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A commercial loan is a type of financing available to businesses. General commercial loans can be used for any business-related expense, from payroll costs to expanding to a new location. There are also specialized loans used for specific purposes, like buying equipment or acquiring another business.  

Read on to learn more about how commercial loans work and how to choose a financing structure that best meets your business needs.

Commercial Loan Definition

So what is commercial financing? It's when a business borrows money from a financial institution. Here's how commercial loans work. The business receives a lump sum to be used at the owner's discretion. The funds are then repaid over time according to the conditions of the loan agreement. The lender charges interest that is added to the loan balance and included in the payments. Depending on the type of commercial loan, payments could be made daily, weekly, or monthly. 

In order to qualify for a commercial loan, businesses apply using their credit scores (often including the owner's personal credit score), revenue, and time in business. Different lenders may have different requirements and request additional types of documentation. They may also request that you offer some type of asset as collateral for the loan. 

4 Types of Commercial Loans

These are four of the most common types of commercial loans to consider as a starting point for your business financing needs.

SBA Loans

Government-backed SBA loans help connect businesses with financing opportunities for a number of different purposes. These types of loans are notorious for their lengthy application review periods, which can stretch out several months. Loan amounts go as high as $5 million, with competitive interest rates and repayment terms that can last anywhere between 10 and 30 years. Most SBA loan programs also require a 20% down payment on the loan so that you're heavily invested in the success of the business. 

There are several different types of SBA loans to consider. A 7(a) loan is the most common one and the funds can be used for general purposes. Smaller 7(a) loans (under $25,000) don't require any collateral. SBA 504 loans are used to purchase a specific asset, like a building or machinery. 

Term Loan

Term loans can either be short-term (lasting less than two years) or long-term (lasting as long as 25 years). In most cases, these loans come with a fixed interest rate and consistent monthly payments so you know exactly what you'll pay back each month. If you use an online lender, you can often get approved and funded in just a couple of business days, making these an attractive option for businesses needing fast cash. A term loan can also help you better predict cash flow since the payments are consistent each month. 

The application process varies depending on the lender. A traditional financial institution, like a bank, may have a longer review process compared to an online lender. Also find out how long it takes to receive funds after your application is approved.

Commercial Real Estate Loan

Also called a commercial mortgage, a commercial real estate loan is designed to help your business purchase property. This could be an office building, retail store, warehouse, manufacturing facility, restaurant space, or other type of real estate. Loan amounts are typically large and the term length is extended to make payments more affordable. 

In addition to purchasing a property for your business, you can also use a commercial real estate loan to refinance the terms of an existing commercial mortgage or renovate a property you already own. If you dream of owning or expanding space for your company, a commercial real estate loan can help you do that. 

Business Line of Credit

Rather than giving your business a one-time injection of capital, a business line of credit gives you access to credit when you need it over a period of one to two years. It acts like a credit card in that you can draw on your credit line as needed and pay interest on your balance, rather than the entire available amount. 

A business line of credit can be an ideal type of commercial financing in a number of scenarios. For starters, a line of credit can be used for financial emergencies, like broken equipment that needs to be replaced. It can also help cover ongoing expenses, like payroll, especially if your revenue is inconsistent throughout the year. Finally, a line of credit gives you agility to act on opportunities as they arise, without having to apply and wait for financing in the future.

Pros of Using a Commercial Loan

Business loans can be a great way to manage and grow your company. Here are some of the primary benefits of using a commercial loan.

Access to capital: When your business’ current cash flow is not enough to get through slow periods or ramp up for busy seasons, getting a commercial loan gives them access to the capital to do so. And because there are so many different types of business loans out there, you can find one that's structured for your business needs. 

Faster growth: Taking on debt doesn't automatically mean your business is in trouble. In fact, many businesses often use debt to accelerate growth and take advantage of new opportunities to expand.

Retain full ownership: There are many ways to raise funds for your company, including taking on external investors. But with a commercial loan, you get to retain full ownership of your company.

Cons of Using a Commercial Loan

There are downsides to consider as well before you decide to apply for a commercial loan. 

Application process: The application process can be intimidating, and there's no guarantee you'll get approved. Be prepared to put in a little elbow grease. But if your business financials are already in order, then you may not have much to worry about. 

