Business Loans vs Unsecured Line of Credit
The ultimate program showdown! Business loans and business lines of credit are two sought after programs that can either save or destroy a business. There are pros and cons to each, but the biggest gap between the two is how attainable these two programs can be. Let's take a quick look:
Business loans/Merchant Cash Advances: These traditional business loans are for higher risk merchants. Generally you will have to be in business for at least 4-6 months at MINIMUM and be earning a minimum of $10,000 per month on the average. But aside from bankruptcies, your credit can be at almost any range. These loans are not based on "interest rates". How they work is based on "buy backs", meaning that they are purchasing future receivables based on the gross income at a determined cost. For example, let's say it's a $10,000 loan. The lender is purchasing receivables at a 1.10 buy back. So that means that they are purchasing your future receivables for $11,000 (10,000 x 1.1).
Pros: They fund FAST. We're talking about 2-3 days. Anyone needing fast funding can apply for a loan on a Monday and have thousands by Wednesday. They are more flexible with credit criteria. Let's face it, most people face some kind of credit struggle every once in a while. These are short term loans with no penalties for early pay offs and are available at the tip of your fingers.
Cons: High buy backs. Most of these loans do not get paid back on a monthly basis, they get paid mostly on a daily basis (business days) and anywhere from 4 months to a year, so payments are relatively high. You need to be an existing business and generate so much capital which doesn't happen right away. With high risk lending comes higher fees as well. These cash advances are mostly limited to certain industries, usually good for businesses with consistent traffic, such as retail stores, automotive shops, etc.
Unsecured Business Lines of Credit:
Pros: Lower interest rates. Point blank, when it comes to business LOC, most programs offer 6-12 months of ZERO interest. You have the option of paying monthly instead of daily or weekly. You only need to borrow what you need and pay interest on what you borrow only. Plus you can withdraw at will. If you qualify for a business LOC, this is the route to go. It is definitely what I would recommend to clients. Any type of business can apply, so it is not restricted to the industry. Time in business is not a factor, you can even apply as a start up! I would know, I have funded start up businesses with LOCs. They report to your business credit and will not affect your personal.
Cons: Low approval rates. These are the typical restrictions: minimum of 680 credit score, no inquiries within the most recent 6 months, no more than a 30% debt to credit ratio, and a minimum of $5,000 of revolving credit is required. For those responsible cash users, this would typically hurt your chances.
Typically what I try to do for my clients is offer credit repair services where they would be able to qualify for a business line of credit should they need it in the near future. In the world of finance, cash is king. But credit and good structured debts is how business grow, expand, or get saved.
Unsecured Business Lines of Credit: Oh the freedom to use a credit when and where you want it, right?