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When running a medical practice, cash flow is often a top concern. Waiting for insurance companies to pay can cause significant delays in receiving payments for services provided. This is where medical factoring comes in as a potential solution.

But what exactly is medical factoring? Let's dive into the details.

What is medical factoring?

Simply put, medical factoring is a financial transaction where a medical practice sells its invoices or accounts receivable to a third party at a discounted rate. This third party, known as a factor, then advances the medical practice with immediate cash for these outstanding invoices. In return, the factor collects payment from the insurance companies on behalf of the medical practice.

In other words, medical factoring allows medical practices to receive payment for services rendered immediately, instead of waiting for insurance companies to pay. This can help improve cash flow and allow medical practices to meet their financial obligations in a timely manner.

How does medical factoring work?

Medical factoring involves three parties: the medical practice (also known as the client), the factor, and the insurance companies. The process usually goes as follows:

1. The medical practice provides services to patients and submits claims to insurance companies.
2. The medical practice sells its outstanding invoices or accounts receivable to a factor at a discounted rate.
3. The factor advances the medical practice with immediate cash, typically around 70% to 80% of the total value of the invoices.
4. The factor collects payment from the insurance companies on behalf of the medical practice.
5. Once the insurance companies pay, the factor deducts their fees and returns the remaining amount to the medical practice.
6. The process repeats, as necessary, for ongoing cash flow needs.

Who qualifies for medical factoring?

Medical factoring is not available to all types of medical practices. Factors typically work with healthcare providers, such as hospitals, nursing homes, home health agencies, and physician practices.

In addition to the type of practice, factors also consider the following criteria when determining eligibility:

• The total amount of outstanding invoices
• Average claim size
• Payment terms with insurance companies
• Length of time in business (usually at least one year)
• Creditworthiness of the medical practice

Factors will also assess the collectibility of the invoices and may require a certain percentage to be insured against non-payment. This is known as medical receivables financing.

Benefits of medical factoring.

Medical factoring offers several benefits for medical practices, including:

1. Improved cash flow - By receiving immediate payment for services rendered, medical practices can improve cash flow and meet their financial obligations in a timely manner.
2. No debt - Medical factoring is not considered a loan, so there is no debt incurred by the medical practice. This can be beneficial for practices with existing loans or those looking to avoid taking on additional debt.
3. Flexibility - Medical factoring allows medical practices to choose which invoices to sell, giving them more control over their cash flow.
4. Faster payments - Factors have the resources and expertise to collect payments from insurance companies in a timely manner, which can help medical practices avoid lengthy delays in receiving payments.
5. Reduced administrative burden - By outsourcing the collection of payments, medical practices can save time and resources that would otherwise be spent on managing accounts receivable.

Medical factoring can be a valuable tool for medical practices struggling with cash flow issues. However, it is important to carefully consider the fees and terms associated with different factors before choosing one to work with.

Factoring Medicare and Medicaid claims.

Working with Medicare and Medicaid can often be a complicated dance for medical practices. These government insurance programs are known for their lengthy payment cycles, which can significantly impact a practice's cash flow. But, did you know medical factoring can offer a solution for this too? Absolutely!

With medical factoring, practices can sell their Medicare and Medicaid receivables to a factor, just as they would with private insurance claims. This means you don't have to wait for these programs to remit payment. Instead, you'll get an advance from the factor, typically around 70% to 80% of the claim value, providing immediate cash flow relief.

However, it's essential to be aware that factoring Medicare and Medicaid claims requires a sound understanding of these programs' unique rules and requirements. Factors with experience in these claims have the know-how to navigate the complex landscape and can help your practice receive payments quicker, relieving the financial pressure that comes from slow-paying insurance claims.

While medical factoring can provide an effective solution to the cash flow challenges posed by Medicare and Medicaid's slow payment cycles, it's still important to consider the associated fees and terms to ensure they align with your practice's needs and financial capabilities.

Conclusion

Medical factoring is a financial tool that can provide immediate cash flow relief for medical practices. By selling outstanding invoices at a discounted rate, factors can provide medical practices with immediate funds to meet their financial obligations. However, it's crucial to carefully consider the fees and terms associated with different factors before making a decision.

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

Many entrepreneurs need some type of funding to get their business ideas off the ground. But you might be surprised to learn that nearly 54% of small business owners use personal finances in the startup phase. 

Of course, not everyone has the ability or the desire to self-fund. So, some business owners may consider an alternative way to use their personal assets to their advantage. Instead of using your own cash to fund your business initiative, you could consider using personal assets as collateral to help secure more affordable financing solutions. 
One potential funding option that some small businesses owners use is a home equity loan. Because you use the value in your home as collateral to secure this type of financing, home equity loans are often a cheaper way to borrow money compared with other loan options. Yet there are drawbacks to putting your home equity on the line for your business as well.

