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

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

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

What is a revolving line of credit?

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

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

How does a revolving line of credit work?

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

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

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

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

Line of credit vs. business loan vs. credit card

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

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

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

Types of revolving credit.

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

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

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

Pros and cons of revolving line of credit.

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

Why choose a revolving line of credit?

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

Your business needs: 

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

Revolving lines of credit for people with bad credit.

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

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

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

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

Revolving line of credit alternatives.

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

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

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

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

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

Revolving line of credit calculator.

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

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Terms and explanation

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

Amount seeking

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

Loan term

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

Interest rate

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

Estimated daily repayment

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

Total repayment

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

How to calculate interest on a line of credit.

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

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

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

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

How to apply for a revolving line of credit.

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

As your business starts to grow, you may encounter clients with orders that you can’t fulfill immediately. Completing these orders could be huge for your business—both financially and for your reputation—but you might not have the resources and funds at that stage. 

This scenario is very common—especially for new businesses—and it’s where purchase order financing comes in. Read on to learn more about the process of seeking out funding to help fulfill orders.

What is purchase order financing? 

A purchase order (PO) is an agreement to pay for goods or services. Companies of all sizes, from multi-billion-dollar manufacturers to small bakeries, use purchase orders to protect themselves and their customers. 

However, there are times when a purchase order is too large or too expensive to fulfill. When this occurs, the organization needs to seek out financing options to pay suppliers, so they can hold up their end of the purchase agreement. A common solution to this problem is purchase order financing. 

Going back to your high school economics class, think about this in terms of a lemonade stand. It’s fine to fulfill one lemonade cup order for a dollar, but what happens when someone orders 1,000 cups of lemonade and promises to pay you upon delivery? You don’t have the money yet for enough lemons and sugar to fulfill the order.

With PO financing, a lender can help to ensure the order gets fulfilled—protecting your customer, your supplier, and everyone else involved in the process.

Purchase order funding is not working capital.

Before diving deeper into PO financing, it’s important to consider what this form of funding isn’t. Purchase order financing is not a working capital loan. You can’t bring a purchase order to a lender and receive cash to fulfill a major order. One of the biggest misconceptions about PO financing is that business owners simply receive the loan like they would with any other source of funding. However, it’s more complicated than that. Let’s review what purchase order funding is so you can understand what it’s not.

How purchase order financing works.

Purchase order financing works when you bring in a lender to mediate between you, your supplier, and your customer. Here are a few steps that explain how this process works:

1. You’ll provide a clear purchase order to your lender to review. 
2. If the lender approves the loan, they’ll reach out to your supplier to discuss the materials and manufacturing. 
3. Your lender will pay your supplier for the work.
4. Your supplier fulfills the order and presents it directly to your customer (not to you, the business owner). Their role in the process is over. 
5. You’ll send an invoice to your customer to pay for the order.
6. The customer pays the financing company, not you. Your lender will take their side of the fees and send you the balance.

Throughout each of these steps, the lender is involved with the purchase process. They need to make sure the order is fulfilled and the customer is happy—or the invoice won’t get paid and they’re not getting their money. 

If you want to return to the lemonade stand example again, it’s like your mom going to the store and making the lemonade for you, but letting you have the profits only after she delivers the order to the customer.    

Understanding the costs of purchase order financing.

When considering PO financing, it's essential to understand the costs associated with this form of funding. Unlike traditional loans, the costs of PO financing aren't defined by interest rates alone. They're typically calculated as a percentage of the purchase order value.

Here's a simple breakdown of how it works:

1. Financing fee - This is usually the primary cost. It's a percentage of the total value of the purchase order and typically ranges from 1.8% to 6% per month. The exact percentage depends on factors such as the complexity of the transaction, the perceived risk, and the lender's criteria.
2. Due diligence fee - This fee covers the lender's cost to vet the deal. It includes verifying the legitimacy of the PO, the creditworthiness of your customer, and the capability of your suppliers. It typically ranges from $400 to $600.
3. Other potential fees - Depending on your lender, there might be additional costs such as origination fees, administration fees, or wire fees. It's crucial to ask your lender about all possible fees upfront to avoid unexpected surprises.