Interest and Fees: There's no such thing as free money, and you'll have to pay interest and fees on your borrowed funds. Weigh the benefits you expect to receive and make sure you can afford the payment terms, even in a worst-case scenario. 
Cash flow crunch: Making loan payments can be tough on your cash flow. Consider all the obstacles your business may face and how well you could maintain those payments before making a decision on your business loan.

Does commercial financing sound like a good fit for your business?

Apply for a small business loan and compare offers with Lendio.

Re-entering the workforce can be difficult after serving jail time as a convicted felon. Not only do felons lose their ability to vote and serve on a jury, they can also have difficulty finding a job to support a new positive lifestyle. Starting a business may be an opportunity to start fresh, but there may be some roadblocks when it comes to scaling growth. Understanding small business loan opportunities for felons can make the path to successful financing much easier.

Small business loans for felons.

Felons will have a harder time finding loans they are eligible for, but there are still some limited options available through the SBA.

SBA loans

SBA loans are backed by the Small Business Administration, which incentivizes lenders to work with qualified borrowers. Felons aren’t automatically denied, but there is an additional form you’ll have to fill out to be evaluated by your lender. Keep in mind that not all lenders who offer SBA loans will work with felons, and those who do will have very strict requirements.  

Qualification questions include if the applicant is currently facing charges (an automatic disqualification), if they have been arrested in the past six months, convicted of or pled guilty or no contest to a crime, or are currently on parole or probation. The applicant is then required to provide details regarding the charges and sentencing along with documentation that all fines and court conditions have been met.

There are a variety of SBA loans to explore, which can be used for things like purchasing real estate, buying equipment, or expanding or purchasing a new business. Most SBA loans are designed for established businesses rather than start-ups. 

Grants & other financial resources for felons.

In addition to taking out a business loan, it’s also worth exploring alternative options to raise capital for your company, including grants, investors, and crowdfunding.

Federal grants

Businesses owned by convicted felons are eligible for federal grants from Grants.gov. That’s because eligibility is based on the business’s background and proposals, not personal finances or history. Business grants are different from loans in that they don’t need to be repaid. Grants are listed on behalf of federal agencies, like the National Institutes of Health or the Environmental Protection Agency, to perform work or research on their behalf.

State grants

There are a number of state resources available through individual states. Most states have an economic development administration that receives federal grant funding to pass on to small business owners. Some of these may be specific to regional areas; for instance, you may find funding opportunities if your company operates in a designated rural region.

Entrepreneurship programs

Large corporations often sponsor programs to help launch and scale emerging businesses. They might provide grant funding or provide free products and services. FedEx, for example, hosts an annual program in which the winners are awarded a cash grant, plus services from FedEx. 

Angel investors

Angel investors are private individuals who use their own wealth to fund companies, often in exchange for equity. They’re currently the largest source of business capital in the U.S. And while you may need to disclose your criminal history as part of your pitch, they’re typically more focused on your business concept and growth opportunities than your background. There are several online platforms that connect entrepreneurs with angel investors, and of course, it’s also good to network locally. 

Crowdfunding

Two of the most common types of crowdfunding campaigns are rewards-based crowdfunding and equity crowdfunding. With the first option, you post a business idea and seek funding from individuals in exchange for a tiered system of rewards. With equity crowdfunding, you take money in exchange for partial ownership of the company. Most crowdfunding platforms require you to set a financial goal and won’t release any funds unless contributions reach that amount.

Resources for felons

HelpforFelons.org

HelpforFelons provides information and resources on how to find a job, housing, or start your own business when you have a criminal record.

Inmates to Entrepreneurs

Inmates to Entrepreneurs offers a free eight-week course to anyone with a criminal background who is interested in starting their own business.

freegrantsforfelons.org

This online resource provides information on housing, education, and jobs for felons.

If you’re looking to make a significant investment in your business, you might consider applying for a long-term business loan. These loans come with low interest rates and fixed repayment terms, so they’re a stable form of financing for companies of all sizes.

However, it’s important to understand the different types of long-term loans and long term financing available and the pros and cons of taking one out. This article will serve as a guide to finding and applying for a long-term business loan. 

What Are Long-Term Business Loans?

A long-term business loan is a loan you’ll repay over a specific period of time. The average repayment term lasts between 5 and 7 years, but some loans come with terms up to 25 years. 

Long-term loans are typically used to finance a major investment in the company—for example, for the purchase of real estate or equipment, or the hiring of additional employees. When you take out a long-term business loan, you’ll receive the money for such a purchase in one lump-sum payment, which you’ll then repay over time. 