How To Use A Home Equity Loan For Your Business

Home equity is the difference between how much you owe on your home (aka your mortgage balance) and its market value. Between 2021 and 2022, accessible homeowner equity in the United States rose by 18%. Many homeowners took advantage of their increasing home values, and, in 2022, home equity loan originations in the U.S. went up by 47%, according to TransUnion. This increase represented the largest volume of home equity loans on record in over a decade. 

Homeowners can use the equity in their homes to secure affordable financing in the form of a second mortgage. Debt consolidation, home improvement projects, and big-ticket purchases are some of the most popular reasons people take out home equity loans (and home equity lines of credit, as well). Yet it’s not uncommon for entrepreneurs to sometimes take advantage of the value they have built up in their homes for business-related goals, too. 

If you want to use a home equity loan as a source of business financing you’ll need to first find a lender that allows you to use the loan proceeds for business purposes. From there, you must satisfy the lender’s qualification requirements to receive a loan. 

Qualifying For A Home Equity Loan

Every lender has different requirements that applicants must satisfy when they apply for financing. But if your goal is to take out a home equity loan for your business, here are some of the general requirements a lender may expect you to meet. 

• A credit score that satisfies its mandatory minimum cutoff point
• Proof of your ability to repay the loan 
• A satisfactory debt-to-income ratio
• A satisfactory loan-to-value ratio (LTV)

Understanding LTV

LTV is a measurement of your property’s value compared to its mortgage amount. Many home equity providers may let you borrow up to 80% of the value of your home, though exact LTV limits can vary. 

Here’s how LTV can impact your borrowing limits with a home equity loan. Imagine you owe $300,000 on a home that appraises for $400,000. In this scenario you have $100,000 worth of equity, but you wouldn’t be able to borrow that amount. If a lender limits LTV to 80%, you might qualify to borrow up to $20,000. The $300,000 you owe on your first mortgage, plus the $20,000 you want to borrow on the second mortgage ($320,000 total), would equal 80% of the current value of the home. 

Pros And Cons Of Using A Home Equity Loan For Your Business

Before you tap into your home equity as a funding source for your business, it’s important to take a close look at the benefits and drawbacks of this type of financing. 

Pros

• Easier approval criteria - Home equity loans tend to be easier to qualify for compared with traditional business loans or SBA loans. 
• Lower interest rates - Because you’re pledging your home as collateral, there’s less risk involved for the lender. This typically translates into lower interest rates for the borrower by extension. 
• Higher loan amount - Depending on how much equity you have available in your home, you might be able to qualify for a larger loan amount with a home equity loan than you could with another source of business financing. 
• Longer repayment period - Home equity loans often feature lengthier repayment periods compared with other business financing options. 

Cons

• Your house at risk - If you’re unable to make the payments on your home equity loan, the lender could foreclose on your home and resell it to recuperate its loss. And with around 65% of small businesses failing by their tenth year in business, according to the U.S. Bureau of Labor Statistics, using a home equity loan to finance your business is a big gamble to take as a small business owner. 
• Good personal credit needed - If you hope to qualify for the most attractive interest rates and borrowing terms, you’ll typically need good personal credit to receive these offers from lenders. Bad personal credit, meanwhile, could lead to a loan denial.
• No business credit building - Taking out a home equity loan won’t help you establish business credit for your company. 

Home Equity Loan Vs. HELOC

When you research home equity loans, you’re sure to come across a similar home-equity based financing product, the home equity line of credit (HELOC). HELOCs are another type of financing that is secured by the equity you have built up in your home. But HELOCs and home equity loans have a few key differences that you’ll want to understand. 

• Fixed vs. variable interest - In general, home equity loans feature fixed interest rates. This provides borrowers with a predictable, unchanging payment amount throughout the life of their loan. In contrast, HELOCs usually have variable interest rates that can go up or down with the market. 
• Lump sum loan amount vs. credit limit - When you take out a home equity loan, you receive a lump sum amount from a lender to use as you see fit (as long as you don’t violate any of the lender’s terms). A HELOC, by comparison, works more like a credit card. With a HELOC, a lender extends a line of credit that you can access up to a certain amount (aka your credit limit). As you repay the debt you owe (plus any interest and fees you owe), you can borrow against the same line of credit again up to the credit limit. 
• Collateral and risk - As a borrower, you pledge the equity in your home to secure both home equity loans and HELOCs. So, if something goes wrong and you fail to repay either type of debt, you risk losing your home to the lender.

