Commercial Financing: Your 6 Best Options

Looking to borrow money for your business but not sure what your commercial financing options are? Here’s a quick overview of the 6 most common commercial financing options to keep your business on track.

1. Traditional Term Loan

This is the type of commercial financing you’re likely most familiar with—their flexibility and simplicity make them attractive.

With term loan commercial financing, you often borrow a set amount of money for a set period of time and pay it back with regular fixed payments. But there are also variable rate term loans where the rate can change over the course of the term. These loans are easy to understand, and term loans are usually used for a wide range of business purposes. They might be secured or unsecured, with terms ranging from 1 to 5 years. If you are looking at a bank, you might find that their term loans have even longer terms. 

If your business has good revenue and you have a strong credit rating, a traditional term loan would probably be a good option.

2. SBA Loans

Though they’re technically traditional term loans, SBA loans refer to the government-backed commercial financing programs offered by traditional lenders. The U.S. Small Business Administration guarantees part (or all) of the loan, greatly reducing the lender’s risk and making small business lending more attractive.

There are three main types of SBA financing for small businesses. The first is the 7(a) Loan Program, a flexible and open-ended option backing loans of up to $5 million. Use these loans for purchasing equipment or real estate, working capital or startup costs, or to refinance existing debt.

If you’re in the market for a big fixed asset purchase, like major equipment or real estate, consider the SBA CDC/504 loan program. Borrow up to $5 million with repayment terms as long as 20 years. While rates are low (based on current treasury rates), these loans are highly regulated and best suited to well-established businesses with long, strong credit records.

On the other hand, if you run a really small business, the SBA Microloan Program might fit the bill—because the amount of money you need to borrow is probably smaller. Offering loan amounts between $500 and $50,000, with an average amount of $13,000, an SBA microloan can be used for working capital, or to purchase inventory, supplies, furniture, fixture or equipment. Repayment terms depend on what you’re using the money for.

3. Equipment Loan

An equipment loan can be an excellent option to purchase expensive machinery, or even to furnish new offices or outfit retail stores. And because that “equipment” is the collateral, these secured loans can have a lower interest rate than unsecured financing does.

With an equipment loan you can make use of the equipment or capital assets while you’re paying the commercial financing off, so you’ll see some return on investment right away.

4. Credit Cards

Surprised to see us here, aren’t you? While you might not have considered credit cards a viable commercial financing option, sometimes they make good business sense.

For example, say you need to make a large purchase quickly, don’t have time to apply for and wait for a loan, and you can pay off the purchase before the balance incurs interest. You’ve essentially borrowed money for free—and potentially earned rewards or cash back, depending on your business credit card. (This only makes sense for purchases directly on the card, not on cash advances, which incur interest from the day you take the funds.)

If you qualify for a 0% introductory rate credit card on balance transfers or new purchases, using a credit card for business expenses also works well, but read the fine print carefully so you know exactly what you’re getting into.

If you’re considering a short-term loan, compare the interest rates you’re offered against business credit card rates. In some cases, a credit card may actually be cheaper—but remember, you might not be able to use a credit card for all of your expenses.

5. Business Credit Line

If you’ve ever had bills come due before your clients pay you, a business credit line could be what your business needs.

Here’s how it works: You get a credit line with a set limit—say, $30,000. Borrow up to your limit at any time, but you’ll only pay interest on the amount you’ve borrowed. So if you take $5,000 out of your credit line to make this month’s bill payments, you’ll only pay interest on that. And when you pay off the $5,000, you can borrow it again.

Like a credit card, a business credit line is revolving credit, so you can borrow against it as long as your account is in good standing. It’s a flexible and convenient method of commercial financing for businesses.

Invoice Financing

Having cash flow troubles because of outstanding accounts receivables? If so, consider invoice financing, also known as accounts receivable financing. Use your accounts receivables as collateral to get a cash advance from a lender for anywhere between 85% and 100% of the outstanding amount. You’ll immediately have cash on hand instead of having to wait—or chase down—money still owed to you. The financing company will take a fee from the outstanding amount, though, so make sure you read the fine print of any agreement very carefully prior to signing.

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With all the commercial financing choices around for small business owners today, it pays to do your research and shop around before choosing the best option for your situation. Learn what you can, ask questions, and gather information to make the finance decisions that’ll help your business grow!

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from Fundera Ledger https://www.fundera.com/blog/2016/02/09/commercial-financing/