These loans are usually best for established businesses with good credit history. And the application process can be quite lengthy—when you apply, you can expect to submit the following documentation:

• Social Security Number 
• Personal and business tax returns
• Personal and business bank statements
• Employer Identification Number (EIN)
• Proof of business registration
• Business plan
• Profit and loss statement
• Cash flow statement
• Balance sheet

Long-Term vs. Short-Term Business Loans

Occasionally, your business may need a quick infusion of cash to help you get through payroll or manage your working capital needs. In this scenario, it may make sense to apply for a short-term business loan.

The biggest difference between short-term and long-term business loans is that long-term loans are designed for long-term investments. In comparison, short-term loans can help you meet your immediate financial needs. 

Short-term business loans are usually available in smaller amounts and have to be repaid in less than a year. These loans also typically come with higher interest rates than long-term business loans.

However, the application and approval process is less extensive than that of long-term loans. And it may be easier for startups and borrowers with poor credit to qualify for a short-term business loan. 

Types of Long-Term Business Loans

There are several different types of long-term small business loans available depending on your business’s needs. Here are four different loan types you can choose from. 

SBA loans

An SBA loan is a business loan that’s backed by the Small Business Administration (SBA). Since the SBA partially guarantees the loan, this lowers some of the risk to lenders. 

And these loans often come with low interest rates and lengthy repayment terms. SBA loans come in all shapes and sizes, with loan amounts between $500 and $5.5 million and repayment terms between 5 and 25 years. 

However, SBA loans can be difficult to qualify for and the approval process can take a long time. If you decide to go this route, you should expect to provide your lender with extensive paperwork. And it may take several months for you to receive the funding for your loan.  

Bank Loans

Another option is to apply for a term loan through a bank. Like SBA loans, bank loans come with low interest rates and lengthy repayment terms, making them an affordable way for small businesses to get access to financing. 

However, these loans are best for established businesses with excellent credit history. You can expect to provide a lot of documentation when you apply, and the approval process will take longer than other types of loans. 

Equipment Financing

Equipment financing is a form of business financing that’s used to purchase business-related equipment or machinery. These loans can be a good option for heavy equipment needs, like restaurants and manufacturing and construction firms.

This business financing allows you to purchase the expensive equipment you need, and break the cost into manageable monthly payments. And since the equipment serves as collateral for the loan, equipment financing may be easier to qualify for. 

Commercial Real Estate Loans

A commercial real estate loan is a loan used to purchase property for your business, like an office, warehouse, or retail location. These loans are offered by the SBA, banks, credit unions, and online lenders. 

Commercial real estate loans can be used to purchase new property, renovate an existing location, or even refinance your real estate debt. These loans are available up to $2 million, and usually come with repayment terms between 5 and 20 years. 

Pros and Cons of Long-Term Business Loans

A long-term business loan can help you finance a major business investment, but it isn’t the best choice for everyone. It’s important to understand the pros and cons of these loans before applying. 

Pros

• These loans typically come with lower interest rates and fixed payment terms.
• Long-term business loans come with low fees compared to other types of loans.
• Most lenders don’t put any restrictions on how you can spend the funds.
• These loans can help you build your business credit. 

Cons

• These loans come with a lengthy approval process, especially if you apply for an SBA loan.
• It may be hard for borrowers with poor credit to qualify for a long-term business loan.
• Lenders usually prefer to give long-term business loans to established businesses.
• You may be required to put down some type of collateral to secure the loan. 

How to Qualify for a Long-Term Business Loan

Here are the four steps you’ll take to apply for a small business loan.

Decide Which Type of Loan You Need

There are several types of long-term business loans you can choose from. The one that’s best for you will depend on where you’re at in your business and what you plan to use the funds for.

For instance, if you’re an established business and are looking for low rates and flexible repayment terms, you may want to consider a bank or SBA loan. If you need to purchase equipment or large machinery, then equipment financing may be the right choice for you.  

Start the Application Process

Once you know what type of loan you need, you can start the application process. Depending on the type of lender you work with, you’ll either complete this online or in-person. 

When you apply, the lender will ask for some basic information about you and your business. They will also check your credit score to determine how risky you are as a borrower. A low credit score doesn’t necessarily rule you out from qualifying for a business loan, but you may receive a higher interest rate. 