Alternatives to Using a Home Equity Loan For Your Business

Using a home equity loan to finance your business could be an affordable way to secure the funding you need. However, it’s also a high-risk decision as a borrower. If you have any doubts about your ability to repay the full debt, it’s not a good idea to put your home on the line for your business. 
The good news is, there are many other types of business loans that could help you accomplish your goals. Even if you’re in need of a first-time business loan for your company, you have numerous options to consider. As you research loan choices, be sure to compare offers from multiple lenders to make sure you find the right fit for your business.

The term ‘mergers and acquisitions’ refers to the combination of two or more companies into a single business entity. This joining-together of multiple companies can take place when two or more businesses form a new legal business entity (aka a merger) or when one company purchases another and absorbs its resources into an existing business entity (aka an acquisition). Acquisitions are the far more common of the two M&A options. 

Whether you’re forming a new entity or preparing to combine an existing business with your own, the M&A process can be complex. But if you execute mergers and acquisitions properly, they could represent a chance to accelerate your company’s growth and add value to your business at a much faster rate than you might be able to accomplish on your own. 

Below is an overview of 10 basic steps in the merger and acquisition process that could set you up for success. You can use the broad details below as an inspiration to conduct deeper research.

1. Acquisition strategy

Before you begin the M&A process, it’s important to define the goals you’re trying to achieve. Write out details about what the ideal business acquisition looks like for your company. For example, how much capital is your company is willing (and able) to invest to acquire another business? What benefits and assets does your business expect to gain in return for purchasing another company?  
Perhaps your business wants to expand its product line or broaden its access to new markets in an effort to boost its profits. Or maybe your company desires to eliminate the competition it’s facing in a particular area. Whatever your acquisition motivations may be, take the time to define them on paper so you’ll know what you’re looking for in advance.

2. Evaluating potential targets.

Next, it’s time to outline the criteria you would like potential acquisition targets to meet. As you make a profile of potential companies you might want to consider for acquisition, here are some key details to consider. 

• Customer base
• Geographic location
• Profit margins
• Company size
• Products and services offered
• Company culture

Once you have a list of companies that meet your criteria, you can perform an initial evaluation of those businesses. From there, you (or a representative on your behalf) can reach out to your top choices to gauge potential interest. 

You’ll also need to decide whether you’re open to the possibility of hostile acquisitions. A hostile acquisition involves making an offer to the company’s shareholders without the knowledge of the company’s board of directors (also known as a tender offer). Hostile acquisitions can be more difficult to navigate in the post-closing phase of the M&A process. So, it’s an important detail to consider.

3. Letter of intent.

If one of your target companies expresses sincere interest in a purchase, the next step in the M&A process is typically to send over a letter of intent (LOI). This document expresses your official interest in moving forward with a merger or acquisition and may provide a summary of your initial proposed offer. 

At this stage most acquiring businesses will also request additional financial details from the target companies with which they’re negotiating, as well. And it’s standard for both parties to sign a confidentiality agreement that agrees not to disclose details of the M&A offer nor the company’s financial information with the public. 

4. Valuation

Once the business you’re interested in acquiring provides its current financial details, you’ll be in a better position to assess the value of the target company. In addition to financial data, you should also consider any external factors that might impact the success of the deal and whether the target company would be a good fit with your existing company culture.

Valuation of a merger or acquisition can be complex. Nonetheless, it’s one of the most important steps in the M&A process. For that reason, many companies seek expert assistance and may hire outside consultants to perform or assist with the valuation process. 

5. Making an offer.

After completing the valuation process, you may be ready to make an initial offer to the shareholders of your target company. The offer you present might propose a cash purchase, stock ownership, or some combination of the two. 

The selling party will take some time to review your M&A offer and may present a counter offer of its own. Negotiations could go back and forth for some time until both parties agree on terms that everyone can accept or the deal falls apart.

6. Due diligence

Assuming negotiations are successful and the selling party accepts your purchase offer, the next step in the M&A process is due diligence. Due diligence is a review period that often lasts 30 to 60 days (sometimes longer). You can (and should) use this review period to confirm that every aspect of the deal is in order before you move into the final steps of purchasing another business. 

As you perform due diligence of a target company, you’ll want to review details such as:

• Financial statements
• Assets, liabilities, and equity
• Products and services
• Key performance indicators
• Customer base
• Human resources
• Company operations
• Etc.

It’s important to leave no stone unturned during the due diligence process. Your goal should be to verify that there are no inconsistencies in the information the seller provided you earlier in the M&A process—the information on which you based your offer. 

