Discover The Best Small Business Loan Uses

Small Business Loan Uses

Many small business owners ask themselves this question when they are first considering different loan programs.  The answer to “What can a Small Business Loan be Used for?” is any business-related expense.

The use of capital must be directly related to helping your business prosper. The one caveat is that the use of funds is only for the business that is applying for the loan.  The idea is to prevent a plumber from applying for a loan to start a printing company.  If the plumber wants to expand and grow his current business, then he can use the funds in any manner he sees fit.

Business lenders like banks and credit unions might have loan covenants that limit the use of bank loans for specific equipment or projects.  Think of it this way.  You couldn’t apply for commercial real estate loans and use the funds to buy a tractor.  On the flip side, the online lender that offers restaurants merchant cash advances can use the business funds for virtually any business expense related to that restaurant.

Online business lenders generally make the process easy.  There is minimal paperwork with a one-page loan application, a wide range of loan types, and a maximum amount equal to what the banks offer.

There are pros and cons to any business decision.  When a prospective borrower asks, “Can a business loan be used for personal?” the answer is always, “No.” These are strictly loans for business and not personal loans.

Check out the following eight examples below of how you can use a small business loan to help your business.

How to Use a Small Business Loan

Have you ever thought about what a business loan can do for your business?   Every example listed may not apply to your particular business.  However, small business owners across the country almost always need additional capital.

1. Equipment

Various pieces of equipment will need to be upgraded, improved, or replaced at some point during the life of any small, large, or online business. 

Replacing equipment is where business equipment loans come in handy. Getting access to equipment financing has the potential to make or break a small business owner’s success. However, you might be wondering what the advantages of equipment loans are and how to obtain them. How do lenders decide whether to approve equipment loans?

To begin, let’s define equipment loans and ascertain whether you require one.

What is an equipment loan?

You can use loans against business equipment to finance the purchase of business equipment. Businesses frequently require the acquisition, replacement, repair, or upgrade of various types of equipment used in the processing, manufacturing, or production of their products. 

All of this equipment is required to keep your business running at maximum efficiency and productivity. What do you do, however, when your equipment becomes obsolete, worn out, or in need of replacement? Often, you can choose between purchasing new equipment outright and leasing it.

How Do Loans and Leases Differ?

Consider leasing equipment when considering commercial equipment loans. When deciding between leasing and obtaining an equipment loan, keep the following points in mind.

Equipment Leasing

Equipment Leasing usually doesn’t require a down payment. This loan strategy is especially advantageous for businesses with a limited or non-existent capital base. 

When a down payment is requested, it’s typically small compared to the amount required for a conventional loan.

You can finance approximately 100% of the cost of the item or items. With a lease, you can also finance about 20% – 25% of the so-called “soft costs.” 

Taxes and shipping charges are soft costs.

Leasing gives your small or online business greater flexibility. You have the option of returning the item at the end of the lease term or purchasing it for a small fee at the end of the lease term.

Equipment Loans

Each lender’s terms will vary, but in general, you can finance approximately 80% of the total purchase price of an item with a loan. When you finance the purchase of equipment with a loan, you immediately own it. 

The majority of small business equipment loans require a down payment of approximately 20%. The item or items purchased with the equipment loan provides the security or collateral for the loan.

Justifications for a Business Equipment Loan 

To upgrade obsolete equipment Increase the size of your existing equipment inventory to maintain and upgrade older or out-of-date equipment.

How to Obtain Loans for Commercial Equipment

The majority of equipment loans are only available to those with excellent credit. After all, it is an investment in the growth and profitability of your business. Consider applying for a loan through the bank with which you do the majority of your business. Alternatively, you may wish to consider a nontraditional lender. One of them is Sunwise Capital, an online lender that assists small and online business owners who require immediate access to capital to expand their operations.

Sunwise Capital business loans – also known as Sunwise Capital Cash Advance or Merchant Cash Advance – may be possible. 

A merchant cash advance lender provides cash in exchange for a percentage of future credit card sales or a portion of future credit card sales.

If your business has been successful, but you have limited, or bad credit, a small or online business loan may be an excellent option. Obtaining the capital you require when you require it can mean the difference between success and failure for your business.

Ensure that all of these requirements are possible before applying to a traditional lender or a nontraditional lender such as Sunwise Capital.

Banks and other traditional lenders frequently express reluctance to extend conventional equipment loans to small or online businesses with poor or no credit. These businesses will be deemed “too risky” and will have significant difficulty obtaining a traditional bank loan to fund their operations. 

This perceived risk presents a problem for a large number of small and online business owners who require capital to acquire, replace, or repair outdated or broken equipment. 

If your business is considered high risk, this is where a business loan could be beneficial. A business loan enables you to quickly obtain the funds you require, allowing you to continue operating your business daily.

The Benefits of Equipment Financing

Rapid Approval 

Typically, equipment loans are approved (or denied) relatively quickly. Consider submitting your small business line of credit application to a nontraditional lender, such as Sunwise Capital, to expedite the process. 

Sunwise Capital is an online lender specializing in providing quick funding for various business needs, including inventory replenishment, equipment upgrades, and marketing campaigns. 

Additionally, Sunwise Capital considers your request within minutes. This streamlined approach enables you to obtain additional capital more quickly, allowing you to acquire or replace critical equipment.

Monthly Payments on Equipment Loans May Be Tax-Deductible

You may be able to deduct monthly payments on your equipment loan as an “operating expense.” To be sure, consult your lender and a business tax attorney.

Additional Cash in Your Pocket 

Keep cash on hand for any other business-related purchases. Consider the scenario in which one of your delivery trucks fails and needs replacing. 

Alternatively, your restaurant’s oven may be malfunctioning. Rather than depleting your business’s cash flow to pay for these extremely costly – but necessary – items, equipment loans can be used to replace or repair this costly – but necessary – piece of equipment.

Payment Schedule Flexibility

Depending on the lender from whom you obtain business equipment loans, you may be eligible for payment schedule flexibility. The flexibility is advantageous as you work to replace damaged equipment, maintain business operations, and repay business equipment loans. 

The type of loan you obtain will determine whether you can make monthly, seasonal, quarterly, biannual, or even annual payments. 

Note: You may also qualify for a 90-day deferment on the repayment of your equipment loan. Again, consult your lender regarding equipment loans to determine the best course of action for your business’s needs.

Approximately 25% of “Soft Costs” are covered. 

Soft costs include fees, delivery charges, and freight charges. Again, each lender is unique, so research to determine the precise fees associated with the loan and which fees are your responsibility.

Procedures for Obtaining a Loan for Equipment

As your business grows, you’ll need to replenish inventory, maintain critical equipment on a daily, monthly, and annual basis, and ensure that your product or service delivers on time. For the owner of a small or online business, equipment loans are critical.

Step 1: Verify your personal credit report and business credit report.

Have you ever had a problem with late credit card payments? Have you become delinquent on any loans? Do you have a poor credit history? 

Unfortunately, all of these circumstances will work against you when you apply for equipment loans. Most lenders will decline to extend any loan to a small or online business they deem excessively risky.

Maintaining an excellent credit history, reflected by your FICO score, is one of the most critical – if not the most vital – small business loan requirements. It is essential to prepare. Conduct a preliminary investigation.

Know your FICO score 

Your FICO score offers a snapshot of your credit risk used by lenders. The score helps them determine whether or not to extend credit and, if so, at what rate. 

Assess your credit risk and determine your FICO score using free online tools such as those found at www.fico.com.

When meeting with potential lenders, be prepared to demonstrate your business credit history and your personal credit history. Do you owe money on your credit cards? A few late car payments? Are you behind on your student loans? 