Provide the Necessary Documentation

Next, you’ll have to go through the approval process and provide the necessary documentation. The exact documents required and timeline for approval will depend on the lender you’re working with. 

For instance, online lenders tend to offer a shorter approval process and faster funding. Whereas if you’re applying with a bank or the SBA, you can expect the approval and funding process to take much longer. 

Compare Your Options 

And finally, you don’t want to just take the first business loan that’s offered to you—it’s a good idea to compare loan offers from several different lenders. Comparing your options will help you find the loan with the best rates and terms. You should also consider any fees those lenders charge, like origination fees, late fees, and prepayment penalties.

Comparing your loan offers is easier when you use a service like Lendio. With Lendio, you apply for a loan once and receive offers from multiple lenders. 

The Bottom Line

A long-term business loan is a loan that’s repaid over a specific period of time. You’ll receive a one-time lump sum payment, which you can use to invest in long-term business growth. 

If you’re looking for a way to compare small business loan options, you may want to consider using Lendio. We offer a variety of small business loans, including SBA loans, term loans, cash advances, and much more. 

We offer a secure online application process, and you’ll receive loan options from our network of over 75 lenders. This will help you find the right business loan for your situation. 

What about your credit score? Whether you apply for financing for your small business or for a personal purchase, lenders will probably want to check your credit score before determining financing options. If this seems a little off-putting to you, don't be too concerned. The more you know about how your personal and business credit scores are used, the more prepared you’ll be for this sometimes stressful step.

What is a personal credit score?

A personal credit score is a number intended to serve as an indicator of how likely you are to pay what you owe. It’s based on a number of factors including: 

• how long you’ve maintained a credit-based product (like financing or a credit card)
• how often you use your credit
• how quickly you pay back what you owe
• how many times you’ve been late in paying back what you owe

Your personal credit score is expressed as a three-digit number between 350 and 800. The higher the number, the better your credit score is. 

What is a business credit score?

A business credit score is calculated using roughly the same criteria as a personal credit score calculation, but with a few more factors: 

• how long you’ve maintained a credit-based product (like a business loan or a credit card)
• how often you use your credit, how quickly you pay it back and how many times you pay late
• how many times you were late paying your rent or your mortgage, your vendor bills or your staff
• your personal credit score

Your business credit score is expressed as a two-digit number between 00 and 99. Again, the higher the number, the better your credit score is. 

And note that personal credit score is a factor in calculating your business credit score. This isn’t the case the other way around, and the reason it’s a factor is because lenders will want to know that the person they’re trusting with their money has a personal history of responsible debt service. 

Who determine your personal and business credit scores?

Why will business loan providers look at both personal and business credit scores?

Lenders and financiers may be looking for a number of things when checking credit scores, but at the heart of their research is the fact that they're attempting to assess the perceived risk of lending money to the applicant. Credit scores were developed as a fast means of identifying the risk. Note that different lenders may assess risk uniquely — credit scores are not the only factor consider by most lenders.

How do good and bad credit scores positively or negatively affect a business? 

The major benefit of a good credit score is an easier path to securing financing you might need for your business. Frequently, a higher credit score is assigned a lower interest rate because the risk of the applicant is considered lower low risk. It may also be a factor in how much financing your offered and the type of financing, too, while a not-so-perfect credit score is perceived as a greater risk.

Can a bad credit score get better?

Yes, a bad credit score isn’t like a scarlet letter. Try these tips for improving your business credit score. For personal credit, paying bills on time, paying down credit cards and any outstanding loans, and not applying for credit for a year are just some of the strategies that will have a positive impact on your credit score. 

Can a company with a bad business credit score still get financing?

Whether or not your credit score will allow you to borrow money often depends on the lender and the type of financing offered. Since lender requirements vary, the best way to find out if you're eligible is to apply to see what's available. A financing marketplace like Lendio simplifies the process by starting with a 15-minute online application that doesn't negatively impact the applicant's credit score. Additionally, Lendio's system works with more than 75 lenders and 10+ financing options, so you can find out quickly (and painlessly) what's available to your business.

Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

As you grow your business, applying for financing can boost your working capital to achieve your goals, whether you want to smooth out cash flow, prepare for financial emergencies, or  expand your operations. There are two primary types of small business funding to consider, each of which comes with its own set of pros and cons. Understanding a line of credit vs. business loan is a great first step in making a smart decision for your business based on your individual needs and goals. 