If you discover any conflicting details—such as financial statements that don’t match up with the information you were given, for example—it might be cause for an adjustment in your offer. In extreme cases, problems that arise during the due diligence phase might result in a decision to walk away from the transaction altogether.

7. Purchase agreement

Once the due diligence process is complete (and assuming there are no issues), you can begin to draft a purchase agreement. The purchase agreement should detail the cash and/or stock that shareholders of the target company will receive once the sale is complete. The document should also outline when said assets would transfer to the target shareholders. 

It’s important to confirm that your agreement complies with all federal and state regulations and doesn’t violate any antitrust laws. Some M&A transactions may require approval from the state and/or federal government before you can finalize your purchase agreement. So, you may want to consult with an attorney with experience in M&A transactions for guidance. 

8. Closing the deal.

Assuming you receive government approval of your purchase agreement (if it’s necessary), you should be ready to close your M&A transaction. All of the parties involved will need to sign the purchase and sale documents for the deal to be considered closed. At this point, ownership of the target company should officially transfer to the acquiring company.

9. Financing strategy

As an interested M&A buyer, you should begin researching business acquisition loan options long before the ink dries on a purchase agreement with a company you want to buy. However, you will likely finalize the details of your business financing terms after you sign those purchase and sale documents. 

10. Post-closing

After a business acquisition closes, the management teams of the target company (aka the seller) and the acquiring company (aka the buyer) will cooperate together during the transition process. The teams will work to combine the two companies into one—merging finances, organizational structures, company culture, and more. This integration process can take months or even years to facilitate, and you should closely monitor for any potential hiccups along the way. 

Are you ready for your first business acquisition?

Business owners are motivated to consider mergers and acquisitions for a variety of reasons. Whether you’re interested in buying out a business partner, acquiring new technology, removing a competitor from the marketplace, or finding a unique way to expand your company’s geographical footprint, the right M&A deal could present plenty of potential benefits. 

At the same time, it’s important to approach the M&A process with eyes wide open to the possible downsides as well. Acquisitions and mergers can be time-consuming and often take months and sometimes years to complete. Not only can the M&A process be tedious and time-consuming, it involves a significant amount of risk as well. More than two-thirds of mergers and acquisitions fall short of producing their desired results according to PwC. 

Nonetheless, the right M&A deals could represent an opportunity to grow and expand your business at a faster rate. Consider the triumphs of famous acquisitions like Google and Android, Disney and Marvel, and Exxon and Mobil as examples. Analysts also point out that although M&A activity tends to decrease during seasons of market volatility, those times can often bring forth attractive value propositions for deal makers who are willing to take a risk. 

So, if you think you’re ready for your first business acquisition, be sure to do your homework. Take the time to learn from the examples of other mergers and acquisitions and review the guide above to help improve your odds of success. 

Key Takeaways on Factor Rates

• A factor rate is a simple calculation to indicate the total amount that a borrower will pay back on certain types of business financing. 

• To calculate payback, multiply the total borrowed by the factor rate (i.e., $10,000 borrowed x 1.5 factor rate = $15,000 total payback).

• Factor rates are used primarily in short-turnaround, higher-risk financing, like business cash advances.

What Is a Factor Rate?

A factor rate represents the total payback amount of specific types of business financing. Factor rates are expressed as a decimal number (ex: 1.5) and are typically used for business cash advances and other, similar business financing options. 

While both factor rates and interest rates help determine the cost of money borrowed, they’re not the same. 

• A factor rate is applied only to the original amount borrowed and acts as a flat fee for borrowing, which is then incorporated into the loan repayment schedule. 
• Interest rates “compound,” which means the amount of interest owed is calculated based on the remaining balance. The amount paid in interest varies somewhat through the life of the loan.

How Are Factor Rates Calculated?

When a business borrows, it owes the principal amount and whatever the lender charges to borrow that money. The factor rate is part of the formula that helps determine the total amount the borrower will pay back.

Borrowed Amount x Factor Rate = Total Payback Amount

For example, if a business takes out a $10,000 short-term small business loan (borrowed amount) with a factor rate of 1.3, the total repayment would be ($10,000 x 1.3) = $13,000 which means you’ll pay back a total of $13,000.

What’s the Difference Between Interest Rate and Factor Rate?

Interest rates and factor rates both relate to the amount a lender charges to borrow money. However, interest rates and factor rates differ as follows:

Factor Rates and Interest Rates are Expressed Differently

The most obvious difference between interest rates and factor rates is the way lenders display them. Factor rates are expressed as decimals (1.5) and interest rates as percentages (50%).

Factor Rates Don’t Change

One key difference between interest rates and factor rates for business loans is how—or if—they change. Factor rates are fixed and do not fluctuate during the life of the loan. Borrowers know up front exactly how much they’ll pay back, whether they pay early or on time.