These types of occurrences will cause the equipment loan approval process to stall, if not stop. Excellent credit is required to get approval for a small business loan.

Make an effort to raise your credit score and correct any credit reporting errors. (*Note: credit reporting errors do occur). Spend time reading your credit reports thoroughly to ensure their accuracy. 

Create a well-thought-out business plan in Step 2.

Lenders

Traditional banks, credit unions, and institutional lenders – will view your business plan as a roadmap to future success. 

Most online alternative lenders will not require a business plan. They make the decisions on the health of your business and cash flow and less on your credit score or finances. 

Identify your business. Indicate the type of product or service you’re offering. 

Describe your current cash flow system and forecast an aggressive yet attainable set of future growth objectives for your business. Determine your target market’s socioeconomic and demographic characteristics, and then explain how your product or service will address a need in that market.

Finally, summarize the entire document in a few paragraphs and label it “Executive Summary.” This summary provides lenders with an overview of your business in a concise manner. A viable business plan does not need to be lengthy. 

It should, however, be exhaustive and well-considered. Numerous sample business plans and templates are available online. Choose one that works for you and incorporate it into your equipment loan strategy.

Prepare cash flow statements in Step 3.

Demonstrating that your money is coming in and going out on current terms is a critical requirement for the majority of lenders before they will approve any equipment loan. Organize your personal finances. 

Hire a CPA to review your financial records. You’ll want to ensure that your personal and business financial statements are current and error-free, as well as that your reporting is accurate and ethical. 

It is one of the best indicators of your business’s real-world performance and one of the primary factors considered by lenders when evaluating small business loan requirements.

How Many Ways Can a Business Benefit from an Equipment Loan?

YOU REQUIRE THE REMOVAL OF OUTDATED EQUIPMENT.

The primary reason businesses seek equipment loans is to purchase new equipment. Depending on your industry, you may require a new forklift to complete a particular project, a wood-burning stove to expand the pizza menu at your restaurant, or new office computers to streamline employee activities. 

Regardless of the type of equipment you require, an equipment loan can help you finance the purchase.

TO REMAIN COMPETITIVE, YOUR EQUIPMENT REQUIRES IMPROVEMENTS.

In some instances, new equipment is necessary to replace older equipment or to expand your offerings. Alternatively, you may need to invest in new equipment before a dire situation requiring immediate attention. 

Specifically, if you require more efficient equipment to improve processes, maintain industry competitiveness, or meet consumer demands, you may need a business loan to fund your investment.

REPAIRS ARE NO LONGER APPROPRIATE.

If your existing equipment requires repair, compare the anticipated repair costs to the cost of new equipment. Repairs are frequently more expensive than replacements, particularly when they do not address the underlying cause of the problem.

Do you believe that repair costs will exceed replacement costs well before the equipment reaches the end of its useful life? Do you find yourself constantly repairing the same piece of equipment? 

Consider the following financial factors when determining whether an equipment loan provides a more sustainable rate of return and is more affordable over time than repeatedly repairing old equipment.

YOU DO NOT WANT TO SUBMIT AN APPLICATION FOR A TRADITIONAL BANK LOAN WITH ITS REQUIRED 28 DOCUMENTS.

Additionally, business owners seek equipment loans because they lack time to navigate the conventional loan process. To qualify, you will typically need to write a business plan, create detailed balance sheets, and submit your application for review. 

Due to the risk mitigation benefits of collateral, equipment loans typically require less documentation, which can be critical if you’re looking to save time and money.

YOU NEED A DEPOSIT ON THE LOAN.

While loan terms and conditions vary, many equipment loans require a down payment of up to 20% of the equipment’s purchase price. You will not get an approval if you do not have the necessary down payment. 

On the other hand, some lenders will finance the entire cost of the equipment in exchange for a higher interest rate or borrowers with excellent credit.

YOUR TAX BURDEN WITH THE PURCHASE OF NEW EQUIPMENT.

When you purchase new equipment, you can typically deduct it as a business expense; additionally, if the purchase qualifies for the section 179 deduction. Talk to a tax professional to see if you can deduct the entire cost in the year of purchase. You may be eligible for up to $500,000 rather than depreciating it gradually over time. 

If your purchase through an equipment loan, this remains true. As a result, while you may deduct the entire cost to reduce your taxable income and thus your tax liability on paper, you can still help your budget by gradually paying for the equipment.

FROM A FINANCIAL POINT OF VIEW, LEASING EQUIPMENT IS IMPOSSIBLE.

In many cases, leasing equipment is preferable to purchasing it. Leasing equipment is analogous to leasing a car. You pay a monthly or periodic lease fee and are responsible for returning the equipment at the lease’s end. 

At that point, you may be responsible for any damage that occurred while the equipment was in your possession. Just like the car lease, you also have the option of purchasing the equipment, typically at a reduced price. 

Conduct a cost analysis before accepting an equipment lease, and choose the equipment loan option if it’s more advantageous cost-wise in the long run.

YOU WISH TO MAINTAIN WORKING CAPITAL OR CASH ON HAND.

Business owners seeking equipment financing are not continuously operating on a shoestring budget. Often, these entrepreneurs can write a check for the equipment’s cost. However, an item of significant capital expenditure may deplete your working capital. 

Suppose you’re trying to conserve working capital. It may make sense to take out an equipment loan and keep a healthy balance in your business checking account to cover payroll, utilities, marketing, and other expenses.

Numerous factors indicate that you may require a loan for equipment. Along with the primary reasons, consider the return on investment carefully before making a final decision. How will the equipment affect your business? Will there be an increase in revenue as a result? 

Are you looking to save time and money on the payroll? How can you reduce your tax liability? After calculating the financial benefits, examine the interest rate on the loan and determine whether the purchase provides the required long-term return on investment.

Cash flow statements – also known as profit and loss statements – detail the revenue received and expenses incurred by a business. The difference between the two calculates your profit margin, along with other factors such as fixed costs.

While traditional loans can be advantageous for small or online business owners, the time involved in applying, processing, and waiting for a decision can be inconvenient. Most small business owners require immediate access to capital to replace, refurbish, repair, or update their equipment.

After determining how to obtain an equipment loan, you can position your small or online business for years of steady growth.

2. Inventory

Why Might Your Business Need a Loan to Finance Inventory?

Even the most successful small businesses encounter seasonal sales slumps, late invoice payments, unexpected equipment breakdowns, and other unforeseen circumstances on occasion. As a business owner, you’ll want to be prepared by having additional working capital available if these types of situations put you in a financial bind.

Fortunately, lines of credit and short-term loans are available that conform to a business’s inventory requirements. Would you please continue to read to gain a complete understanding of inventory financing and how it works? We’ll discuss the pros and cons of inventory financing loans, the application process, and a few popular business financing options.

What Is Inventory Financing and How Is It Defined?

Inventory Financing is when a business obtains a term loan or revolving line of credit to acquire products for sale. This type of small business loan is secured by existing inventory, and no personal collateral is required. If you are unable to make the loan payments, the collateral will be your products or merchandise.

Inventory financing enables you to plan for seasonal fluctuations and stock up for your busiest season to ensure the timely fulfillment of large orders.

Inventory Loans Benefit a Diverse Range of Businesses

Each business’s inventory requirements will be unique. For example, you may require inventory financing to fund the acquisition of a new line of products. In contrast, another small business may require inventory financing to cover raw material costs associated with a large order from a client. By and large, the requirement for inventory financing is a positive development. The need for this type of funding indicates that your business is doing well enough to warrant anticipating increased demand or maintaining adequate inventory.