Remember, the total cost of PO financing isn't simply the sum of these individual charges. The true cost should also consider the opportunity cost of potentially losing a large order if you can't fulfill it without financing.

How do I qualify for PO financing?

If you are considering PO financing, there are a few things you need to know. Having the right information beforehand can make the loan process easier and bring you closer to approval. 

• Verifiable purchase orders - Oftentimes, business owners mistakenly request funding when a PO is about to come through or when they’re responding to a proposal. A lender won’t fund your order unless the customer has already submitted the order. 
• Time in business - Criteria here will vary by lender. Some have no minimum while others will look for a minimum of one year in business.
• Profit margin - Many purchase order financing companies require at least a 20% to 30% profit margin on any project they agree to fund. This ensures that the lender can get paid and the company still makes money in the process. 
• Down payment - This will vary by lender. Some have no down payment requirements, while others will require a down payment that varies based on the terms of the agreement.
• Collateral - Some purchase order financing companies will take a blanket lien on the company’s assets.
• Type of product - Most funders will only provide PO financing for tangible products—not services. They may also have restrictions based on whether you're ordering completed products versus raw goods.
• Customer - Your customer must either be a commercial business or a government entity.

If you plan to work with a PO business to get funding, make sure you read their requirements carefully. A good lender will explain clearly what they need before you start the application process. 

Pros and cons of purchase order financing.

Like any financial decision, PO financing comes with its own set of advantages and disadvantages. Understanding both sides can help you make a more informed decision about whether it's the right choice for your business.

Pros

1. No need for perfect credit or business history - Unlike traditional loans, PO financing isn't necessarily based on your company's credit history. Instead, lenders focus on the creditworthiness of your customers and the validity of the purchase order.
2. Helps manage cash flow - PO financing can bridge the gap between receiving an order and getting paid, helping you maintain a healthy cash flow.
3. Fulfill larger orders - With PO financing, you're able to accept and fulfill larger orders that might otherwise be out of reach due to financial constraints.
4. Quick turnaround - You'll generally have access to funds within two to 10 days.

Cons

1. Cost - PO financing can be more expensive than traditional financing options. Lenders take on a considerable amount of risk and charge accordingly.
2. Loss of control - Since the lender is directly involved in the process, you may feel like you're surrendering some control over your operations.
3. Limited to physical goods - PO financing is typically only applicable to businesses dealing with physical goods. Service-based companies may not qualify.

Remember, it's crucial to consider your specific business needs, circumstances, and financial health before opting for PO financing. Consulting with a financial adviser could provide valuable insights tailored to your situation.

How to choose the right purchase order financing company.

Choosing the right purchase order financing company is crucial for the success of your business. There's no one-size-fits-all solution—what suits one business may not necessarily meet your unique needs. Here are a few tips to guide you:

1. Experience and reputation - Consider the company's experience in the industry and its reputation among other businesses. A lender with a long track record of success is generally more reliable and adept at handling different types of financial issues. Be sure to check out their reviews or ask for references.
2. Understand the terms - It's crucial to understand the terms and conditions of the financing agreement. This includes interest rates, fees, repayment terms, and any potential hidden charges. If something seems unclear, don't hesitate to ask for clarification.
3. Customer service - Opt for a lender that is responsive and has a good customer service record. You want someone who is readily available to answer your questions, offer advice, and resolve any issues that may arise during the process.
4. Flexibility - Look for a company that offers flexibility. Every business has unique needs and challenges. A lender that can adjust its terms or provide a customized financial solution can be invaluable.
5. Industry knowledge - A PO financing company with knowledge of your industry can better understand your business needs and challenges. This can lead to a smoother working relationship and more effective financial solutions.

Remember, it's not about finding the cheapest financing company, but rather finding the one that understands your business and offers the most value. So, take your time, do your research, and make an informed decision.

Alternatives to purchase order financing.

While PO financing can be an effective solution for certain businesses, it might not be the best fit for everyone. Luckily, there are various other financing options available that you might want to consider.

