revenue, periods of low income can lead to difficulties in meeting loan obligations, potentially exacerbating financial instability.

How to get a cash flow loan.

Navigating the process of obtaining a cash flow loan can seem daunting, but with the right approach, it can be streamlined and successful. Here's a step-by-step guide to get you started:

1. Evaluate your financial health: Before applying, assess your business's current financial status. This includes reviewing your cash flow statements, profit and loss accounts, and future financial projections. Understanding these will help you determine how much you need to borrow and can afford to repay.
2. Research potential lenders: Not all lenders offer the same terms for cash flow loans. Spend time researching to find those that cater to your business type and offer terms that align with your needs and repayment ability.
3. Prepare necessary documentation: While cash flow loans may not require collateral, lenders will still expect a comprehensive view of your business's finances. This typically includes financial statements, tax returns, cash flow projections, and a business plan that outlines how the loan will be used.
4. Apply for the loan: Once you have gathered all necessary documents, fill out and submit your loan application. Be prepared to answer additional questions about your business and financial projections.
5. Carefully consider the terms of your loan agreement: Carefully examine the terms outlined in your loan agreement. Pay close attention to the interest rate, repayment schedule, and any fees or penalties for early repayment or late payments. If there are points or terms that are unclear, don't hesitate to reach out to the lender for clarification. Making an informed decision now can prevent misunderstandings or financial strain in the future.

Remember, transparency with your lender about your business's financial health and clear communication can significantly enhance your chances of success in obtaining and managing a cash flow loan.

Exploring alternatives to cash flow loans.

While cash flow loans can be an excellent solution for many businesses, they’re not the only option. Other financing alternatives may be more fitting, depending on your business’ specific needs. Let’s take a look at a few:

1. Invoice factoring: One alternative to cash flow loans is invoice factoring. This method involves selling your unpaid invoices to a third party (i.e. ‘factor’) at a discounted rate. The factor then collects payments directly from your customers, allowing you to get immediate cash. It’s an excellent choice for businesses that have to wait for long periods to receive payments from their customers.
2. SBA loans: SBA loans are backed by the Small Business Administration (SBA) and often come with lower interest rates and more favorable terms. However, they can take time to process and may require more paperwork.
3. Term loans: Term loans are traditional business loans where a lender provides upfront money, repaid over a specified period with interest. They are used for capital investments like equipment or real estate. While term loans have lower interest rates than cash flow loans, collateral and a solid credit history are usually required.

Remember, the best financing option for your business depends on various factors, including your business’ size, its stage in the business lifecycle, its financial stability, and your specific needs. Weigh your options carefully and consider seeking advice from a financial advisor to make an informed decision.

Cash flow loans can be a versatile and valuable solution for businesses requiring extra cash. They provide flexibility and easy access to funds. However, as with any financial decision, it’s important to carefully consider the potential risks. Understanding the nature of these loans—as well as the differences between them and their asset-based counterparts—is crucial for making informed and beneficial financial decisions.

More than 30% of American small businesses are not approved for at least some of the funding they apply for.

Reasons for this can range from operating in a risky industry to a low credit score. But what really shouldn’t be a concern is flubbing the preapproval process by not having the required documentation.

If you’re concerned that you might fall into that category, read on—these are the documents you’ll need to apply for a small business loan or other financing.

Which documents will you need to apply for business financing?

The first thing you will do when you apply for financing at Lendio is give us enough information to help our lender network assess your risk. When you click “Apply now,” you’ll start our 15-minute online application.

You’ll need the following documents:

• 3 months of business bank statements (you’ll be given the choice to connect your account or manually upload images)
• A copy of your driver’s license or state ID
• Voided check from your business account
• Proof of business ownership
• Month-to-date transactions

You’ll also be asked to provide:

• The amount of money you want to borrow
• When your business started and some general information about your business
• Your birthday and your social security number

What documents will you need for the next stage?

After we receive your application, our financing network will review your application and we’ll let you know what you’re eligible for. Depending on the types of loans or other financing you’re being offered, you may need to provide some of the following documents before your financing funds. And you won’t be asked to guess at anything: your Lendio funding manager will walk you through all of this.

You may be asked to provide:

Tax returns 

These will objectively show lenders how much money your company makes, how much you draw from the business, and how much money you personally have in the bank.