Interest rates, however, can be either fixed or variable. When borrowing money with a variable interest rate such as a 10-year SBA loan, the variable interest rate will fluctuate as the prime interest rate changes. Additionally, total interest paid can be reduced through early payoff.

Compounding Interest Rates

Factor rates are static and based only on the amount borrowed.

Interest rates on business loans may be compounded daily or monthly or at other pre-disclosed intervals. Compounded interest is calculated by taking the percentage rate and dividing it by the number of times it “compounds.” For example, an annual interest rate of 10% that compounds daily would compound 365 times each year.

Compounded interest is calculated based on the total amount owed rather than the initial amount borrowed. So a $200,000 loan at 10% annual interest compounded daily would look like 

• Day 1: $200,000 owed
• Day 2: $200,000 + ($200,000 x .10/365) = $200,054 owed
• Day 3: $200,054 + ($200,054 x .10/365) = $200,108 owed

Remember, interest charges are based on the total amount owed. When a payment is made, total owed is reduced, which also reduces the amount of interest charged.

What Types of Business Financing Products Use Factor Rates?

Factor rates are often associated with less traditional, shorter-term, higher-risk financing, including the following:

Cash Advance (Business Cash Advance and Merchant Cash Advance)

Both business cash advances and merchant cash advances are common examples of financing products that use a factor rate. In both cases, lenders “advance” a business money based on future, anticipated income.

Business cash advances are tied to the overall financial performance of a business. Merchant cash advances are linked solely to credit card deposits. Both are paid back as a portion of daily sales, although a business cash advance’s specific repayment amount is calculated upfront and based on a “fixed daily percentage.” Payments can be structured as daily, weekly, or through other arrangements and are almost exclusively processed through an automated withdrawal of funds. 

Other Short-Term Business Loans

Other “short-term business loans” may use factor rates, if that’s how the lender structures the financing. Note, however, that financing will not use both a factor rate and an interest rate. 

Because the total payback amount can vary between factor rates, interest rates, and other repayment options, it’s important to fully understand the conditions of a short-term business loan before signing. Work with an expert, like a Lendio funding manager, to understand all of the terms, conditions, and payback amounts of each option presented.

Does Business Loans Charge an Interest Rate on Top of a Factor Rate?

Short answer: no. Business financing will not charge an interest rate on top of a factor rate. 

Note that the money you borrow with the help of a financing platform like Lendio, where a single application delivers your information to more than 75 different lenders, is required by law, in select states, to disclose all costs and fees upfront so you’re never wondering what you’ll pay.

If you have questions about financing offered through Lendio, please talk to your Account Executive, who can help you sort through the details, the overall cost to borrow, repayment schedules, and other information.

As a small business owner, knowing how to raise capital for your business is crucial to its longevity. Whether you need money for operating expenses or are looking to expand, there are many reasons you might need access to additional capital. 

If you're a small business owner, here are some capital options you may want to consider. 

Bank Loans

Bank loans and alternative business loans are both common ways for companies to raise capital. In fact, many businesses utilize business loans even if they have plenty of cash. Either they want to keep a certain level of liquidity for potential opportunities or they want to be prepared for a possible financial emergency. 

There are a variety of business loans companies can use:

SBA Loans

SBA loans are loans disbursed by financial institutions, but are insured by the U.S. government. Because of this, they come with some of the lowest rates in the industry. There are a few different types of SBA loans—such as microloans, 7(a) loans, and 504 loans—and each has a unique purpose. If you’re looking for working capital, a 7(a) loan may be the one you need. 

Term Loans

Term loans may be what you think of when you think of a business loan. Term loans are deposited in one lump sum and monthly payments are made until the loan matures. The money can be used for a variety of purposes, but how much you can borrow will depend on your creditworthiness. 

Equipment Loans

Equipment loans are unique in that they are used specifically to purchase machinery.  

Business Cash Advances

Business cash advances provide lump sums of money that are repaid in daily or weekly installments as either a percentage of credit card sales or as a fixed amount withdrawn from the business’s bank account. 

Accounts Receivable Financing

With accounts receivable financing, unpaid invoices are sold to a third party who pays up to 80% of the invoice’s value. That company then works on collecting payment from the customer(s). Once the payment is received, any remaining amount is distributed back to the company minus any fees. Invoice financing is a smart way to obtain working capital that is necessary for future projects or orders. 

Business Lines of Credit

A business line of credit is very similar to a credit card in that it is a revolving account. As the principal is paid down, those funds once again become available. It differs from a business credit card in that the borrowing amounts are typically much higher and the interest rates are usually much lower. However, unlike credit cards, business lines of credit have draw periods where funds are available, but many lending institutions will offer the chance to renew the line of credit if there were no issues with repayment. 