Invoice factoring

Invoice factoring is a similar concept to PO financing, but it focuses on invoices instead of purchase orders. If you're dealing with customers who take a long time to pay, this can be a great option. You essentially sell your outstanding invoices to a factoring company, which gives you an immediate cash advance. When your customers pay their invoices, the money goes straight to the factoring company.

Business lines of credit

A business line of credit provides flexibility that a regular business loan doesn't. It's a revolving fund that you can tap into whenever you need it. You only pay interest on the funds you use, and once you pay back the funds, your line of credit refills to its original amount.

Despite labor and supply chain issues, the U.S. construction market is booming. In fact, analysts predict North American construction output to grow 32% by 2030. 

Construction business owners can capitalize on these opportunities while navigating challenges by having a smart financing plan in place. Using a line of credit for construction businesses, contractors, and builders creates a financial safety net at all times.

What is a construction line of credit?

A business line of credit helps construction-related industries maintain ongoing access to capital. It’s similar to a credit card in that you have access to a credit line and only pay interest on the amount of money you borrow. Once you repay your balance, you can continually borrow from the line of credit for the rest of its term.

Having a line of credit comes with a lot of benefits for construction-related businesses. It helps companies manage cash flow during periods of large expenses, including insurance premiums, licenses and permits, raw materials, and payroll.

Secured vs. unsecured lines of credit.

Secured and unsecured lines of credit constitute two primary categories of construction lines of credit.

A secured line of credit involves collateral, such as equipment or real estate, which the lender can claim if the borrower defaults on the loan. This type of credit is typically larger, with lower interest rates due to the reduced risk for the lender.

An unsecured line of credit doesn't require collateral. However, they usually come with higher interest rates and require a strong credit history for approval, due to the higher risk posed to the lender. These options cater to different needs, and the choice between a secured or unsecured line of credit should be based on the borrower's financial situation and risk tolerance.

Line of credit options for startups.

While it's generally harder for young companies to qualify for financing, some lenders will offer a line of credit to businesses with a minimum time in business of at least six months if you meet the other eligibility criteria. Learn more about specific lines of credit available to startups here.

Benefits of a construction line of credit.

Some of the benefits of a business line of credit include:

• Flexibility - Businesses don't have to draw on the entire credit line if they don't need it, unlike a traditional loan where the full amount is typically disbursed at once.
• Easy access to funds - Borrowers can access funds quickly and easily when needed, without having to reapply for a loan every time.
• Better cash flow management - A line of credit can help businesses stay afloat during lean times or when facing unexpected expenses.
• Lower interest rates - Compared to other types of financing options, lines of credit often have lower interest rates, which can save businesses money in the long run.
• Increased purchasing power - With a line of credit, businesses have more purchasing power and can take advantage of discounts.

Line of credit for contractors.

Contractors are especially susceptible to cash flow issues, especially while waiting on customers to pay invoices on time and purchasing materials to start a new job. And when managing larger projects with employees or subcontractors, there’s even more capital required to cover payroll costs.

To stay liquid, a line of credit for contractors helps even out inconsistent income. A line of credit can also help you grow your business by funding the upfront costs of new projects as demand for your services grows.

How can you use a construction line of credit?

A construction company can use a line of credit for a number of different purposes, such as:

• Purchasing equipment - When old equipment breaks down or new projects demand more specific machinery, a line of credit can be used to purchase or lease needed equipment. This can help avoid project delays and lost productivity.
• Buying materials - Construction projects require a lot of raw materials upfront. A line of credit allows for these materials to be purchased and costs managed until clients make their payments.
• Managing payroll - During periods of heavy work, construction companies may need to employ more workers. A line of credit can be used to cover these additional payroll costs.
• Expansion - When a company is looking to expand its operations—either by taking on more projects or increasing its physical footprint—a construction line of credit can provide the necessary funds.
• Emergency expenses - In construction, unexpected costs are a given. Whether it's damage that needs repairing, cost overruns, or abrupt changes in project scope, a line of credit can cover these unexpected expenses.
• Marketing and advertising - To attract new clients and bid on larger projects, construction companies often need to invest in marketing and advertising. A line of credit can be used to finance these efforts.