Since inventory is a term that refers to products, inventory financing is only beneficial to product-based industries.

Several businesses require inventory loans, including the following:

• Merchants

Department stores sell footwear, clothing, jewelry, cosmetics, and housewares. Specialty retailers specialize in a single product category, such as toys, sporting goods, or lingerie.

• Distributors

Wholesalers are warehouse retailers who stock a wide variety of products packaged in bulk and sold at a discounted price compared to retail. Due to the bulk nature of their product, wholesalers require a large amount of inventory to hold in their warehouses or other storage facilities at any given time.

• Seasonal businesses

Seasonal businesses may not experience a year-round steady flow of customers or clients. However, they experience an increase in demand for their products during certain seasons, including the holidays, the start of school, summer vacation, the winter months, and even major sporting events such as the Super Bowl.

The Advantages of Inventory Financing

It is prudent to weigh the benefits and drawbacks of any financial decision, especially when taking out a loan. Both of these scenarios are possible with inventory financing. Several advantages of inventory financing for small businesses include the following:

• Ascertains your ability to meet customer demand

Seasons of high demand for your products can leave you critically short of inventory or, worse, forced to inform customers that you are out of stock. As a small business building a reputation, the last thing you want to do is disappoint potential customers. Getting access to a line of credit or dedicated capital for inventory purchases can help your small business avoid going out of business due to a lack of inventory.

• No personal collateral is required.

Other types of loans will require you to provide collateral in the form of personal property. Knowing that the possibility of losing your home, car, and other assets registered in your name is always a possibility can cause anxiety in any business owner. And this feeling will last until you make the final loan payment! When you finance inventory, you use the inventory you acquire as collateral. If your business fails in the worst-case scenario, you will not lose your home, but you will forfeit all stock acquired with the loan.

• Fast

Obtaining a loan for inventory financing is significantly easier than obtaining other types of loans. There is considerably less paperwork if you qualify and meet all of the requirements. You can get a thumbs up within one to two weeks.

• No personal credit score is required.

Business owners and entrepreneurs do not need to worry about their credit score or lack thereof when applying for inventory financing. Lenders are unconcerned about your credit history because they view inventory as collateral. That is why inventory financing is possible without a credit check.

Inventory Financing’s Negative Consequences

We’ve discussed which types of businesses are most likely to benefit from inventory financing. Inventory financing is not appropriate for everyone due to the diversity of business types. Take a look at the following disadvantages:

• Obtaining approval is challenging.

While the application process for an inventory loan is straightforward and quick, approval is not. Because the merchandise purchased will be considered collateral, lenders will need to assess your business’s riskiness. If they determine that you will have difficulty selling your products, they will also struggle to unload the inventory if you default on your loan and end up with it.

Lenders are more receptive to financing inventory for high-potential product lines. As the borrower, you may have to work extra hard to demonstrate the viability of your products.

• Interest rates increased

Inventory financing is typically associated with a higher interest rate. Lenders believe they require additional security because there is no personal guarantee or collateral other than the inventory involved.

Inventory finance lines have higher setup costs because the lender must appraise the merchandise and evaluate your business. Additionally, the lender must factor in the substantial operational costs associated with routine appraisals, typically performed on-site by a specialized appraiser.

Am I Eligible for a Loan for Inventory Financing?

Are you curious about how you’ve financed inventory thus far? To begin, you’ll need to establish your eligibility. Your business must meet the following criteria to qualify for an inventory loan to purchase inventory:

• Minimum of one year in business

Your business should be at least a year old. The longer you’ve been in business, the more likely you are to be approved, as you’ll have a complete sales history. Because a newly formed company will have no prior sales history, it is exceedingly rare to hear a lender approving a loan for a start-up.

• Sales history

Lenders will determine your eligibility based on your business’s financial and inventory records. To expedite the loan application process, you should prepare a detailed report outlining your sales history, including inventory turnover, profit margins, and sales projections. The sales history of your business must establish that it is profitable and capable of repaying the loan.

• Is capable of maintaining an exhaustive inventory system

Lenders are meticulous with their inventory management and product movement. They’ll expect you to provide timely reports on product shipping and returns, accounts receivable or sale order receipts, and anything else that demonstrates you’re monitoring and safeguarding the merchandise.

How Can I Obtain a Loan for Inventory Financing?

As previously stated, applying for an inventory financing loan can be a more streamlined and paper-free process than applying for certain traditional term loans. Indeed, some lenders permit you to apply for a loan online. However, they are not the simplest type of business financing to obtain, and you must organize your financial documents to ensure your eligibility and creditworthiness.

The following is a step-by-step guide for applying for inventory financing:

Step 1: Compile Your Business’s Financial Records

The inventory financing lender will conduct a thorough financial analysis of your business. You must collect all financial records about your assets, liabilities, profits, and losses to provide them with one. Forecasting your business’s future growth is also beneficial.

The application process will begin with the compilation of the reports listed below. The following is a list of records that you should have kept regarding your finances:

Accounts Receivable

Are your financial statements precise? The loan officer will request year-to-date financial reports for your business, as well as balance sheets for the previous two fiscal years.

2. Statements of Income and Expenses

P&L statements (Profit and Loss) are financial statements that summarize your business’s revenues, costs, and expenses over a specified period. Additionally, you may submit income statements referred to as earnings statements, statements of operations, or income statements.

Your profit and loss statement provides the loan officer an accurate picture of your business’s net income. The P&L is critical because the lender must determine whether you can repay the loan after your monthly, quarterly, or annual expenses.

3. Business Bank Statements

Your business bank statements or account statements summarize your financial transactions over a specified period. Lenders may contact your bank on occasion to verify your account and information. 

Another option is to complete and submit a request for verification of deposit (VOD) form to the bank for account verification. Lenders require proof that you own the funds and that the funds came from a legitimate source.

When applying for a short-term loan, you may be required to provide only three months of bank statements. The lending institution may require you to provide more recent banking statements with longer loan terms.

4. Stockpiles, Inventory, Merchandise

Your inventory list informs the lender of the current inventory you own and its estimated resale value. If a default happens, the lender will inquire about the value of your merchandise, which they will then be required to sell.

5. Inventory Management Records

Most Lenders want to know that you are more than capable of efficiently managing and maintaining inventory-related documents and files. The lender will request documentation regarding previous inventory, such as the turnover rate or percentage of unsold inventory.

Bear in mind that your inventory will include both existing stock and any merchandise purchased with the funding. As a result, the lender will want to see that you have a defined process for managing new inventory that may become available in the event of default.

6. Sales Forecasting

While lenders are concerned with your business’s history, they are also concerned with your business’s potential and future. Ascertain that your sales forecast is well-researched and indicates an upward trajectory for your business.

7. Business Tax Returns

Your tax returns determine the revenue and creditworthiness of your business. The pattern of your returns over the last 2-3 years will alert lenders to the possibility of you defaulting on your debt obligations. Alternatively, they may demonstrate that you are a creditworthy risk.

Step 2: Complete and Submit the Initial Application and All Required Documentation

You can complete a loan application form after compiling the necessary financial records and inventory documentation. As mentioned previously, specific lenders provide online application systems. The forms request basic information such as your name, your business’s name, and the loan amount. Financial information is submitted electronically or as an attachment to the online application form.

Once the lender determines your creditworthiness and eligibility for inventory financing, a lender representative will contact you to explain the “Due Diligence Period.” Due diligence refers to the examination of your business conducted before entering into an inventory financing contract.

In Step 3, Agree on a Preliminary Commitment.