Some lenders will want to see profit on your business tax return—and if not profit, then a clear path to profitability. They’ll want to know that you pay your taxes in full and on time. 

Business bank statements

You will have already uploaded 3 months’ worth, but some types of financing can require additional bank info. These documents are used to show lenders your cash flow patterns. BTW, these will need to be business bank accounts, not a personal account.

A business plan

Some lenders will request a copy of your business plan, which they may review from two angles. 

First, they’ll be looking at the legitimacy of both the problem your business solves and your solution to it, as well as how you plan to bring your solution to market and how you plan to make money from it. 

And don’t make the mistake of thinking that only apps and tech platforms solve problems. A hair salon could solve the simple problem of there not being another hair salon closer than 6 blocks away, and it’s a perfectly sound solution to a perfectly reasonable problem.

Second, they’re looking for a good fit, both from your business and from you, and this could mean different things. You may not be a good fit if:

• They have a different idea of how you should be growing
• They don’t share enthusiasm for the category you’re in
• Any of a number of other reasons

Also, don’t worry about not being a good fit, however. Lendio works with 75+ lenders, which opens up a lot of options.

Profit and loss statement and balance sheet

A P&L statement, also known as an income statement, shows a business's revenues, expenses, and profits or losses over a specific period. It helps lenders understand how much money the company is making and where it is being spent.

A balance sheet provides a snapshot of a company's financial position at a given point in time. It lists all of the assets, liabilities, and equity of the business. This document gives lenders an overview of what the business owns and owes.

Business license and related documents

If you didn’t previously upload your business license, you may be asked to by some lenders to provide it now. You could also be asked for a copy of your LLC or articles of incorporation, if relevant.

Debt schedule

A debt schedule is a document that outlines all the outstanding debts of a business, including loans, interest payments, and other financial obligations. It is an important piece of information for lenders when considering a business loan application.

A debt schedule typically includes the following information:

• Outstanding balance: This is the total amount owed on a particular loan or debt.
• Interest rate: The annual percentage rate charged by the lender on the outstanding balance.
• Payment frequency: This refers to how often payments are due (monthly, quarterly, annually).
• Maturity date: The final date by which the loan or debt must be repaid in full.
• Collateral: Any assets that have been pledged as security for the loan.
• Guarantors: Individuals or entities who have guaranteed to repay the loan in case the business is unable to do so.

Documentation requirements for SBA loans.

If you have your heart set on a Small Business Association (SBA) loan, you’ll be asked for the following information in addition to the documentation listed above.

• Why are you applying for this loan?
• How will the loan proceeds be used?
• What assets need to be purchased, and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your management team?
• Anyone who owns more than 20% of the business will need to complete SBA Form 413.

If any of these seem confusing, don’t worry. If you apply for financing through Lendio’s marketplace, your funding manager will explain any additional documentation required. You’ll also upload everything in your online document center, so you’ll have a record of what you’ve submitted and what’s still missing.

It’s common for companies growing faster than their current income to seek outside capital to keep up their momentum. An under-capitalized business will find it difficult to make the leap required to scale and expand.

A clear first step to lining up outside capital is to determine whether equity investment or debt financing (or a combination of the two) might be the best route for your business.

What is equity financing?

When you own a business concept or company, there’s a subjective value attached to it called equity. The equity of any type of asset—whether intellectual or physical—is the value someone is willing to pay for it, minus its liabilities. That could mean the value of an entity today (measured in time and money invested) versus its value in the future (measured by comparable growth).

Once the owner and investor determine the “valuation” of the asset, the owner can then sell parts of the equity to raise capital. 

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

What is debt financing?

Debt financing is a source of business funding where a lender provides to the business an agreed-upon amount of money that is to be repaid over a period of time, in addition to any associated fees or interest.

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

Key differences between debt financing and equity financing

Understanding the key differences between debt financing and equity financing can help you make an informed decision tailored to your business needs.

1. Ownership and Control

• Debt Financing: You retain full ownership and control of your business. Lenders have no say in business decisions.
• Equity Financing: You give up a portion of ownership in your business. Investors may have input on business decisions and strategic direction.

2. Repayment Obligation

• Debt Financing: Requires repayment of the borrowed amount, plus interest and fees, according to the lender’s terms.
• Equity Financing: No obligation to repay the investment. Investors expect returns in the form of dividends or an increase in the company’s value.