Requirements for a construction line of credit.

Lenders consider three primary factors when evaluating a construction industry line of credit. Here’s what they’ll look for:

• Time in business - Currently, most lenders want borrowing companies to have been in business for at least six months.
• Revenue - Lenders vary but most will be looking for construction businesses that can show gross revenue of at least $50,000 per year.
• Credit score - Currently, lenders in the Lendio network require a personal credit score of at least 600.

Business loans vs. line of credit

In the construction industry, understanding the distinct differences between traditional business loans and a line of credit can help determine which financing option is best suited for your individual business needs.

How to apply for a line of credit for your construction business.

Applying for a line of credit is similar to applying for any other type of financing. You'll need to provide standard business and personal information, along with some additional details specific to your construction industry, such as:

• Copies of contracts or purchase orders from current projects.
• A list of equipment you own or lease.
• Estimated budgets for upcoming projects.
• Financial statements and tax returns for your business.

Conclusion

A line of credit is an essential tool for construction businesses looking to manage cash flow, take advantage of opportunities, and navigate challenges in the ever-growing industry. By understanding the different types of lines of credit available, how to qualify for one, and how to use it effectively, construction companies can ensure they have set themselves up for strong growth.

*The information in this blog is for informational purposes. It should not be used as legal, business, tax, or financial advice. 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 (November 13, 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.

If you’re looking for lower real estate costs and longer loan terms, an SBA 504 loan may be a good option. However, these loans are a bit different from other SBA loans. 

For one thing, the loan is a combination of two loans — a traditional lender covers a portion of the loan, and a Certified Development Company (CDC) covers the rest. Before applying, it’s a good idea to learn how 504 loans work and the pros and cons of taking one out. 

What is an SBA 504 loan?

The SBA’s 504 loan program provides long-term financing for real estate, equipment, and other fixed assets. These loans are partially funded by Certified Development Centers (CDC), certified through the SBA.

The maximum loan amount is $5 million, though there are exceptions for specific energy projects. In this case, a borrower can receive $5.5 million per project for up to three projects not exceeding $16.5 million.

What are 504 loans used for? 

SBA 504 loans are designed to promote business growth and job creation through the purchase of real estate or other long-term assets. They can be used to purchase the following long-term assets:

• Existing real estate or land
• New facilities
• Long-term equipment and machinery
• Updates to new or existing real estate
• The improvement of land, streets, utilities, and parking lots

However, a 504 loan cannot be used for speculative real estate investments, working capital, or inventory. 

How SBA 504 loans work.

To complete an SBA 504 loan, there will be three parties involved:

• A Certified Development Company (CDC) - SBA-certified companies that are authorized to issue 504 loans
• A third-party lender - A bank or credit union
• The borrower - The small business owner

The small business owner applies with a Certified Development Company. The CDC coordinates a two-part mortgage between the borrower, the SBA, and a third-party lender. Fifty percent of the loan will function as a conventional commercial mortgage through a lender such as a bank or credit union. A second mortgage backed by the SBA will cover up to 40% of the loan. The remaining 10% is contributed by the owner as a down payment.

Newer businesses, defined as a business that has been in operation for two years or less, must contribute a 15% down payment. If the loan will be used to purchase or build a limited or special-purpose property, you will also need a higher down payment. The SBA defines special purpose properties as those with a unique design that restricts its use for other purposes such as a bowling alley.

How to apply for an SBA 504 loan?

Applying for a 504 loan is a bit different since the loans are only available through CDCs. You’ll start by finding a CDC location in your area—more than 200 centers are located across the U.S.

Once you’ve found a CDC, you need to get prequalified to see what your business is eligible for. Getting prequalified won’t hurt your credit score, and the process is much less rigorous than the full application process.

Once you’re ready to submit a formal loan application, you can use the 504 Authorization File Library to see what documentation you need. It typically takes the SBA about a week to approve or deny your application, but it could take several months to close on the loan and receive the funds. 

Eligibility requirements for a 504 loan.