For the investigator, due diligence is a time-consuming process. Due to the time commitment, many lenders will require you to sign a loan agreement to reduce the risk of deciding not to proceed with the loan despite conducting due diligence.

Step 4: Conduct a field audit of your business.

Due diligence entails a field audit of your business, including a personal meeting with a lender representative. They’ll want to inspect your office space, facility, and warehouse where you store your inventory. They will, of course, wish to check your current merchandise.

Step 5: Consider the Offer

After reviewing your application and completing your financials, the lender will present you with a preliminary offer outlining the loan or line of credit amount. Additionally, the initial proposal contains interest rates and terms. Bear in mind that this is a non-binding offer that is subject to change. This non-binding serves as a “preview” of the amount, terms, and interest rates and helps you determine your rate of interest. If you accept the preliminary offer, the lender may require you to pay a due diligence fee to demonstrate your commitment to the loan and your intention to proceed.

Step 6: Await Final Approval

After submitting your application and demonstrating your commitment, you must await a final decision. You probably have a good idea at this point whether you will be approved for financing or not.

Step 7: Complete the Agreement and Obtain Financing

Following final approval, the lending institution will ask you to sign some paperwork and the official contract outlining the principal, interest rate, and loan term or line of credit. After completing all required documentation, you can typically expect to receive the funds within a few days.

I do not have a credit history and do not have any existing inventory. Can I apply for a loan against my inventory?

Inventory financing helps small businesses in operation for a sufficient period to demonstrate that their products are in high demand, resulting in a high inventory turnover rate.

As previously stated, because the purchased merchandise will serve as collateral, a lack of credit history when applying for inventory financing is irrelevant. If your business lacks inventory, convincing the lender that you qualify for an inventory financing loan may be difficult.

We know that businesses want access to capital to grow and expand. A firm that initially specialized in services may wish to diversify its offerings at some point, as indicated in its business plan. You may need to convince the lender that your service-based business is profitable and influential enough to warrant the addition of a product line. It is up to you to persuade them of your products’ worth and commercial potential.

Alternatives to Financing Inventories

Meeting all of the requirements for an inventory financing loan doesn’t mean every business owner is a good fit.

Occasionally, alternative financing options may be a more cost-effective way to meet your financing needs. Consider the additional inventory financing options listed below:

• Long-term borrowing

A term loan from the bank is the most common type of business loan. You receive a lump sum of cash upfront, which you must repay with interest over a predetermined time. The major negative of this type of loan is that a personal guarantee or collateral is sometimes required. The advantage is that you can use the cash for purposes other than inventory purchases; additionally, you can cover other business expenses that do not require justification from the lender.

• Business credit cards

You may apply for a business credit card if your business requires financing for ongoing expenses such as utilities, raw materials, and equipment. The business credit card provides a revolving line of credit that you can borrow against and repay as needed, similar to a credit card, as long as you make the minimum monthly payment and do not exceed the credit limit. Additionally, they may carry high-interest rates and additional fees, similar to the majority of credit cards.

• Merchant cash advances

Does yourIf your business generates a high volume of credit card sales consistently? Then a merchant cash advance may be an ideal financing option if you cannot secure financing elsewhere. Your funding is in exchange for a percentage of your business’s daily credit card revenue. Typically, the MCA financing company will deduct your company’s repayments daily from debit and credit card purchases your customers make.

• Invoice factoring

Small businesses frequently run out of capital or inventory due to slow payments from customers. Holding off on purchasing merchandise until you pay your invoices can result in dangerously low stock levels. Factoring invoices is a method of obtaining payment for those unpaid invoices. A factoring company will purchase your invoices and assume responsibility for customer collection. This option is a viable option for many businesses, including those with poor or no credit, but it can be costly in terms of interest and fees.

• Invoice financing

Invoice financing and invoice factoring are similar; however, instead of selling your unpaid invoices, you secure a cash advance by using them as collateral. This financing is a fast way to obtain funds and an excellent option if you want to maintain control over your customer relationships.

• Purchase Order Financing (POs)

Purchase order financing is another way to finance inventory. Purchase order financing enables you to finance inventory that is directly related to a specific purchase order. PO’s are advantageous for wholesalers who have large purchase orders but cannot fulfill them because of a lack of capital for the merchandise acquisition. Additionally, PO financing is typically more readily available than traditional bank financing. Read our comprehensive guide to financing purchase orders.

• Business line of credit

A small business line of credit, like a business credit card, is a financial tool. It enables the borrower to obtain capital up to a predetermined amount. Additionally, like a business credit card, you can use the money to fund business expenses such as inventory purchases.

Business lines of credit provide significantly more flexibility than term loans, which give an upfront payment and require monthly repayment.

The balance on Sunwise Capital’s business lines of credit is revolving, which means you pay it off month to month. The calculation of interest is constant regardless of the amount borrowed. As you repay the principal, available funds (less flat transaction fees) replenish, allowing you to use your credit card in a manner consistent with that of a credit card.

3. Expansion

If you’re a small business owner considering expansion, you may lack the necessary capital. An expansion loan can provide a growing small business with the funds needed to expand by opening a new location, hiring additional staff, or upgrading existing equipment.

The first question is usually, where do you start, and how do you know if a business expansion loan is a good idea? This quick reference will guide and assist you in moving forward.

What is a Small Business Expansion Loan?

A small business expansion loan is a particular type of loan designed specifically for established businesses. Capital obtained through an expansion loan may enable you to scale or maintain growth in your company.

Did you apply for a business loan when you first started your business? If so, you might be hesitant to do it again. To obtain a startup business loan, you typically need to have skin in the game. It’s not unusual for a 20% to 30% down payment, and lenders will typically conduct extensive due diligence on your business plan.

Are you profitable? If yes, the process may be much more straightforward.

Can you get an expansion loan without requiring a cash injection? The requirements are less onerous than they would be for a startup business loan.

However, before you begin locating a lender, you must have a plan for the funds and be confident that borrowing is a good idea.

How to Spend the Money

There are numerous ways to utilize funds from a small business expansion loan, which is why it is critical to focus on your business’s specific needs. The following are just a few examples of how to use your loan funds:

Increase your team’s size.

Whether you work as a sole prop or with a small team, you may feel as if you’re overextended. Not only can expanding the team assist you in meeting demand, but it can also enable you to delegate more menial tasks to new hires, freeing you and other decision-makers to focus on the big picture.

Expand an existing location or establish a new one. A startup business is not uncommon to outgrow its initial physical location. Perhaps the office has devolved into a standing-room-only environment, or customer demand is so high that the line frequently extends around the block.

An expansion loan can help you expand your current facilities or open a new location, potentially alleviating some stress and generating new opportunities for expansion in other ways.

Financing the acquisition of new equipment.

Occasionally, your team and location are sufficient, but your equipment requires an upgrade. For example, a restaurant may meet increased customer demand by adding a new oven, or a manufacturing business may be able to increase production by adding larger-capacity machinery.

Launch a new product.

If you began your business with only one or two products and quickly discovered a substantial market for them, expanding your line may benefit your business. Expansion of a product line, on the other hand, can be costly. You’ll need to invest in R&D and cover the costs of materials and manufacturing. A business expansion loan can help you cover those costs without depleting your retained earnings.

Extend your market reach by entering a new market. Assume you’ve achieved success with your current product or service, but the market in which you currently operate is saturated, or you see an opportunity in a less competitive market. A growth loan can help you finance the costs of entering a new market.