Because there are so many options on the market, there are business loans to suit just about any small business regardless of their credit score, income, or asset situation. 

Equity Financing

Equity financing is when a company sells ownership shares in exchange for capital. While a percentage of future profits go to the new owners, the benefit is that the company does not have to take on debt. Sometimes business owners offer partnerships, too, as part of their equity offer. When they do, they may not necessarily be seeking only capital—they may also be seeking that person’s expertise and knowledge. 

Companies looking to sell company equity will want to work through venture capitalists or angel investors, but another option is to sell completely to a private equity firm. Private equity vs venture capital boils down to how much of your company you’re willing to sell.  

Depending on the size of your company, you may even consider going public and having an initial public offering; however, to have a successful IPO, your company will need to meet certain financial requirements and show strong growth potential.

Crowdfunding

There are a few different types of crowdfunding, and, yes, the premise behind each is similar to the categories mentioned above. However, crowdfunding should be thought of as its own thing, because of the potential to reach a much bigger market. 

As a business owner, you can do the following types of crowdfunding:

• Donation-based crowdfunding
• Rewards-based crowdfunding
• Equity-based crowdfunding
• Debt-based crowdfunding

Donation-based crowdfunding is often utilized by individuals and nonprofits, but small business owners can take advantage of it, too. The benefit to doing a donation-based campaign is that any money raised is not taxed by the IRS. Of course, it can be difficult to convince donors to contribute to your campaign if your business is not philanthropic by nature.

Unlike donation-based crowdfunding, rewards-based crowdfunding is taxable by the IRS because there is an exchange of goods or services for money. However, if done correctly, it can be a great way to raise money and market your business—especially if your business is partially or 100% online.      

Equity based crowdfunding is when you sell company equity through crowd-based platforms. While you are giving up a percentage of future profits, the benefit of equity based crowdfunding is that you can reach a wider market of investors than you could through traditional equity financing. Plus, you’ll still be the sole decision maker and likely won’t have to communicate one-on-one with any investors.

Debt-based crowdfunding is essentially P2P (peer to peer) lending. It can be a good alternative to traditional bank loans if you’ve had trouble getting a business loan in the past. The downside is that you will likely have less favorable loan terms and higher interest rates and fees. 

Grants

Grants are available to small business owners, but they are extremely competitive. Unlike loans, grants do not have to be repaid, nor does any equity have to be relinquished. 

Consider looking for grants offered by your local community or state first, as well as any corporate grants that may be specific to your area. Keep track of which grants renew and when. Just because you were denied once doesn’t mean you will be denied indefinitely. 

Friends and Family

If possible, consider seeking the financial support of friends and family. Many successful small businesses have gotten the jumpstart they needed from personal relationships. To successfully do this, disclose why you need the money, how you intend to use it, and when they can expect to be paid back. To put them more at ease, you may even want to have legal paperwork prepared. 

Final Thoughts

Many small businesses don’t simply rely on one method to raise capital. To fulfill your current and future capital needs, consider a combination of the options discussed above. 
Compare business loan options today at Lendio. 

Buying into an existing business as a partner can be an incredible opportunity for both the new partner and the existing business. In addition to capital, the new partner may bring knowledge and expertise currently lacking in the company. In many situations, both sides see a good return when the pairing is right.  

How do you become a business partner?

To become a business partner, you must purchase company equity. The aim is not to buy a business outright, only a portion or percentage of it. To do this, you'll either need to use cash, take out a business loan, or do a combination of the two. 

Once you’re a partner, any future profits will be shared with you as a new part-owner. How much you receive will depend on your ownership percentage.

Why do businesses look for new partners?

Businesses open to new partners sometimes prefer selling equity rather than taking on additional debt, because the money they receive from the new partner doesn’t have to be paid back. However, the partner will receive a return on their investment via a percentage of any profits.

Sometimes companies are not able to qualify for the loan they need, or maybe the current owners are looking for someone who has a particular skill set that might help their business grow. Another option is that one of the partners is looking for an exit. Before you buy out a partner. make sure you fully understand why he or she wants to be bought out.

What is a partnership agreement?

A partnership agreement is needed when a new partner buys equity in the business. It outlines how profits and losses will be shared, what responsibilities and duties each owner assumes, and the overall terms between all parties. It’s similar to a buy-sell agreement, but a buy-sell agreement only establishes when one owner can buy out another.  

When becoming a partner, it’s important to fully understand both the partnership agreement and the buy-sell agreement. 

Can you use a loan to become a business partner?