3. Profit Sharing

• Debt Financing: Profits remain with the business owner. There is no requirement to share profits with lenders.
• Equity Financing: Profits need to be shared with investors based on their equity stake. This can reduce the total profit that goes back to the business.

4. Credit Impact

• Debt Financing: Can help build business credit if the lender reports to credit agencies. Poor credit might make it difficult to qualify.
• Equity Financing: Doesn’t impact business credit directly. Credit history is generally not a barrier to obtaining funds.

5. Business Risk

• Debt Financing: Poses a risk if the business is unable to meet repayment obligations, potentially leading to loss of collateral or personal assets if a personal guarantee is involved.
• Equity Financing: Reduces financial risk since there’s no debt to repay, but you risk losing a measure of control and having to share future profits.

Considering these differences can clarify which financing option aligns best with your business goals and current financial situation.

When to choose equity vs. debt financing.

Every business has to choose for itself whether equity financing or debt financing makes the most sense, and many companies opt for a mixture of both types of funding. There are risks with either option you choose. 

If your business closes and it still owes outstanding debts, you may still have to repay those loans plus interest. The same isn’t true with equity financing. On the other hand, if you sell your business for a sizable profit, paying off shareholders could be much more expensive than the cost of paying off a business loan. 

It’s up to you to weigh the pros and cons of each type of financing and figure out which solutions make the most sense for your business. 

Lendio’s mission is to empower your small business by making small business loans simple by providing options, speed, and trust. Whether you are looking for an acquisition loan or a startup loan, Lendio offers hundreds of different loan products from a variety of lenders. Find out which business loan is best for you.

Understanding how credit scores are calculated can sometimes feel like unraveling a complex puzzle. However, breaking down the key components gives a clearer picture of how these scores are derived and what they signify. A credit score is essentially a numerical representation of your creditworthiness, influenced by various financial behaviors and patterns. This guide will delve into the factors that impact your credit score and explain how each element contributes to your overall rating.

What is a credit score?

A credit score is a numerical representation of your creditworthiness. It is calculated based on your borrowing and payment history and indicates to lenders how likely you are to repay your debts on time.

It’s also important to understand that you don’t have just one credit score—different lenders and credit reporting agencies use multiple credit scores. While most scoring models assess similar factors such as payment history, amounts owed, length of credit history, new credit, and types of credit, they may weigh these factors slightly differently, resulting in variations in your score.

How is a credit score calculated?

The most common credit score you’ll hear of is FICO or the Fair Isaac Corporation. FICO determines the creditworthiness of an individual with a number, typically between 300 and 850. This FICO credit score is the lending industry standard for making credit-related decisions.

FICO scores are calculated from information pulled from the three major credit bureaus in the United States: Experian, TransUnion, and Equifax. These bureaus, in turn, gather information from lenders like credit card companies, student loan lenders, and banks.

FICO credit scores are divided into several ranges that help lenders assess an individual's credit risk. Here's a breakdown of the different ranges:

• Very Poor (300-579)
• Fair (580-669)
• Good (670-739)
• Very Good (740-799)
• Exceptional (800-850)

Your personal credit score has a large impact on your ability to get a business loan. Most lenders will have a minimum credit score requirement in addition to other eligibility criteria.

FICO determines your credit score based on five factors, but each is weighted differently. Your repayment history and overall credit utilization are the main components of your score.

5 components of your FICO credit score.

1. Payment history

FICO says that payment history determines 35% of your credit score, making this factor the most important aspect of your credit reports. The guiding wisdom here is that past repayment behavior is the best way to determine your ability to pay off new debts.

“Both revolving credit (i.e., credit cards) and installment loans (i.e., mortgage) are included in payment history calculations, although installment loans take a bit more precedence over revolving credit,” financial expert Rob Kaufman of FICO writes. “That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.”

You can boost this portion of your score, and, therefore, greatly boost your FICO credit score overall, by paying down existing debts. One of the fastest ways to push your score skyward is to pay off a debt like a credit card completely. Even ensuring your payments are timely can have an impact, although paying above the minimum will compound your efforts to improve your score.

2. Amounts owed

The next biggest factor FICO uses in determining your credit score is your “credit utilization.” As the term suggests, this metric compares the amount of credit you are using to the credit available to you. This factor accounts for 30% of your FICO score.

Basically, your credit utilization is the percentage of debt you carry. If your credit burden is high, it will lead lenders to believe that much of your monthly income is going toward debt repayments.