How to Determine if a Loan for Business Expansion is a Good Investment

Recognize the source of your motivation. Simply having the ability to borrow money for your business does not automatically mean you should.
“You must grasp the rationale for expansion,” Fleming advises. “Are you expanding purely for the sake of expansion? Certain individuals exhibit this behavior by sprinting ahead of walking.”

It is critical to be completely candid with yourself regarding your motivation for expanding your business. If you currently lack control over your situation, expanding may result in a total loss of control.

Calculate.

While securing a business expansion loan may be less complicated than securing a startup loan, you will still need to convince lenders to lend you money.

Your strategy for expansion must be financially viable. If you’re considering expanding to a new location, for instance, begin conducting market research. Calculate the price and include all associated costs. Carry out the procedure for a few backup sites in case your first choice does not work out. Then determine the incremental revenue that a new location would generate to ensure that the return on investment is justified.

Figure out your capacity for growth management.

Even if your expansion idea is financially viable, ensure that you understand how the nuances of your new product line, location, or team will work.

If you are a sole proprietor, consider bringing in a partner or hiring someone with management skills to avoid taking on all the responsibilities.

What You’ll Need to Apply

Following due diligence, gather the necessary plans and documents to apply for a small business expansion loan.

Here’s a recap of what you’ll need before submitting your application:

Tax returns:

Typically, you’ll need three years’ worth of personal and business tax returns will be required. These provide information to the lender about the profitability of your business.

Payables:

This report may include your balance sheet, income statement, and cash flow statement. It demonstrates the health of your business to lenders. “Lenders will want to ensure that [you] have sufficient cash flow to cover any additional debt payments,” says Patrick O’Keefe, CEO of Grow Michigan, a fund established by a consortium of Michigan banks to assist small businesses.

Commercial strategy:

Would you mind informing us about your business, your intended use of the funds, and your strategy for profitability?

Even after a business is up and running, lenders may require collateral to protect themselves against default. Consider which tangible business assets you could use as collateral for the loan.

Report on the creditworthiness of a business:

Does your business has a good credit history? How about you personally? If the answer is “yes,” this can increase your approval chances. On the other hand, if your business’s credit is poor or you lack a credit history, you may have difficulty obtaining a loan.

Lenders may require you to provide various legal documents, including your business license, articles of incorporation, third-party contracts, franchise agreements, and commercial leases.

Where to Look for a Small Business Loan to Expand

Since there are numerous small business lenders, it is critical to understand your options and associated benefits and drawbacks. Sunwise Capital stands ready to assist you in your growth and expansion plans. Ask how we can help.

4. Employee Payroll

Making payroll is almost always stressful, especially if cash is tight.  A small business loan can be used to help ensure that your employees are paid, allowing you to keep morale from dropping.

Payroll Financing: What Is It?

What happens when payroll is due, and you cannot meet your obligations due to a lack of working capital? Let’s say that business has been slow, and one of your customers is more than a week late on an invoice. You know that you’ll get money soon, but you require immediate access to funding to pay your employees.

Is a Payroll Loan Right for You?

When cash flow becomes insufficient, stagnant, or otherwise disrupted (large purchases, past-due accounts, etc.), business owners become vulnerable to various financial difficulties. Bills can become delinquent, vendor relationships can deteriorate, and your credit score can rapidly decline if the issues persist. Regrettably, cash flow problems can also hurt another critical component of your business – payroll.

Apart from causing employee dissatisfaction, failing to meet payroll obligations violates the Fair Labor Standards Act (FLSA), subject to Department of Labor penalties.

What if, however, you lack the necessary funds to make payments? Are you considering obtaining a loan to cover payroll expenses?

The answer is complicated and requires some strategic thinking. There are multiple considerations, and it depends on a variety of factors, including your legal obligations to employees, but before you take out a loan, consider the following:

What is the reason for your inability to pay your employees?

1. You are currently experiencing a cash shortage.

2. You’ve increased your staff.

3. You have not received conventional financing approval.

Though the specific cause of payroll issues varies by business, there are typically two primary scenarios that force business owners to scramble to meet this obligation: Cash flow and unexpected expenses.

Whether it’s a slow season or a general decline in business, each pay cycle can become a source of dread when you’re unable to pay your bills. If your cash flow problems have become chronic, taking out a loan, particularly an alternative short-term loan, can exacerbate the problem by exposing you to higher interest rates and increased debt. If that is the case, you may wish to consider some additional options, which we will discuss in greater detail shortly.

Suppose your inability to make payroll results from an unexpected blip caused by immediate equipment repairs, seasonal staff ramp-ups, or other unforeseen circumstances. Let’s assume you are confident that you can repay the loan quickly (often within the next pay cycle, depending on the loan). In that case, a payroll loan may be a reasonable solution to a temporary problem.

Payroll is the most critical aspect of business for employers and employees alike; payroll is just as essential for all employers as positive sales and superior customer service. Without some form of incentive, a business owner cannot expect their employees to provide excellent customer service and help boost sales, which is why ensuring that your business, regardless of industry, can consistently cover payroll costs is a priority. 

If you are a business owner and pay your employees late or make incorrect payroll classifications, your employees may become dissatisfied, resulting in an unmotivated workforce. In essence, you cannot retain employees if payroll is late, inaccurate, or worse, not paid at all. 

The latter can result in a slew of expensive legal consequences, which is why it is critical to keep track of your employee’s payroll. No business owner wants to run afoul of those federal and state law enforcers.

Payroll affects every aspect of a business, whether large or small. While employees must have confidence in their employer’s ability to pay them consistently and on time, payroll can also affect your business’s financial stability. 

Various state and federal regulations regulate the relationship between an employee and an employer, which often results in payroll errors by many employers, particularly new or small business owners. 

Hundreds of different rules and regulations govern payroll. That is why the Internal Revenue Service penalizes approximately one in every three businesses for payroll tax errors. 

Unfortunately, understanding how payroll works and the complexities involved in the time-consuming process can confuse business owners and cause numerous headaches. 

Numerous business consultants advise entrepreneurs to consider utilizing external resources, such as a payroll service or an accountant. Using outside sources to manage a small business’s payroll needs saves time for business owners and can also help avoid violations of mandatory state and federal laws. 

Truthfully, most business owners do not have the time or inclination to learn about many state and federal obligations and responsibilities. Outsourcing payroll to another company familiar with these regulations makes life simpler and lets the owner focus on the company.

While this appears to be an excellent option for any merchant, startup, small, or large business, hiring other firms to assist with payroll can be costly when operating on a tight budget.

That is why reviewing the various lending options available to your business can be beneficial.

Numerous reputable business owners believe that a startup’s or small business’s success is directly related to the people they employ, which means that those employees deserve every penny they earn. 

Regrettably, even the most prosperous business owners encounter adversity. Forget about the devastating effects of Covid-19. It will be some time before we unravel the outbreak’s actual impact on business in 2020, 2021, and beyond.

According to research, looking back at the last financial crisis in 2008, there were some 43,546 small businesses that filed for bankruptcy protection. Ouch!

Additionally, only half of the newly formed small businesses survive beyond their fifth anniversary. As a business owner, how do you compensate those employees who are your bread and butter without jeopardizing your business’s survival? Numerous options are available to struggling business owners, and you can start here.

Communicate 

Notify your employees first and foremost. Generally, business owners know when they will be unable to meet payroll obligations for a particular pay period. 

When there are not enough funds to make payroll, many business owners experience embarrassment or pride when they cannot pay their employees. You’d be surprised at who sticks around during these trying times. 

Inevitably, you will have some employees who are unwilling or unable to wait, and providing them with sufficient time to search for new employment is the only reasonable action.