Business Line of Credit: How Does It Work 

A line of credit provides small businesses with flexible financing on your own schedule. Rather than getting a lump sum as you would with a business loan, you instead get access to a line of credit up to a certain dollar amount. You can draw on the credit line whenever you need capital, and only pay interest on your outstanding balance. 

This type of revolving credit is similar to the way a credit card works. When you pay back part or all of your outstanding balance, you can then borrow from that amount again when you need to. It’s easy to get a sense of how much a certain balance would cost using a business line of credit calculator.

Business Line of Credit: Terms and Rates 

A business line of credit can range anywhere between $1,000 and $500,000. Rates range from as low as 8% APR to as high as 24% APY. If you open a business line of credit with bad credit, you’re more likely to pay a higher rate. Funding times are quick, usually providing the cash you need within one to two weeks. The maturity term typically lasts between one and two years. 

It’s rare to find a business line of credit with no credit check, but you may be able to qualify with a personal credit score instead of one for your business. Similarly, you may not be able to get a business line of credit with no revenue at all, but you could qualify after being in business for a minimum period of time—often six months. 

Business Line of Credit: Requirements

Most lenders have specific requirements in terms of credit score, time in business, and revenue. Lendio’s network of partners typically request the following eligibility minimums:

• Personal credit score of 560+
• 6 months in business
• $50,000+ in annual revenue

A secured line of credit requires some type of collateral to back the financing. You’ll typically receive better terms, like a lower interest rate. Alternatively, you can also opt to apply for an unsecured line of credit, which doesn’t involve any collateral at all. 

Business Loan: How Does It Work?

Another type of financing is a small business loan, which is structured very differently from a business line of credit. You’ll get a one-time lump sum of cash to use however you want for your business. Then you’ll have fixed monthly payments over a set period of time, which include both principal and interest payments.  

Repaying a business loan is similar to repaying any type of installment loan, like a car payment or a mortgage. As long as your interest rate is fixed, so is your monthly payment. It gives business owners the ability to plan their finances because the payments don’t change. 

Business Loan: Terms and Rates 

Business loans typically range from $5,000 to $2 million. The larger amounts of money are reserved for stable businesses with a strong track record and enough revenue to handle the payments. The repayment period can also vary, usually between 1 and 5 years. Rates start as low as 6% APR and funding time is fast—online lenders can deposit cash within 24 hours. 

Business Loan: Requirements 

Business loans often require a review of both the company’s financials and the owner’s personal finances. As part of your application, lenders will review:

• Your credit history
• Time in business
• Collateral 
• Revenue

Just like a line of credit, a business loan can either be secured or unsecured, depending on whether or not you pledge any assets as collateral.

Business Loan vs. Line of Credit: The Difference 

There are benefits of a business line of credit as well as a business loan. Both help you build your business credit score, as long as the lender reports payments to the credit bureaus.  

With a business line of credit, you can borrow as much as you need over a set period of time thanks to a flexible credit line. Plus, the line of credit is replenishable, so you get ongoing access to capital. 

With a business loan, you receive one lump sum of capital. You would have to apply for another loan in order to qualify for additional funds. On the plus side, loans come with a fixed monthly payment so you can easily budget to pay off the balance. 

Business Loan vs. Line of Credit: Which One Works Best for You?

There are a few different factors to help you determine which option is best for your business: a loan or line of credit. 

Amount needed: Term loans typically offer higher funding amounts than lines of credit. If you need to purchase a major asset, like a piece of equipment or real estate, then a loan is probably better than a line of credit. But if you don’t need a huge loan amount and have several purchases to make over an extended period, then a line of credit may be better. 

Timeline: Because loans often include larger amounts, they also have longer repayment periods. A line of credit, on the other hand, usually needs to be repaid in a year or two. 

Predictability: If you’re looking for a predictable payment plan, then a business loan is the way to go. But if you have consistent cash flow and don't mind paying relative to the amount you borrow, then a line of credit could be a good choice. 

Ready to fund your business? Apply for a business loan or line of credit from Lendio.

Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

We all love to celebrate a founder who bootstrapped their way to the top. 

• MailChimp was built in-house by a design agency. 
• Sara Blakely funded Spanx with $5,000 of her own money, got into Neiman Marcus, and never looked back. 
• And the GoPro guy (Nick Woodman) moved back in with his parents to get his now-billion-dollar company to its initial public offering. 