You must meet the following requirements to qualify for a 504 loan:

• Operate as a for-profit company 
• Do business in the United States or U.S. territories
• Have a net worth below $15 million
• Have an average net income below $5 million after taxes for the two years prior to your application
• Have hazard insurance on the property being financed

In addition, borrowers have to meet general eligibility standards set by the SBA.

Pros and cons to consider

When evaluating whether a 504 loan is the right choice for you, consider the following pros and cons.

Pros

• Low interest rates - Interest rates on the CDC portion of the loan are limited by the SBA, so they tend to be lower than what most lenders offer. And the interest rate is fixed, so it won’t change throughout the life of the loan. 
• Lengthy repayment terms - SBA 504 loans also come with generous repayment terms. If you purchase equipment, you’ll have a 10-year repayment term. But real estate comes with 10-, 20-, and 25-year repayment terms.
• Low down payment requirements - When you take out a 504 loan, you’re required to pay a 10% down payment which is lower than what most commercial lenders require.  

Cons

• Comes with a personal guarantee - The SBA requires a personal guarantee on all of its loans, including 504 loans. A personal guarantee means the lender has a right to pursue the owner for loan repayment if the business defaults on the loan. 
• Rigorous application process - The SBA is known for its extensive documentation requirements—it could take a couple of months to close on the loan and receive the funds.

Can a SBA 504 loan be used for a change of ownership?

A 504 loan may be used to finance the purchase of eligible, long-term, fixed assets as part of a business acquisition. The purchase of any ineligible assets must be financed through other means such as an SBA 7(a) loan.

SBA 504 loan alternatives

If you’re unsure whether a 504 loan is the best option for your business, there are other options you can consider. Here are a few SBA 504 loan alternatives:

• SBA 7(a) loans - An SBA 7(a) loan is another loan that’s backed by the SBA. These loans are typically used for working capital, equipment, and refinancing business debt. Loans are available for up to $5 million with repayment terms up to 25 years.  
• SBA Express loans - SBA Express loans are available for up to $500,000, and the rates may be slightly higher than other types of SBA loans. But the turnaround time is less than 36 hours, so it’s a good option for anyone looking for faster funding.

The bottom line.

If you want to purchase commercial property or other fixed assets for your business, you should consider an SBA 504 loan. These loans come with a 10% down payment, low rates, and longer repayment terms. 

But if you want to put some of the funds toward working capital needs or refinancing debt, you can look into a 7(a) loan instead. If you’re ready to get prequalified for an SBA loan, you can use Lendio to quickly compare loan offers from multiple lenders.

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.

What does it mean to sell accounts receivable?

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.

Six benefits of selling accounts receivable.

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.

1. It removes the burden from your shoulders.

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!

2. Your credit score won’t be scrutinized.

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.

3. You can actually build your credit score.

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.

4. There’s no need to risk collateral.

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.

5. Money comes fast.

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.

6. There’s no need to worry about repayment.

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.

How to find the right factoring company.

You’ll find a range of quality among factoring companies. Some factors to consider when evaluating a factoring company include:

• Receivables percentage - This is essentially the percentage of the invoice amount that the factoring company will pay you upfront. A higher percentage could mean more cash in hand, but note that this might also come with higher fees.
• Fees - Factoring companies might charge additional fees for their services. These can include processing fees, account setup fees, credit check fees, etc. Be sure to ask for a clear and detailed fee structure.
• Customer service - The quality of customer service is crucial in this business. You'll want to work with a factoring company with a reputation for being responsive, transparent, and easy to work with. Read reviews and consider asking for references from current clients.
• Add-on services - Some factoring companies offer additional services such as credit insurance, online account access, and collection services. These can be beneficial but might also come with extra costs. Evaluate if these add-on services provide value to your specific business needs.

Types of accounts receivable financing.

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.

• Accounts receivable - This is one of the most common versions, also known as factoring. After selling your purchase orders and accounts receivables, you receive upfront cash and also a cut of the payments collected.
• Inventory financing - You can acquire a revolving line of credit for your business with this asset-based form of lending. Your inventory serves as collateral.
• Single invoice factoring - When short-term money is needed, you can advance the payment of a single invoice to increase your cash flow.