Yes, you can use a loan to purchase company equity and become a business partner. You'll likely need to secure the loan with a personal asset, such as real estate, stocks and bonds, or company assets from a business you already own. Depending on the loan amount and the value of your assets, you may have to collateralize multiple assets to secure the loan.

What types of loans can be used to purchase company equity?

There are many ways to purchase company equity. Common options include:

• Traditional bank loan - If you have a strong credit score, a traditional bank loan can be used to purchase a partnership. Unlike the SBA loan, you don’t have to currently be a small business owner. 
• Seller financing - Seller financing is when the seller offers the capital needed to buy them out of their business. Instead of loaning money in the traditional manner, the seller is paid through monthly payments. Loan terms vary, and are whatever both parties agree to. 

Final thoughts

When purchasing equity to become a business partner, it’s important to understand why the company is looking for a new partner and what their current financials are. Complete understanding of the partnership agreement is also necessary. If everything looks good, a business acquisition loan may bring in a great return on your investment.
Learn more about business acquisition loans today at Lendio.

Researching how to get a government loan to start a business? Or have you heard that government business loans have some of the best rates? Government business loans do come with competitive rates, and some of them can even be used to cover startup costs. In fact, a government business startup loan may be the capital solution you’ve been looking for. 

Learn the different types of government business startup loans, their pros and cons, and things you’ll want to consider when searching for the best loan product for your business.

How Do Government Loans Work?

A government loan works the same as any other type of loan. First, the borrower must meet the eligibility requirements in order to qualify for the loan. Some loans have more requirements than others—meaning the borrower might have to work and conduct business in a certain location or have been in business for a certain minimum amount of time. Once the application is submitted, an underwriter reviews the application to determine if the borrower qualifies.

Interest and Fees

All government loans charge interest and have fees. Interest rates are usually capped at a certain percentage. SBA loans, for example, have maximum interest rates lenders can charge borrowers, which is why they are some of the most sought-after business loans on the market. 

Collateral Requirements

Depending on the loan product, collateral may be required to secure the loan. If there are not enough assets within the business itself, lenders may require that the borrower sign a personal guarantee and pledge any of their personal assets. 

Most lenders will not accept assets that have already been collateralized for another loan (such as a house for a mortgage). Lenders that will accept those types of assets likely already have a working relationship with the borrower and will still charge higher interest. Typically, lenders do not like to be the second lender in line for collateral, because it means they will be less likely to recoup any losses if the borrower defaults on payments. When a borrower defaults on one loan, they are more likely to default on another. 

Repayment

Like other loans, government loans have set repayment periods and require monthly payments to keep the account current. The length of the repayment period varies with the loan product and can range from a few months to 25 years. The longer the repayment period, however, the more the borrower will pay in interest over time. 

Loan Funds

One last thing to consider is that many government loans have specific purposes the money must be used for. Some are intended for large asset purchases and construction costs, while others are to be used solely for working capital, which covers any expense that helps or enables a business to generate revenue).

What Are The Different Types Of Government Business Loans?

There are many types of government business loans. Some of the more popular ones include:

SBA Loans

The Small Business Administration (SBA) is a government agency created to help provide resources to support small business growth and development. There are a variety of SBA loans on the market that may help your business. Borrowers often prefer SBA loans because of the favorable interest rates and repayment periods. 

USDA Business Loans

The United States Department of Agriculture has a few different types of loan programs aimed at helping businesses in rural areas. For example, there is the Business and Industry (B&I) Loan and the Rural Energy for America (REAP) loan. B&I can be used for working capital, construction, and business acquisitions, while REAP is intended to help companies invest in renewable energy. 

Community Development Financial Institution (CFDI) Loans

CDFI loans are intended for both individuals and small businesses operating in economically distressed areas. They are generally given by nonprofits to borrowers who are unable to get loans through traditional lenders.  

Export-Import Bank Loans

Shortened to EXIM, export-import loans can be used for working capital, but can also be used to cover both exporting and importing costs for both raw materials and finished products. 

State and Local Government Loans

Local banks, credit unions, and government websites may offer loans for small businesses. Not all locations offer them, so borrowers will need to conduct some research to see if there are any opportunities in their area. 

Note: Business grants may also be an option. Just keep in mind that you will be competing with other business owners for the same money, and there will be stricter eligibility requirements you’ll have to meet to qualify. 

How Many Different Types Of SBA Loans Are There? 

The Small Business Administration offers a few different types of SBA loans business owners may want to consider. Each comes with its own terms, eligibility requirements, and loan amounts. 