“Credit score formulas ‘see’ borrowers who constantly reach or exceed their credit limit as a potential risk,” Kaufman explained.Generally, a “good” credit utilization ratio is 30% or less. Improving this aspect of your credit score can require some strategic thinking. If you pay off a credit card, you might want to keep that account open so the open credit line pushes the ratio in your favor. Similarly, asking for credit limit increases can better your burden percentage.

3. Length of credit history

The number of years you have been using credit has an impact on your score. FICO says it makes up 15% of your score, although this can be a bigger factor if your credit history is very short.

“Newer credit users could have a more difficult time achieving a high score than those who have a credit history,” Kaufman said, “since those with a longer credit history have more data on which to base their payment history.”

It’s smart to always have some lines of credit open, even if you aren’t using them. This approach is especially true if you, or your children, are young adults, although you want to ensure you can responsibly handle credit cards.

4. Credit mix

Credit mix accounts for 10% of your FICO score, so it is a relatively minor factor unless your credit history is limited. Generally, lenders like to see several different kinds of lines of credit on your report, like credit cards, student loans, auto loans, and mortgages.

“Credit mix is not a crucial factor in determining your FICO score unless there’s very little other information from which to base a score,” Kaufman stated.

If you have multiple lines of credit open, you probably don’t have to worry about this factor. Instead, focus on changing your credit utilization ratio or improving your repayment history.

5. New credit

The final 10% of your FICO score is determined by how many lines of credit you have opened recently. This aspect is why people say hard checks on your credit score can actually hurt your standing.

“Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history,” said Kaufman.

When you apply for a new credit card, loan, or lease, lenders look at your credit history. This check itself shows up on your credit report, even if you were denied the line of credit.

Inquiries can remain on your credit report for 2 years, but FICO only includes credit checks made in the last 12 months in determining scores. “Soft” checks on your credit, like credit monitoring services, are not included.

What doesn't affect your credit score?

Several factors contribute to your credit score, but some things don't impact it:

• Personal information: Age, race, ethnicity, nationality, sex, and marital status don't influence your credit score.
• Soft inquiries: Background checks by potential employers or when you check your own credit report don't affect your score.
• Salary and employment: Salary, employment history, and occupation are not considered when calculating your credit score.
• Location and rental payments: These are not factors unless reported to and recorded by credit bureaus.

Lenders may use this information to evaluate credit applications, but it doesn't directly affect your numerical credit rating.

A personal credit score determines the level of risk that comes with lending to you. You use it to apply for credit cards and other financing options to cover major purchases. A business credit score works similarly, except instead of evaluating your risk as an individual, financial institutions evaluate your business’s viability.

Like personal credit, business credit takes time to build. While your equity may be able to boost your business credit, the overall goal is to keep your personal and professional finances separate. This guide will review the factors that go into your business credit score range and what a healthy number looks like.

What is a business credit score?

A business credit score is a numeric expression that represents the creditworthiness of a company. It is used by lenders, suppliers, and other financial institutions to evaluate the likelihood that a business will repay its debts. This score typically ranges from 0 to 100 for most scoring models, with higher numbers indicating better creditworthiness.

Unlike personal credit scores, business credit scores take into account factors such as the company's payment history, credit utilization rate, length of credit history, public records including bankruptcies, and the company’s size and industry. A healthy business credit score is crucial for securing financing, favorable loan terms, and establishing trust with suppliers and vendors.

Business credit score benefits.

Having a high business credit score can unlock numerous advantages for your business that go beyond simply qualifying for loans or credit lines. These include:

• Better financing terms: A strong business credit score can help you secure lower interest rates and more favorable repayment terms on loans and lines of credit.
• Increased borrowing power: With a higher business credit score, you may be able to access larger amounts of capital for major purchases or expansions.
• Improved supplier relationships: Many suppliers and vendors use business credit scores to determine whether or not they want to extend credit to a company. A strong business credit score can help establish trust and open up more opportunities for trade credit.
• Separation of personal and professional finances: By building a solid business credit score, you can keep your personal assets separate from your business assets, protecting yourself in the event of any financial issues.
• Insurance policy rates could be lower: A good business credit score may influence your insurance premiums, potentially leading to lower rates on your business insurance policies.

Overall, investing time and effort into building and maintaining a solid business credit score positions your company for better financial health and long-term success.