When business owners cannot cover payroll costs, there are viable options that utilize other available resources. If your business has unpaid receivables or needs to liquidate existing inventory, you may wish to consider discounting these items in exchange for immediate payment. 

While there are always drawbacks, putting payroll ahead of future revenue is always prudent.

Sacrifice: 

If your company is structured so that senior employees have some equity, discussing the possibility of temporarily holding back their pay to cover the costs of lower entry-level employees is always an option.

Payroll Financing Alternatives

While these suggestions are novel ways to meet payroll demands, every business owner should be familiar with all available payroll funding lenders. These include traditional bank payroll lenders, SBA payroll lenders, alternative payroll lenders, asset-based lenders, merchant cash advance, and payroll funding companies. 

Numerous factors can indicate a business owner’s need for a loan, including slow-paying clients, rapid growth periods, inconsistent cash flow, and seasonal patterns. 

Keeping an eye on industry trends in general and historical seasonal patterns can benefit you as a business owner. If you know that your busiest season is the holiday season, you should anticipate a decline in business in the months following the holidays. 

Suppose you understand the general patterns of your business and anticipate the need for multiple financing options. In that case, it is critical to utilize traditional bank loans and SBA loans, as the process is significantly longer than other loan options. 

However, suppose your business has been impacted by the economy, changing industry trends, or late client payments. It may be helpful to review alternative loan or cash advance options.

Payroll Loans Are Available in a Wide Variety of Forms

Bank Payroll Loans

The most secure and cost-effective method of financing your business is through a bank loan if you can obtain one. Low rates and extended terms, on the other hand, imply increased bank scrutiny and requirements. 

Thus, the borrower must have excellent credit and a healthy business revenue stream to qualify for bank-rate financing.

Payroll Loans from the SBA 

The SBA’s loan programs, particularly the Express loan program, are an excellent source of payroll funding. The SBA Express program offers SBA-backed bank-rate financing with a lightning-fast turnaround (SBA can decide within 36 hours)

Alternative Payroll Loans

A mid-prime alternative loan, which is rapidly gaining popularity as a source of payroll funding, offers small businesses affordable financing options without the hassles of a bank loan. Alternative payroll loans can be funded in a matter of days, not months, and require minimal documentation to qualify for and fund.

Cash Advances for Payroll Funding

A merchant or business cash advance may be a viable option for businesses that require immediate payroll funding, lack the necessary documentation for more traditional forms of business financing, or have poor credit. Advances are an exchange of future bank or credit card deposits for immediate cash. Approval and funding of a cash advance can be within a day, and they are popular for payroll funding among small businesses.

5. Marketing & Advertising

Getting customers in the door and remaining loyal to your brand is essential for any business. With a loan, you can conduct the marketing campaign necessary to reach more potential customers than you would otherwise.

Loan Programs for Advertising Your Business

Business owners, are you tired of being the “best-kept secret” in your industry? You are not alone! Millions of businesses across the country provide superior solutions but remain on the periphery. The reason is due to a lack of awareness. 

That is, they are either unaware of your existence or are unaware of the critical benefits and advantages of choosing you over the competition. Thus, the time has come to launch some high-impact marketing campaigns to attract, convert, closing, and delighting your customers, as well as converting them into long-term “brand evangelists.”

However, there is a problem; and it is a prevalent one: you do not have the necessary working capital. As a result, you’re stuck in a vicious cycle: you need to launch marketing campaigns to generate additional working capital, but you can’t launch marketing campaigns without first acquiring working capital.

Small businesses drive our economy. However, these businesses have to compete for advertising space to reach their intended audience. 

Distinguishing yourself from established brand names can be even more challenging. Even if you are successful in standing out, traditional marketing is prohibitively expensive! 

Traditional marketing techniques include billboards and television commercials. Due to the high cost, participation in these mediums can be challenging for a small business. Consider obtaining a loan for business advertising.

Even if you avoid traditional marketing, marketing costs continue to exist. While the new wave of digital marketing tools has simplified the process of connecting with your audience, they are not without cost. Marketing your products and services to your customers online can also be costly. 

Furthermore, you cannot ignore your website. The cost of developing your business’s domain and giving it a professional appearance is substantial. Maintaining a social media presence and actively monitoring your social community are critical components of connecting with your customers. 

While social media may appear to be free, most people are unaware of the hidden costs. Remember that you must either pay for content creation or devote your own time to growing your online following. If you do not have cash in the bank, a significant upfront investment is required to start digital marketing, another reason to consider a business advertising loan.

Return on Investment (ROI)

It is critical to developing a strategic approach to advertising and marketing that maximizes your return on investment. Return on investment is crucial, as you will pay back the loan with interest! 

And, as a business, you’re going to want to maintain profitability!

The issue with advertising loans for businesses is that traditional channels don’t always offer this type of funding. Banks, credit unions, and conventional lending institutions are less likely to lend money to a company that intends to use the funds for marketing. 

Certain banks will lend money for this purpose, while others will not. It is critical to research before applying for a business advertising loan. It is essential to keep in mind that banks may lend you money if you meet their stringent criteria.

Among the requirements of a bank are the following:

• A favorable credit rating for you and your business. 

• A detailed business plan outlining the use of funds.

• Collateral to guarantee repayment of the business loan. 

• At least two years of business experience!

• Current financial statements.

That is why there is a second possibility. This loan option is a “merchant cash advance.” This funding method can provide you with cash in as little as one day, allowing you to immediately begin marketing campaigns. 

Additionally, the lender will not inquire about your intended use of this advance. As a result, you can use it to pay agency fees, create a new website, erect a billboard, or air a commercial!

Marketing and advertising are critical to a small business’s growth. With the proper strategy and team in place, the difference between success and failure can be significant. 

We understand how costly marketing can be. That is why Sunwise Capital offers a simplified application and funding processes.

• A one-page online application
• Prompt turnaround and response
• Fast access to the funds in your bank account
• Have been operational for a minimum of 1 year
• At least $15,000 in monthly revenue
• The freedom to invest your money in ways that will benefit your business’s growth

6. Refinance or Pay-off Debt

It may seem contradictory to acquire a loan to pay off debt, but thousands of small business owners have used a small business loan to refinance or consolidate their current debt. A lower interest rate can equal a lower monthly payment, which can help when you are trying to balance your books. SBA loans and various lines of credit can have low interest rates and can be beneficial in the consolidation process.  Remember that the SBA and lines of credit look at your personal credit score and require a personal guarantee.  Unfortunately, bad credit doesn’t work with these two solutions. However, depending on your current rates, business credit cards may work for you.  In some circumstances, bad credit loans will work.

What is refinancing a business loan?

Applying for a new loan with the same or a different lender constitutes refinancing your business loan. After repeating the loan process, you obtain a loan that pays off your existing debt.

When Is Refinancing a Small Business Loan a Good Idea?

Operating a business is challenging enough without having your cash flow stifled by large loan payments. Refinancing your small business loan may provide much-needed relief if repaying your lender has become increasingly difficult.

Why are you considering refinancing?

Numerous reasons exist for refinancing a small-business loan, assuming you qualify. Typically, the primary advantage is a lower interest rate, which translates into significantly lower monthly payments. Lower rates are not, however, the only possible benefit. 

Additionally, refinancing may enable you to obtain additional funds for business expansion and new expenses. Additionally, it may allow you to extend or improve the terms of your loan or avoid an impending large balloon payment.

The advantages of business debt refinancing

A small business loan for debt consolidation can help you free up cash to reinvest in your business while also lowering the total cost of your debt and monthly payments. Discover additional benefits of debt consolidation:

Monthly installment payment decreased.