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.

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.

Default vs delinquency: Understanding the difference.

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:

1. Unsecured loans 

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.

2. Secured loans 

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.

3. Secured SBA loans 

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.

Additional impacts of a business loan default.

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 default on a business loan: strategies to consider.

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:

1. Improve your cash flow - Financial health of a business largely depends upon its cash flow. Implement strategies to improve cash flow like prompt invoicing, offering discounts for quick payments, and managing inventory efficiently.
2. Regularly monitor your finances - Keep a close eye on your cash flow and financial forecasts. Regular monitoring will help you identify potential issues before they become serious problems.
3. Maintain good relations with your lender - Maintain open lines of communication with your lender. If you foresee any financial hiccups, inform your lender in advance. They may work with you to adjust the payment terms.
4. Consider loan refinancing - If your current loan repayments are becoming difficult to manage, loan refinancing might be an option. It could help you secure lower monthly payments, but be aware that this could mean you'll be paying more in total over a longer period of time.
5. Seek financial advice - If you're struggling to manage your business finances, seek advice from a financial advisor. They can assist you in reviewing your financial situation and suggest ways to manage your debts effectively.

Remember, business financial management requires consistent attention and action. By adopting these strategies, you can significantly reduce the risk of defaulting on your loan.

What to do after your loan goes into default.

If your business loan has already gone into default, don't panic. There are still steps you can take to mitigate the situation:

1. Communicate with your lender - Reach out to your lender immediately. Transparency about your financial situation can lead to a cooperative and understanding approach from the lender. They may provide options for loan restructuring or deferment.
2. Consult a financial advisor - This is a critical step. A financial advisor can guide you on how to navigate this predicament. They may suggest ways to consolidate your debt or advise on possible legal implications.
3. Evaluate your financial situation - Take a hard look at your finances with the goal of freeing up resources to repay your debt. Identify areas where you can cut costs and increase revenue. 
4. Consider selling assets - If you have assets that you don't need and can easily liquidate, consider selling them to pay off your debt.
5. Negotiate with the lender - If your financial situation is dire and there's no way you can pay back the loan in the near future, consider negotiating with the lender. They may agree to reduce the debt or modify the terms to fit your current ability to repay.
6. Explore legal options - If negotiations fail or aren't an option, you might want to explore legal options like bankruptcy. However, this should be your last resort, as it would severely impact your credit score and reputation. Always consult with a legal advisor before choosing this path.

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.

What is invoice factoring? 

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.

What are the benefits of invoice factoring?

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.

How does invoice factoring work? 

Let's delve into the nuts and bolts of how invoice factoring actually functions in the business world.

1. Invoice generation - The first step of invoice factoring starts with your business generating and issuing invoices after delivering products or services to your customers.
2. Selling the invoice: - Next, instead of waiting for your customer to fulfill the invoice payment, you sell your invoice to a factoring company.
3. Factoring company pays - The factoring company reviews the invoice and if approved, pays you a significant percentage (typically 70% to 90%) of the invoice value immediately.
4. Customer payment - The factoring company then takes over the collection process. Your customer is informed about the new payment arrangement, and they will pay the invoice directly to the factoring company.
5. Receiving the remaining balance - Once the customer pays the invoice in full to the factoring company, you'll receive the remaining balance of the invoice, minus the factoring fee.

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.

Factoring example

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.

How much does factoring invoices cost?

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.  

Is factoring invoices a good idea?

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. 

Pros

• Lenders are less concerned about your credit score and company history. This could be a viable option if your business has poor credit or is just starting out. Instead, the lender focuses on the invoice itself and its likelihood of getting paid. 
• Your invoice will get paid quickly. You will receive the cash in seven to 10 days in most cases, giving you a boost to your cash flow to cover operating expenses. 
• You can return to the lender frequently, as you don’t have to worry about requalifying after your invoice gets paid. If you have another invoice that you want to be cashed, you can approach the factoring company a few days later. 
• You don’t need collateral. Your assets aren’t at risk because the lender doesn’t care as much about your company—they’re only focused on the invoice. 