How a business credit score works.

A business credit score, much like a personal credit score, is a reflection of a company's financial responsibility and creditworthiness, but with a focus on the business's operations. When a business applies for loans or credit lines, lenders and suppliers will examine this score to decide how risky it is to offer credit. 

This score is calculated based on several factors, including the timeliness of bill payments, the amount of available credit used by the business, the length of the business's credit history, any legal filings such as liens or bankruptcies, and the company's financial stability. Essentially, this score is a numeric summary of a business’s financial history and current financial position, aimed at predicting the likelihood of the business fulfilling its financial obligations.

What goes into your business credit score?

Multiple factors contribute to your business credit score—some are in your control while others aren’t. A few of these factors include:

• Your payment history: If you have paid off your loans steadily over time without missing any payments, you will have built a strong business credit score.
• Credit history and age: How long has your business had financial liabilities? A new business will have a much lower credit score than a company that has maintained good credit for the better part of a decade. 
• Number of accounts: How many accounts do you have? How many are active with existing debits or credits? 
• Credit utilization: What percentage of allowed credit do you have? Have you reached the maximum limits of your business credit cards, or do they still have available credit for you to use? 
• Types of credit: Credit bureaus look for multiple funding sources, otherwise called a credit mix. 
• Recent credit inquiries: Have lenders recently requested information about your business? How many and how long ago?  

Many of these factors are also used for personal credit scores. However, they take on a new meaning when applied to a business. 

For example, the severity of the debt you take on also depends on the size of your business and your expected profits. Your credit can also be impacted by vendors that send unpaid invoices to collections or report overdue bills that you miss. 

Essentially, almost any financial transaction you make as a business owner can contribute to your credit score, which is why it is so important to maintain good, organized bookkeeping.

What is a good business credit score?

The main difference between a personal and business credit score is the number range. While a personal credit score ranges from 300–850, business credit scores are typically developed on a scale of 0–100. Additionally, there are 3 main business credit score bureaus, all of which use this range. These are Dun & Bradstreet (D&B), Equifax, and Experian.    

As a rule of thumb, the higher the score, the better. If you have a business credit score above 75, then you have exceptional business credit and shouldn’t have trouble securing funding. 

A score of 50–75 is considered fair and you should be able to get funding, though maybe at a higher interest rate or more limited terms. Finally, anything below 50 is considered poor credit and a high-risk account.Each of the three major credit bureaus collects and measures different information to calculate your business credit score.

How to improve your business credit score.

Improving your business credit score is a strategic process that requires consistent effort over time. Here are practical steps you can take to enhance your company's financial standing:

• Pay your bills on time or early: Establish a track record of timely payments, as payment history heavily influences your credit score.
• Reduce credit utilization: Aim to use a smaller portion of your available credit to show lenders you're not overly reliant on credit.
• Update your business information: Ensure your business information is accurate and up to date with all credit bureaus. Inaccuracies can negatively affect your score.
• Monitor your business credit report: Regularly review your credit reports from the major credit bureaus to catch and dispute any inaccuracies or fraudulent activities early.
• Establish trade lines with suppliers and vendors: Use trade credit to your advantage by establishing and maintaining positive payment histories with multiple suppliers and vendors.
• Limit credit inquiries: Only apply for new credit when necessary, as too many inquiries in a short time can indicate risk to lenders and negatively impact your score.
• Build a diverse credit mix: Having a mix of credit types, such as a business credit card, a line of credit, and trade credit, can positively affect your score.

By taking these steps, you can improve your business credit score, which can lead to better loan terms, increased funding opportunities, and a stronger financial foundation for your business.

Check your business credit score.

You can find sample business credit score reports for each of these credit bureaus so you can determine which ones you want to use. The scores should stay relatively equal across each report. 

To access your credit scores, visit the websites of these credit bureaus. You can pay from $40 at Experian up to $100 at Equifax for your report.

Understanding your business credit score range can help you secure funding for startup expenses and company expansion. You can be more aggressive in negotiations with lenders when you have a good score and can take steps to improve it before taking out a loan if you have a poor one. Don’t be afraid of your credit score—use it to make sound financial decisions for your business!

Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often emphasize a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’s ability to get funded and its borrowing capacity. 

How does asset-based lending work?