An adequately structured refinance may result in a significant reduction in your monthly payment. Reducing your monthly payments allows your business to improve its cash flow and invest more in itself.

Rates of interest reduced.

Additionally, refinancing the debt can result in a lower interest rate and thus a lower overall cost of the loan. High-interest debt can keep you paying for an extended period, as a more significant portion of your payment every month goes toward interest and a smaller amount toward debt repayment.

You can save money and, in some cases, use the savings to pay down the principal on your debt by obtaining a more affordable loan. The result is a shorter term of payment.

Credit score improvement

Numerous high-interest loans or fully charged credit cards can have a detrimental effect on your credit score. And a poor credit score is a significant barrier to obtaining affordable loans.

You can improve your credit score and credit utilization ratio by repaying high-interest business credit cards and loans on time. The benefit is it lowers your debt-to-credit-limit ratio.

Is refinancing my business the best course of action?

While refinancing a small business may sound appealing, it is not for everyone. If your business meets the following criteria, refinancing may be a viable option:

• Interest rates have decreased by at least one point since you initially financed: Calculate your payment to ensure that it decreases sufficiently to generate a profit after closing costs and fees.

•Early repayment penalties will not derail you: Prepayment penalties on your current loan may negate the refinancing benefit.

• You intend to continue operating your business in perpetuity: It takes time to recoup refinancing costs such as points and fees.

• Currently, the majority of your payments are interest-based: You’ve only just begun repaying the principal on the loan at this point. During this period, refinancing at a lower rate can significantly reduce your total interest burden. Savings will be minimal if you are paying primarily principal.

• You are an owner of equity: While you do not want to wait an extended time to refinance, having some equity in your business qualifies you for lower interest rates.

• You have outstanding credit: You must have good credit to qualify for low annual percentage rates.

• You’re unhappy with the terms of your current loan: You may be paying exorbitant interest rates, facing a big balloon payment, or oppressive late fees, or other terms and conditions that are suffocating your business.

• You meet the requirements for SBA refinancing: While you have various refinancing options, the Small Business Administration offers some of the most competitive rates and terms available. 

It refinances loans from other lenders and even its own older loans in certain circumstances: Your business must be eligible for SBA financing; the current debt terms must be unreasonable; the current creditor must remain unaffected by the refinance, and your business must stand to benefit materially from the refinance.

1. Compute the math

2. Make intelligent inquiries

3. Be selective in your lender selection.

4. Maintain a vigilant eye out for penalties

5. Keep an eye on your lender.

6. Develop into a savvy borrower

7. Consider incorporating an SBA loan into your refinancing strategy.

Do you know the difference between debt consolidation and a business loan?

If you have multiple business loans, it may be worthwhile to consider business debt consolidation. Consolidating business debt simplifies debt repayment by cramming it into a single monthly payment, ideally at a lower interest rate. It can help make debt repayment more manageable and potentially more affordable — especially if you’re consolidating high-interest financing sources such as credit cards, lines of credit, or merchant cash advances.

Is a business debt consolidation loan, on the other hand, the best course of action for your business? And how does it work? Jump in to learn the answers to those questions, as well as more about business debt consolidation.

Small business debt consolidation is similar to consolidating any other type of debt. The following is the procedure:

• You have the option of consolidating which commercial debts.

• You apply for a new business loan; if approved, you repay the consolidating loans with the proceeds.

•You make payments on the new loan under the consolidation lender’s terms.

There is more to it. For example, you’ll need to research lenders and their business debt consolidation options to secure the best terms. Additionally, you’ll need to review your credit report to determine the types of loans for which you may qualify. Additionally, it is critical to recognize that consolidating business debt does not necessarily imply refinancing it.

Is taking out a business consolidation loan prudent?

Consolidating your business debt may or may not be the best course of action for you. Think about the various factors before applying for a business consolidation loan. Improvements in the following areas could result in a lower interest rate, longer repayment terms, and a greater probability of approval:

• Individual credit score 

• Business credit score

• Personal finances (increased income and or acquisition of a new source of revenue) 

• Business finances (increased income and or acquisition of a new source of revenue) (increase in revenues and decrease in expenses)

An excellent place to start is by weighing the benefits and drawbacks of small business debt consolidation.

To begin, let us consider the advantages:

1. Lower interest rate on a new business debt consolidation loan.

2. Repayment of loans is less stressful

3. Your credit score may improve.

Consider the disadvantages now:

1. No guarantee that you will receive a lower rate.

2. The cost of repaying your business debt consolidation loan may be higher.

3. Consolidating business debts may not be enough to address more severe cash flow problems.

What are my debt consolidation loan options for my business?

1. Apply for a bank loan.

2. Consider contacting the SBA.

3. Utilize alternative lenders to consolidate business debt.

What Is the Difference Between Business Debt Refinancing and Consolidation?

When the time comes to restructure your business debt, you have a few options as a small business owner. Each of these strategies aims to gradually reduce your debt’s burden and reduce your overall cost. If your objective is to improve your cash flow or reduce the total cost of ownership of your loan (or loans), you may want to consider consolidating or refinancing.

Although the terms consolidating and refinancing are frequently interchangeable, they are two distinct methods of restructuring business loans. Consider the distinctions between these two strategies and how they can benefit your business.

Before Consolidating or Refinancing, Consider the Following

Before you pursue either of these restructuring options, determine the growth in revenue since your last loan. If neither your credit score nor your income has significantly improved since then, you may remain ineligible for a substantially better financing option. 

Consolidating or refinancing may require you to wait until your business improves or your credit matures.

When shopping for financing, compare the annual percentage rates (APRs) of various loan products, not just their interest rates—the APR includes all yearly fees and provides a comprehensive picture of a loan’s total cost. Consider the term length to determine how much each loan requires adherence to a strict repayment schedule.

Additionally, it would help if you considered any prepayment penalties that your original lender may impose. Consolidating or refinancing is considered “prepaying” in this situation and should be considered. 

Proceed if the benefit of restructuring outweighs the cost of the penalty.

After evaluating your business’s needs and determining that the time has come to restructure, you must decide whether to refinance a single loan or consolidate multiple loans. 

Either option is a proactive step toward financial strength for your business, eschewing more immediate solutions in favor of longer-term ones. You’ll be laying the groundwork for the continued success of your business.

7. Day-to-Day Expenses

Making sure that your business runs smoothly and that the lights stay on takes both time and money. Many small business owners use a line of credit or a working capital loan to help cover the costs of their day-to-day expenses. They use what is called operating capital.

What does the term “Operating Capital” mean?

Operating capital is simply the cash and liquid assets that a business can use on a day-to-day basis to conduct business. Whatever industry or business type, all companies have unique operational processes and tasks associated with creating a product (or products) or providing a service (or services) to consumers.

These core processes are critical to a small business’s success, and the more efficient they are, the more money the company saves and can use to expand operations or add as pure profit.

What Different Types of Business Operations Are There?

• Physical location: This includes your business’s physical location, uses, processes, production, and operations. Depending on the company, the location and particular building or offices cost money. The cost is in lease or rent, mortgage payments for commercial real estate purchases, and the refinancing debt associated with the commercial property acquisition.

• Equipment: Your industry and type of business will typically require some form of business equipment and or assets to assist it in performing its tasks. These items may include stoves or ovens for restaurants, heavy machinery for construction companies, various trucks for contractors, computers for business consultants, and software for information technology firms.

• Labor: The operation of the business requires the assistance of staff and employees. While technology has streamlined employee tasks, all companies need actual humans to operate and run them. Each of these employees gets paid for their services with a salary and wages.