Many early-stage entrepreneurs buy into the allure of being the next bootstrapped billionaire. A few of them actually make it, too. But behind every bootstrapped business is an owner who may be putting their business’ health at risk.

Bootstrapping definition

What is bootstrapping in business?

Bootstrapping is self-funding your business. You use your own savings and earnings to keep the business afloat—through the highs and the lows—in the hopes of achieving success without a business loan or early-stage investors. To fund business expenses, bootstrappers tap into money on hand, including savings and personal credit cards, as well as 401(k)s, second mortgages, and, of course, reinvesting their income. They may also work a day job while they grow their small business at night, or vice versa.

Why bootstrap?

Why would a founder bootstrap their company?

You have an idea. It’s good. And when that idea is to start a business, it’s not unusual for the business owner to turn to the easiest-to-access resources: their own funds. In fact, getting a startup loan often requires a six-month history in business (there are, however, other financing options beyond loans). So it can make a lot of sense to self-fund a business, at least for a while. 

Additionally, there are some very small businesses that legitimately don’t need outside capital. Non-medical professional services firms are a good example. A solopreneur lawyer, accountant, copywriter, or talent agent might only require a laptop, website, and cell phone. A family business where each family member contributes to the final product and sales may be able to support itself. However, in both of these cases, growth may be limited.

Pros And cons

Pros and cons of bootstrapping.

So is bootstrap financing the right option for your business? There are several pros and cons to consider when making a decision.

Pros of bootstrapping.

Self-funding a business allows for complete control of operating and growth decisions, which comes in handy in the following situations:

You have a client you want to drop.

If you're self-funded, the only person you need to convince that you should fire that client is you.

You see an opportunity you want to pursue, like a service-for-equity situation.

The most famous example of this is the artist who took shares as payment to paint Facebook's first office. His share wound up being worth over $200 million.

You have personal values or beliefs that you're not willing to compromise.

This was the case with Chick-fil-A. In fact, the founder has forever forbidden the company from going public so it continues operating within its founding principles.

The dream of DIYing everything is strong.

It's hard to ignore a great story of founders who grew an entire business themselves. Look at Gorilla Glue, which is still a family business, and Qualtrics, which was self-funded by two brothers for 10 years before selling for $8 billion in cash.

Cons of bootstrapping.

Allure aside, self-funding a company can be an uphill battle. One batch of supplies for a big project can exhaust a savings account, particularly when high inflation chips away at your budget, and running a full business as a side hustle can only take you so far. Those, by the way, are just the tip of the iceberg. Here are some other things you risk:

Burning out

Burnout is probably the most common danger of bootstrapped companies because it can lead to serious mental or physical health problems. And it’s not just burnout from long, lonely hours. It’s the stress of liquidating your investments, not getting the deal you were banking on, or simply having no time to yourself. This is particularly risky for business owners who work a day job and build their business during their off hours. While growing a side hustle into a full-fledged business can be done successfully, continuing this way too long can be hard to bear.

Running out of money.

It would be great if money were an unlimited resource, but it’s not. And unexpected expenses or increases in costs can wreak havoc on the best budget. The biggest shock? Sometimes it comes simply from the increased expenses associated with growth. Emergencies like property damage, illness, or other unexpected shutdowns can also thwart the best-crafted plans. If the only fallback is a personal savings account, staying in business may not be practical. Running out of money is one of the main reasons small businesses fail.

Not having the money to take advantage of opportunities.

A lack of capital can limit growth and the ability to seize opportunities, launch products, and take chances. For example:

• You may not be able to upgrade your factory without equipment financing. If you turn it down, your competitor will take it, upgrade their factory, and leave you in the dust. 
• You may be forced to let your best employee walk without taking a business line of credit to offset their new salary demands as your revenue grows. If you don’t pay them what they want, you’ll take a hit on irreplaceable talent, which will eventually affect the customer experience.
• And what if you’re invited to pitch what could wind up being your best client, but you need $20K to do it properly? Without a short-term loan, you may have to pass and always wonder what could have been.

There are solutions.

So what do you do when you’re starting a business but don’t have a large cash reserve? Bootstrapping is still a great option, but you may also want to consider investors or partners. Additionally, there are financing options available to newer businesses, too, that can help a business owner take advantage of opportunities as they arise or even simply be prepared–just in case the money in the self-funded bank account starts to run a little low.