In asset-based lending, a business secures a loan or line of credit by offering its assets as collateral. These assets can include real estate, inventory, accounts receivable, equipment, and other property that holds value. The lending agreement specifies how much money the business can borrow, which is usually a percentage of the collateral's appraised value. This percentage varies depending on the type of asset and its marketability; for instance, receivables might be financed at around 70% to 80% of their value, while inventory may only secure around 50%.

The process begins with the lender evaluating the assets to determine their current market value. If the business defaults on the loan, the lender has the right to seize the collateral, sell it, and recover the owed amount. This makes asset-based loans less risky for the lender compared to unsecured financing, potentially leading to more favorable interest rates for the borrower. However, businesses must consider the risk of losing their assets before entering into such agreements.

How much can you borrow? 

Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details).

Pros and cons of asset-based financing.

If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. 

Pros of asset-based financing.

• Qualification requirements: Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. 
• Fast funding: Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours.
• Less personal risk: With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). 

Cons of asset-based financing.

• Higher costs: It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. 
• Some assets may not qualify: Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash.
• Loss of asset(s): If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral.

Asset-based lending vs. cash-flow lending.

When comparing asset-based lending to cash-flow lending, it's essential to understand the primary differences between these financing options. Asset-based lending focuses on the value of the collateral that a business can provide, such as inventory, equipment, or accounts receivable. This type of financing is particularly beneficial for companies that have significant physical assets but might not have a strong cash flow.

On the other hand, cash flow lending evaluates a business's future cash flows as the main criteria for the loan. Lenders look at the company’s past and projected cash flow statements to assess its ability to repay the loan. This type of lending is more suitable for businesses with strong and predictable cash flows but fewer physical assets to use as collateral.

The choice between asset-based lending and cash-flow lending depends on the specific needs and circumstances of the business. If a company has valuable assets but faces cash flow challenges, asset-based lending may offer a viable solution. Conversely, for businesses with strong cash flows but limited assets, cash-flow lending might provide a more appropriate form of financing. Both options have their merits and potential drawbacks, necessitating a careful analysis to determine the best fit for the business’s financial strategy.

Is asset-based lending right for my business?

Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. 

First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.

Running a small business often means navigating a financial landscape where debt is vital to growth and sustainability. However, managing business debt can be a double-edged sword. On one hand, it offers liquidity and can fuel expansion; on the other, it can be a significant financial burden if not managed properly.

Understanding when to use business debt.

Debt is not inherently bad. When managed properly, it can help your business take advantage of opportunities and grow. But recognizing the right time and the right reasons for taking on debt is crucial:

Consider debt for investments that will grow your business.

Debt is often used for investments in areas like real estate, inventory, equipment, or acquiring another business that will increase profitability and contribute to long-term success.

Construction

In the construction industry, a loan can facilitate the purchase of state-of-the-art machinery or equipment that increases operational efficiency and allows you to take on larger projects.

Retail

For retail businesses, a loan can be pivotal in expanding inventory, especially before peak shopping seasons. Additionally, it can help acquire bulk inventory at a discounted rate, reducing overall project costs and increasing profit margins.

Healthcare

Healthcare providers can use loans to invest in new medical equipment, expanding their services.

Transportation

In the transportation sector, loans can enable the purchase of additional vehicles, such as trucks or vans, expanding service capacity. Investing in newer, more efficient vehicles can reduce maintenance and fuel costs, leading to higher profitability.

Restaurants

Restaurants can benefit from loans by renovating their space to increase seating capacity or create a more appealing ambiance. Additionally, funds can be used to upgrade kitchen equipment, enhance the efficiency of food preparation, and expand the menu to attract more customers.

Unexpected events and short-term cash flow problems.

Sometimes debt can be a solution to bridge a gap between a large, upcoming expense and liquid funds, as long as you have a plan to pay it back promptly.

For example, a construction or transportation company could use a business loan to cover ongoing expenses while waiting on final payment from customers.

Other factors to consider before taking on debt.

Before you approach a lender, there are several factors to evaluate to ensure that debt is the right decision for your business:

Your business metrics.

Evaluate your business's debt service coverage ratio (DSCR) to determine if you have enough cash flow to cover new debt payments comfortably.

Market conditions.

Consider the current economic climate and market conditions that could impact your business's ability to repay debt, such as interest rate fluctuations or industry-specific risks.

Your business's financial health.

Assess whether you have exhausted all other financing options and whether taking on debt aligns with your overall financial plan and business objectives.