• Process: How business tasks get done to achieve a company’s goal of delivering a product or service to the end-user and generating revenue and profits. These processes encompass not only operational activities but also those associated with support and management.

How Critical Is Operating Capital?

Every thriving business is reliant on the availability of materials and services necessary to operate efficiently. These resources presuppose access to capital to assist in financing such business activities.

As an example, all manufacturers must have raw materials. Staffing firms must maintain sufficient capital to pay their employees on a timely basis. Wholesalers and distributors require cash to finance their supply chain operations.

Both brick-and-mortar and online retailers require funding to assist with inventory purchases. Simply put, a business cannot function properly without an adequate amount of available operating capital. This capital is frequently the difference between a successful small business that grows and profits and one that fails to survive.

What is an Operating Capital Loan?

Working capital loans are a type of financing used to assist a business with its daily operations. A working capital loan is another term for an operating capital loan – the two terms are essentially synonymous. Working capital loans are available in various forms, sizes, interest rates, repayment terms, and structures.

In general, a working capital loan is secured against a business’s cash flow or is used to supplement a business’s cash flow. Due to the critical nature of operating capital and the fact that it varies according to sales and revenue streams, a company cannot always plan for long-term operating capital financing.

Sometimes, the loans are for emergencies or repairs. While rates on traditional operating capital loans can be pretty affordable, they can be significantly higher when seeking alternative working capital.

Working Capital Loans: Their Advantages and Disadvantages

One immediate advantage of working capital loans is that they are simple to obtain and enable business owners to efficiently cover any gaps in working capital expenditures.

Additionally, it is a form of debt financing that does not require an equity transaction, which means that a business owner retains complete control of their business, even when financing is urgently needed.

In some instances, unsecured working capital loans are available. An unsecured loan means there is no requirement for collateral to secure the loan. On the other hand, unsecured loans are available only to businesses and business owners with a good credit history.

Securitization or collateralized loans are for businesses with a limited or non-existent credit history.

It can be inconvenient to obtain a collateralized working capital loan that requires asset collateral. However, this type of working capital loan has additional disadvantages.

Interest rates are high to compensate lenders for their risk exposure. Additionally, business owners must personally guarantee the collateralized working capital loans. The interest rate and term reflect the business owner’s credit score, which means that any missed payments or defaults will hurt their FICO score.

Operating Capital Loans

Bank Financing Capital for Operations

Banks offer a range of low-interest loans with flexible repayment terms, including short- and long-term. Banks most frequently offer operating capital loans in the form of term loans and lines of credit.

Banks offer monthly repayment for term loans, and the interest rate is an annual percentage rate (APR).

A line of credit is a pre-approved line of credit that a business can access as needed. Rates are typically competitive, making them the best debt financing option available.

Small Business Administration Loans

SBA working capital loans are very similar to traditional bank loans but differ slightly in that the US Small Business Administration governs the program.

The SBA’s primary source of operating capital is the 7(a) loan program. Through the SBA Express Program, this program can provide operating capital in the form of a term loan with a maximum maturity of ten years or a line of credit. Funding is as quick as ten days after the business applies for the SBA loan program.

Asset-Based Operating Capital Loans

Not every business or small business has collateral to use to secure a loan. If your company has substantial receivables, high-quality equipment, significant inventory, or owns commercial real estate, you may be able to borrow operating capital using these assets as collateral.

While the amount of funding and interest rates reflect the collateral available, an asset-based lender will also consider your business’s overall financial picture when determining the most appropriate funding structure.

Additional Operating Capital Sources

When it comes to operating and cash-flow requirements for your business, you may not always have the luxury of waiting for a bank or credit union to complete their funding process. Alternatively, you may have excellent credit but lack the profitability, assets, or collateral required by a bank and or the SBA.

If this applies to your business, alternative lenders can finance businesses with adequate – but not exceptional – credit and can fund within days with significantly less documentation than traditional lenders.

Advances on Working Capital

Suppose you require immediate operational cash flow and are willing to accept a slightly higher interest rate in exchange for more expedited financing. In that case, an operating capital cash advance may be a viable option.

A funding company may be willing to pay you a portion of your business’s future revenue in exchange for selling a part of that revenue upfront (at a discount to the lender). While these financing tools are expensive, the loans fund in a matter of days, if not the same day.

Additionally, because these loans reflect the cash flow and health of the business, and not the companies owners’ imperfect credit, the loans may be approved, even those with FICO scores as low as 550.

8. Upgrade Technology

New technologies and equipment is coming out all the time. Upgrading your systems can help improve the performance and profitability of your business. If you are still using old or obsolete technology, maybe investing in your business is just what the doctor ordered.

Small businesses have constrained budgets, particularly when it comes to upgrading systems and technology. However, upgrades can quickly pay for themselves through increased employee productivity and accomplishing more in less time. Perhaps it is time to prioritize your technology assets to ensure their continued smooth and efficient operation.

It is critical to invest in technology to stay ahead of the curve. Keeping up with technological advancements enables you to maximize the efficiency and effectiveness of your business. However, technology is not cheap and frequently necessitates substantial investment.

Consider your business’s decision to install or upgrade computers. This decision includes the hardware cost and the costs associated with establishing a network connection to connect to the Internet. While the price of computers and accessories has decreased, purchasing one still requires a significant investment. If you opt to buy servers, the cost will increase even more.

In this case, hardware alone would be insufficient and additional software would be required. The good news is that most software products are now available on a subscription basis, which typically results in a lower upfront cost. Furthermore, businesses would require specialized software, which naturally adds to the expense. There will be additional costs and fees if you choose to hire someone to manage your technology needs.

Additionally, you may be required to pay for advisory services to ensure that your requirements are fully understood. There is a wealth of technology available to businesses, and it may be beneficial to seek outside assistance in determining which technologies work best for you. These services will take care of the entire process of upgrading your technology, from planning to defining the strategy and ensuring a smooth implementation.

Why is it prudent to obtain a bank loan?

Everyone knows that technology is expensive and that a significant amount of money is required to acquire it. While you should consider using your available resources if you have sufficient cash on hand, large capital expenditures may not be prudent in the current volatile environment. Bank loans are a viable option in this instance. It’s a lengthy process, and funding can take weeks or even months.

The primary benefit is that you can obtain funding without diluting the ownership of your business. It makes little sense to acquire or upgrade technology for your company through an equity stake sale. A better option is to obtain debt. The creditworthiness of your business and you personally, time in business, and annual revenue will dictate the interest rates and terms for repayment. Don’t be surprised at the amount of paperwork required by your bank and the time required to gather all the documentation.

Remember, a bank loan does not come without strings attached. While you must adhere to certain covenants, your business can continue to operate normally as long as you make payments on time.

Additionally, it is beneficial to understand the repayment terms and to budget appropriately. This clear understanding provides peace of mind while avoiding depleting working capital to implement new or upgraded technology.

What if the bank responds with a resounding “No!”

If the bank cannot provide capital, consider alternative capital sources such as the Small Business Administration and alternative online lenders like Sunswise Capital.

Sunwise Capital

At Sunwise Capital, we understand how hard it is to run a small business. Sometimes you need to take out a loan for that little boost to help your business take off. If you have any questions about what you can use a small business loan for, or if you would like to see if you qualify for a loan, contact us today. We’d be happy to answer any questions you may have. The loan amounts at Sunwise Capital be anywhere from $10,000 to as much as $5 million. Loan repayment terms can range from 6 months to 5 years (or more with SBA loan types). Give us a call at 888-456-9223 and let us know how we can help.