Cons

• The fees can be expensive and will eat away at your profit margins. In the worst-case scenario, you could lose money on the invoice because of the fees. 
• Invoice factoring is typically for B2B companies. If your business works primarily with individuals, you may have a harder time getting funded. 
• Your customer relationship might be at risk. The factoring company will deal with the invoice collection process after they buy it from you. If the company is aggressive and unethical, your customers might not want to work with you again as a result. 
• Your customers could derail your financing. If your customers have a history of late payments or poor credit, then the factoring business might not want to cover your invoice. While the lender doesn’t care about your finances, they’re deeply concerned about your client’s standing.  

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. 

How to qualify for invoice factoring.

To qualify for invoice factoring, certain criteria must be met by businesses.

1. Volume of invoices - Factoring companies typically require a certain minimum amount of invoices. This may be a specific number or a total value.
2. Creditworthy customers - Since the factoring company will collect payment directly from your customers, they must be creditworthy. The factoring company will likely investigate your customers' credit history as part of their decision-making process.
3. B2B operations - Your business typically needs to be a B2B (business-to-business) operation. Factoring companies prefer businesses that issue invoices to other businesses, rather than B2C (business-to-consumer) businesses.
4. Unencumbered invoices - The invoices you want to factor must be free of any legal claims or encumbrances. This means that they cannot be pledged as collateral for another loan.
5. Industry - Some factoring companies only work with specific industries, while others are more flexible. It's important to verify that your business operates in an industry that the factoring company services.
6. Time in business - Some factoring companies require that your business has been operational for a certain length of time, although this is not always the case.

Remember, different factoring companies may have slightly different requirements, so it's essential to research and confirm the criteria for each prospective factoring company.

How to evaluate factoring companies.

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:

1. Recourse vs. non-recourse factoring - Factoring can be either recourse or non-recourse. With recourse factoring, if your customer doesn't pay the invoice, you are responsible for repaying the amount to the factoring company. Non-recourse factoring means the factoring company assumes the risk if the customer fails to pay. While non-recourse factoring may seem more attractive, it usually comes with higher fees due to the increased risk for the factoring company.
2. Spot factoring and single-invoice factoring - Some factoring companies offer spot factoring or single-invoice factoring, allowing you to factor just one invoice at a time. This can be a great option if you need cash flow help only occasionally. However, keep in mind that the fees for spot factoring can be higher than if you commit to factoring a certain volume of invoices.
3. Factoring fees and advance rate - Understand the fees associated with the factoring service. They can range from 1% to 5% of the invoice value, depending on the factoring company and the risk involved. Also, look at the advance rate, which is the percentage of the invoice amount that you receive upfront. A higher advance rate can mean more immediate cash for your business.
4. Contract terms - Look closely at the contract terms. Some factoring companies require long-term contracts or a minimum volume of invoices, while others offer more flexibility.
5. Reputation and customer service - Research the factoring company’s reputation. Read reviews, check their Better Business Bureau rating, and ask for references. Additionally, consider their customer service. You want a factoring company that will respond promptly and professionally to your inquiries.
6. Industry experience - It's beneficial if the factoring company has experience in your industry. They will be more familiar with industry practices and any specific challenges that might come up.

By taking these factors into account, you can better evaluate factoring companies and choose the one that best fits your business's needs.

Invoice factoring vs. invoice financing.

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.

Invoice factoring

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.

Invoice financing

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.

Types of invoice factoring.

There are three types of factoring options you should be aware of:

1. Full-service factoring – The factor assumes full responsibility for and control of collecting the debt, even if the customer never pays the invoice. The factor assumes all the risk. As you might expect, this type of factoring carries with it a higher discount when they purchase your invoices.
2. Recourse factoring – If your customer doesn’t pay the invoice, you are obligated to buy it back. Recourse factoring allows you to sell your invoices at a small discount and is great if your customers have a history of paying on time.
3. Spot factoring – Spot factoring, also called single-invoice factoring, follows the same process as invoice factoring except you are selecting a single outstanding invoice to factor rather than a group of invoices.

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.