• 7(a) loan - The most popular loan option for small businesses because the borrowed money can be used for a variety of purposes, such as working capital, refinancing, and purchasing necessary equipment 
• Microloan - For small capital needs up to $50,000 to help businesses get established or expand
• 504 loan - For businesses making large asset purchases, with loan amounts and repayment periods greater than those of other loan products 
• EIDL - Low-interest loans for businesses affected by COVID-19 and natural disasters 
• SBA Express - Offers loans up to $350,000 for approved borrowers, with an easier and faster application process compared to other SBA loans
• International trade loan - Intended for businesses that are expanding into foreign markets 

What Are The Pros And Cons Of SBA Loans?

Overall, despite their cons, SBA loans are the loan of choice for many business owners. In general, all loan products have drawbacks. The trick is finding a loan with the strongest benefit. 

Government business loans can help businesses cover startup costs and save money in interest. The key thing to consider is that the application and review process can take longer than a standard business loan, and the eligibility requirements may be more difficult to meet. However, if you are not in a financial emergency, the extra time may be well worth your while because of the money you’ll save. 

Learn more about SBA loans today with Lendio. 

In today's fast-paced business world, companies are always looking for ways to access capital quickly and efficiently. One option that has become increasingly popular is invoice financing. This lending method allows companies to use their outstanding invoices as collateral to secure a loan, providing them with the funds they need to cover operating expenses, payroll, and other costs associated with running a business. In this article, we'll take a closer look at how invoice financing works, its requirements, costs, pros and cons, and how it differs from invoice factoring.

What is invoice financing?

Invoice financing, also called accounts receivable financing, is a lending method in which a company uses its outstanding invoices as collateral to secure a loan. Normally, lenders require some sort of company asset to act as collateral. However, with invoice financing, unpaid invoices are the asset. This process is usually faster than other small business loans, both in terms of application and receipt of funds.

One thing businesses should keep in mind about invoice financing is that the full invoice amount is not given. While it depends on the lender, companies are typically only able to borrow up to 80% of their accounts receivables. 

Invoice financing requirements

To qualify for invoice financing, businesses need to meet a set of specific criteria. First and foremost, your business must have outstanding invoices from reputable clients, as these will act as your collateral. Generally, lenders prefer invoices due to be paid within 90 days.

Second, it's crucial that your business has a solid track record of successful transactions with its clients. High levels of disputes or returns can raise red flags for lenders. In other words, a history of strong customer relationships can make your business more attractive to lenders.

Third, many lenders also require a minimum monthly revenue of $10,000 to qualify, ensuring a steady cash flow and loan repayment capability.

Finally, industry preference is also another factor that lenders consider. Some sectors are more favorable to lenders due to the predictability of their cash flow and lower risk levels. However, this varies by lender and it's always best to check with your potential lender about their preferred industries.

Remember, each lender may have their own set of requirements, so be sure to do your research and understand the terms before you apply.

How invoice financing works.

Here's what to expect with invoice financing. Once approved, you'll receive a cash advance based on a percentage of the outstanding invoice (usually around 80%). You can use those funds for whatever operating expenses you need, such as payroll or inventory. When your customer pays the outstanding invoice, you pay the lender back along with the agreed-upon fee.

Invoice financing example

Let's explore a concrete example to better understand the process of invoice financing:

Imagine you own a small tech company, "Bright Future Tech," and you've recently completed a large project for one of your clients. The client is happy with the work, but they operate on a net 60 payment term. That means you won't see the payment for two months, but you have bills that need to be paid now.

Bright Future Tech has an outstanding invoice of $100,000 from the client. You approach a lender for invoice financing. The lender agrees to provide you with 80% of the outstanding invoice amount, which is $80,000. This cash advance helps you to manage your immediate operational costs.

After two months, when your client pays the invoice in full, you then repay the lender the $80,000 you received upfront, plus any fees associated with the loan. In the end, invoice financing has enabled your business to maintain a healthy cash flow, despite the lengthy payment terms of your clients.

Costs associated with invoice financing.

You do have to pay the invoice financing company for getting the advance. Instead of a factoring fee (as you'd pay with invoice factoring), you'll pay an ongoing percentage of the invoice amount until your customer pays.

For instance, your financing terms might have you pay 3% of the outstanding invoice every month. On a $10,000 invoice, that would be $300 per month. These costs can quickly add up if your customer is extremely late in paying.

Invoice financing pros and cons

Companies in need of working capital—or who need help financing a purchase order—may find their borrowing needs met with invoice financing. However, there are other loan products on the market that may be a better fit. When choosing an invoice financing lender, make sure to compare its rates and fees with its competitors to ensure you get the best one. 

Ready to get paid sooner? Apply for accounts receivable financing today with Lendio.