Lendio facilitates financing for small businesses, including SBA loans, lines of credit, cash advances, and more. Learn more about small business loan options for your business.

ROI stands for “return on investment,” and it’s a measurement of how much you earn on the money you spend or borrow. For example, if you buy a machine for $10,000 in January, but having the machine makes you $20,000 by the end of the year, the return on your investment is 200% because you made 100% of your investment back, and then doubled it.

An ROI measurement can be applied to just about anything, from a machine to an employee to a location — or even to  money you might borrow for your small business.

What is Financing?

Financing is money you borrow to move your company forward. You could use financing to hire people, purchase assets, move into new markets, upgrade your technology, or anything else. Regardless of how or where you apply financing, your goal is to eventually have that money produce a positive ROI (is it worth taking otherwise?).

So how do you determine the potential ROI of financing? Here are a few simple steps to get started.

Start by Calculating the Total Cost of Financing

Obviously, there’s the money you’re borrowing. But on top of that will be interest you’ll have to pay as well as any fees. These should be taken into account when you calculate how to break even. 

For example, a $10,000 loan paid over 12 months at a 20% interest rate will take $11,290 in total revenue to break even. The extra $1,090 – that’s your interest. 

BTW, if you don’t have the full loan cost on hand, you can use a financing calculator to figure it out. 

Estimate the Result of Your Financing

How much you’ll need to make is the easy part. The trickier component is projecting how much that single loan or other financing, which could be anything from a line of credit to a merchant cash advance, will produce.

At this point, it’s time to do a bit of educated guessing. And it’s particularly challenging if the financing is being used for multiple reasons because some might yield positive ROI while others might not. But for the sake of simplicity below, let’s say financing is being used for a single specific purchase. Here are a few examples:

• With the new WidgetMaker Plus, a widget manufacturer can make 200 widgets per hour versus the 50 they’re making now with the original Widgetmaker. This will put them in more stores, which will open the market to new customers.

• A second delivery van will let a retailer deliver items to 30 customers per day, an increase from 15 customers previously. 

• Hiring a CFO will give a lawyer more time to get out there and get new clients because they’re spending less time doing administrative financial stuff.

Once you understand how your production will increase with the new investment, you can track your ROI. Increasing production means increasing sales. 

• If the widget maker can make an extra 150 gadgets per hour and sell them for $10 each, then they will make $1,500 more per hour than they could before.

• If the average delivery order for the store is $45, the owner will make $675 more per day by doubling their deliveries. 

• If the lawyer can land one new $12,000/year client a month, they’d make an additional $78K per year.

With these calculations, you can track how much your business stands to profit from spending that extra money. 

Apply the ROI Formula

The good thing about the ROI formula is that it never changes. Once you know it, you can apply it to any money you spend, whether it’s financing or retained earnings. This is the formula:

ROI % = Profit / Investment x 100

So, if $10,000 in financing that costs $11,290 with interest will generate an extra  $15,000 in sales over the course of the year, the profit would be $3,710 ($15K –  $11,290), and the ROI would be $3,710 divided by $11,290 x 100, which comes to 33%.

BTW, if you need a refresher on gross profit and net profit, read this.

What’s a Good ROI for Financing?

So how much ROI do you need to justify financing? Honestly, that will depend on what you’re using the financing for because certain purchases will have different benchmarks.

So, if we go back to our examples from above, the widget maker should expect a double-digit ROI because the machine is a single cost (minus yearly maintenance) and should keep producing ROI well after it’s paid off. 

On the flipside, the lawyer who hires a CFO will probably want to pay top dollar for that CFO and, even with that CFO installed and working, they can’t guarantee that they’ll close a $12K client every month. For that entrepreneur, anything above 0% ROI would be a win.

Whatever your expectations are, this formula is an excellent guide for determining whether or not financing would be generally profitable for your business and so worth your time and investment. 

The Best Way to Ensure Positive ROI on Financing is to Find Affordable Financing

If a certain loan or financing alternative isn’t a good option for your business, consider looking for other financing options that can help you to save. For example, you may find a different short term financing option with more favorable terms. You can also look into credit cards and equipment financing and other alternatives, depending on your needs.

Lendio’s single application can match you with financing options that fit your business and financing plans and goals — plus you can access more than 75 lenders with a single application that takes about 15 minutes to complete. Visit our online lending hub to learn more.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.