The purpose of the loan.

Be clear on how the loan will be used and how it contributes to the long-term strategy of your business.

Time to increase revenue.

Once you've decided to take on debt to invest in your business, understanding the timeframe in which you can expect an increase in revenue is crucial.  For instance, upgrading equipment may yield quicker productivity gains and revenue increases in manufacturing sectors, while investments in marketing or expansion might take longer to show tangible results.

Debt management strategies

Identifying your financial position and setting the right strategies is essential for effectively managing your business debt.

Create a debt schedule.

Creating a debt schedule might sound daunting, but it's a straightforward process that can bring significant clarity to your financial management. Start by gathering all the relevant information about each debt your business owes. This includes lender names, the original amount borrowed, the current balance, interest rates, monthly payment amounts, and the maturity date for each loan.

Steps to Create a Debt Schedule:

1. List Each Debt: Begin with a spreadsheet or a table. List out each debt individually. This could include bank loans, credit cards, lines of credit, and any other form of debt.
2. Detail Loan Information: For each debt, record the total initial amount borrowed, the current balance owed, the interest rate, and the terms of repayment (such as the loan term or payoff timeline).
3. Monthly Payments: Note down the monthly payment required for each debt. This helps you understand how much of your monthly cash flow is allocated to debt repayment.
4. Update Regularly: Your debt schedule is not a static document. Update it regularly as you make payments or take on new debts. This will help you keep a clear picture of your financial commitments.

Manage your cash flow meticulously.

Effective cash flow management ensures you can meet your debt obligations and prevent undue financial stress. Start with detailed cash flow forecasts and consider seasonal trends in your business.

Increase your business revenue.

Boosting income through sales, diversifying your offerings, or exploring new markets can provide additional funds for debt repayment.

Cut unnecessary expenses.

Reducing costs by renegotiating vendor contracts, eliminating non-essential services, or finding more efficient operational processes can free up money to pay down your debt.

Negotiate with creditors.

If you’re struggling with high debts or interest rates, it's worth reaching out to your creditors to negotiate more favorable terms.

Use windfalls wisely.

Any unexpected funds, such as tax refunds or a robust sales season, can be used to accelerate your debt repayment.

Consider selling off assets.

If you have assets not vital to your business’s operations, consider selling them to generate funds for debt reduction.

Use the snowball or avalanche method for debt payoff.

If you are managing debt from multiple sources such as credit cards and struggling to pay it off, consider adopting a focused method for paying your debt off. The snowball method involves paying off the smallest debts first, gaining motivation as you extinguish individual debts. The avalanche method focuses on paying the debt with the highest interest rate first, saving you money in the long run.

Be cautious with loan stacking.

Loan stacking is when a business takes on multiple loans from different lenders in a short period. This can lead to confusion and overcommitment. Instead, be strategic about the timing and number of loans you take out.

Consider debt consolidation and refinancing.

Debt consolidation involves combining multiple debts into a single loan with a longer repayment period, potentially lowering your monthly payments. Refinancing involves taking out a new loan to pay off your existing business debt, usually to secure a lower interest rate or better terms.

Monitor debt and revise strategies.

Managing business debt is not a one-time action. It requires ongoing attention, especially as your business grows and changes.

Regularly review and update your debt schedule.

New loans or changes in interest rates can affect your overall repayment plan. Updating your debt schedule ensures you're always clear on your financial commitments.

Stay connected with your accountant or financial advisor.

Professional advice can be invaluable in navigating complex financial matters, including debt management and restructuring.

Be proactive in addressing potential issues.

If you anticipate having trouble making debt payments, communicate with your lenders early to explore possible solutions and avoid penalties or damage to your credit.

Debt can be a powerful tool for small businesses, but it must be wielded with care and sound judgment. By following the strategies outlined in this guide, you'll be better equipped to manage and eventually overcome your business debt, positioning your company for long-term success.

Remember, effective debt management is not just about repaying what you owe—it's about using your financial resources wisely to grow a thriving, sustainable business.

Given the potential impact financing can have on your business, you need to find the best place to get a small business loan. Lendio reviewed the largest SBA lenders and national banks to find the ones with the best small business loan options. Let’s look at some of the prime bank options available to you.

US Bank: Best for smaller loan amounts.

US Bank offers a specialized business “quick loan”, which is a term loan from $5K to $250K with terms of up to 7 years and no origination fee. The loan is “quick” because it can be applied for online. Both unsecured and secured options are available. 

