Business financing can be a smart strategy to expand your business without tapping into your personal savings or waiting for your company to generate enough funds. Fortunately, there are a variety of options available for businesses seeking financing, including term loans, lines of credit, and unsecured working capital (also known as cash advances). This article will provide guidance on determining which program you qualify for if this is your first business loan, and offer tips to help you secure the best programs with the lowest rates.
The most preferred financing option is a term loan, offering the lowest rates among the three programs with monthly payment options and 1-10 year terms. However, it is also the most challenging program to get approved for, as an average minimum credit score of 720 is required. Approval chances are higher if your business has been operating for at least two years and consistently generating profits. Besides the usual documents, such as a copy of your driver's license, voided check for the business, and an application, you must provide many other documents, including the last 12 months of business bank statements, a copy of your last two years' tax return, and possibly a P&L report for the company. The underwriting process is lengthy and intricate, considering multiple factors about the business and owners. Additionally, this option requires a personal guarantee, impacting your credit score.
Our next option for financing your business is a line of credit, which works like a credit card. You get approved for a certain amount and can borrow up to that limit, only paying interest on the money you use. While rates are slightly higher than for term loans, they are still competitive. A line of credit is best used for a rainy day fund or if you plan to use financing regularly. The average minimum credit score for this program is 680, making it slightly easier to qualify for than a term loan. This program has monthly/weekly payment options depending on your credit history. The term ranges from 6 months to a true revolving credit line that does not expire. To apply, you will need to provide your last six months of business bank statements, a copy of your driver's license, a voided check for the business, and an application. The underwriting process is not as rigorous as for the term loan option, but your credit history is still a factor.
The last financing option is unsecured working capital or a cash advance. This option does not require any collateral or personal guarantee, hence the name "unsecured". However, it has the highest rates among the three options and is not meant for long-term financing needs. The payment structure for this option is usually daily (Monday-Friday, no holidays) or weekly, with a micro-payment structure to facilitate payments. Although daily payments may seem inconvenient, they are smaller and easier to manage, especially for businesses that generate revenue regularly. The approval process for this option primarily considers your business's revenue, with an average minimum requirement of $10,000 per month. The approval amount can range from 50% to 80% of your average monthly revenue, depending on other factors such as your average daily balance and number of deposits. The terms for this option range from 1 month to 2 years. This is also the only option that offers an early payback discount, which allows you to save money if you pay off the advance before the end of the term.
Now that we have gone over the programs lets recap, you can fall into three main categories.
A Profitable Business for over 2 years and credit over 720
A Profitable Business for over 1 year and credit over 680
A Profitable Business
In addition to the financing options we've discussed, there are several other types of business financing available. These include equipment loans, SBA programs, factoring programs, commercial real estate loans, and franchise funding, to name just a few. If you're interested in learning more about these programs and how they can help your business, be sure to visit our Programs page.
Your loan options are determined by the category you fall into. However, just because you only qualify for a cash advance, it doesn't mean you'll never be eligible for a line of credit or term loan. If you have low personal credit, you can work on building your business credit. By paying off a cash advance or revenue-based financing on time and without missing any payments, you can become a better candidate for other programs, even if your credit score is not that high. Although your credit score reflects how likely you are to keep up with payments, when working with a private lender like Trust Capital Funding, you can build your credit directly with the lender.
As a direct lender, Trust Capital Funding has built long-lasting relationships with clients over the years. By maintaining a good payment history, we can offer you better programs and lower rates in the future. Remember, loan brokers cannot change any terms or make the final decision in your funding process. When applying for a business loan, always make sure you are working with a direct lender like Trust Capital Funding to avoid any potential issues.
If you're looking for a business loan but do not qualify for the programs you want right now, take a small loan to build a relationship with a direct lender like Trust Capital. Private equity firms and direct lenders have the final say on what programs you qualify for when working with them directly. When you first apply for business financing the only thing a lender can look at is your credit history. We know that your credit history is not always the best representation of you or your business, and that is why we urge you to build a relationship with us, so we can better understand your specific situation. If you are only being offered cash advances you may be working with a loan broker.
Be careful when getting a business loan, make sure you are always working with a direct lender like Trust Capital Funding and not a loan broker. Direct lenders use their own money to lend to businesses and a broker is sending your file out to multiple different lenders to try and get you a loan. A broker can not change any terms or make a final decision in your funding process so you gain non benefit working with them. Direct lenders also have connections with other lenders and will sometime syndicate or pool their money to fund a deal. So just because the deal is funding with a different lender another direct lender can make changes that a broker would not be able to do. Brokers also make more money on programs like a cash advance than a line of credit or term loan, making the chances of getting the other options less likely.
Hopefully you learned a lot about what business loan options are available and how to qualify for better business programs if you are stuck getting cash advances. If you are interested in getting a free pre-approval fill out an application now and see what you qualify for.