Products offered:

• “Quick” term loan from 5K-250K with terms up to 7 years
• Line of credit up to $250K
• Commercial real estate loans with terms of up to 15 years
• SBA loans

Online application: Yes

Huntington National Bank: Best for underserved communities.

Huntington National Bank is the number one distributor of SBA loans in the U.S. It also runs a program called “Lift Local Business” that supports minority, woman, and veteran-owned small businesses through loans with reduced fees and lower credit requirements.

Products offered:

• SBA loans
• Term loans
• Lines of credit

Online application: Yes- for current customers.

JPMorgan Chase: Best for no origination fees.

Chase offers term loans, lines of credit, commercial real estate, and SBA loans. The bank charges no origination fees on its term loan and has no prepayment penalty on loans less than $250K. 

Products offered:

• Line of credit up to $500K 
• Term loan up to $500K with terms of 1-5 years
• Commercial real estate loans from $50,000 with terms of up to 25 years
• SBA loans

Online application: No

TD Bank: Best online application options.

TD Bank is the 2nd-largest SBA loan distributor in the U.S. and offers an online application for any of its loan products for amounts less than $250,000.

Products offered:

• Line of credit from $25K-$500K
• Term loan from $10K-$1M with terms of 1-5 years
• SBA loans
• Commercial real estate loans of up to $1M with 5-year terms

Online application: Yes

Wells Fargo: Best for unsecured lines of credit.

While Wells Fargo offers fewer loan products to small businesses than other banks, it offers multiple unsecured line of credit options with no fee. For businesses with less than two years of business, they can apply for an unsecured line of credit of up to $50K. For those with two years in business or more, Wells Fargo offers a line of credit of up to $150K.

Products offered:

• Line of credit
• SBA loans

Online application: Yes

PNC Bank: Best for unsecured loan options.

PNC Bank offers multiple unsecured loan products including an unsecured line of credit and an unsecured term loan. The unsecured line of credit and unsecured term loan are both available for amounts from $20-$100K.

Products offered:

• Unsecured line of credit from $20K-$100K
• Secured line of credit from $100K
• Unsecured term loan from $20K-$100K with 2-5 year terms
• Secured term loan from $100 K with 2-7 year terms

Online application: Yes - for existing customers for limited loan products.

BayFirst National Bank: Best for fast SBA loans.

BayFirst, the third-largest SBA lender in the U.S. offers a specialized SBA 7(a) loan called “BOLT”. The loan is available for up to $150,000 with a 10-year term. The streamlined online application process can you get funded as quickly as six days.

Products offered:

• SBA loans

Online application: Yes

Bank of America: Best for building credit.

Bank of America offers a secured business line of credit to business owners with six months in business and $50K annual revenue. The credit line’s purpose is to help the business owner build business credit, so the lines start as low as $1000 and are secured by a refundable cash deposit equal to the line amount. Once the business has established its credit history and reached a revenue of $100K/year, the business can graduate to a larger unsecured line of credit.

Products offered:

• Secured line of credit from $1K
• Unsecured line of credit from $10K
• Unsecured term loan from $10K with 1-5 year terms
• Commercial real estate loans from $25K with terms of up to 15 years
• SBA loans

Online application: Yes

Eligibility criteria for bank business loans.

While some banks will have specialized products with more flexible requirements, the most common eligibility criteria for a bank business loan are:

• 700 credit score
• 2 years in business
• $100,000 annual revenue

Other lender options.

Community banks

Community banks have a smaller footprint than banks listed above, but your local community bank may have more flexible options and a more personalized customer experience.

Online lenders

Online lenders don’t offer bank accounts. Instead, they focus solely on lending. These lenders offer several alternative financing options like business cash advances and invoice factoring that can be easier to qualify for in addition to term loans and lines of credit.

Microlenders

Nonprofit lenders offer loans of less than $50,000 called microloans. Microlenders often have less strict eligibility requirements and frequently cater to specific locations or underserved groups.

Learn more about how to get a business loan.

Methodology

Lendio based its selection on the following criteria:

• The largest number of SBA loans originated according to SBA data.
• Largest national banks by assets held according to federal reserve data.
• Loan products the bank offers according to the bank’s website.
• Special features such as an online application, unsecured loan, or faster processing times as identified by the bank’s website.