One of the most frequent questions upon which we advise our clients is when to use a business line of credit as opposed to a business term loan. We commonly advise our clients based on the use of funds and rate of return. In other words, what are they doing with the funds and how quickly will that merchant see a return.
The first step is understanding the difference between the two financial instruments. A business line of credit differs from a business term loan in several key factors. First a business line of credit allows the merchant only to borrow what they need for as long as they need the funds. In other words, if the merchant only needs the funds for ten days, they will only pay ten days worth of interest with a complete principal payback.
The second distinction is in regards to the frequency of draws. A business line of credit, for a merchant in good standing, allows that merchant to draw as frequently as needed. For example, if the merchant draws $10,000 today, then decides 48 hours later that an additional $3,000 is required, the merchant retains that flexibility. Unlike a business term loan, the merchant does not have to pay back a specific percentage of the funding to be eligible for additional funding.
A similar distinction is in regards to payback structure. With a term loan, funds do not become available as the principal balance is reduced. With a business line of credit, there is no waiting period. As soon as payment is applied and the principal is thus reduced, the merchant can borrow those funds again.
Given these factors, we can see when each product would be appropriate. A business term loan is an excellent product for longer-term investments where a company has reached or is about to enter peak growth. On the other hand, if a company is in a growth stage, shorter-term funding would be more appropriate. A great example of a shorter term funding is a business line of credit.
More simply put, a business line of credit is the best financial product when a company has a more frequent use. A great example is a construction company with overlapping jobs. Most projects will be completed with payment received in 90 to 180 days. However, most construction companies will manage multiple projects at a time. A business line of credit will allow the construction company to take several draws as each product starts. The line of credit will also allow the constructions company to pay-off or pay down the balance once payment is received for a project. The flexibility of the line will enable the construction to pick up supplies as needed and save on interest.
There are many examples when a business line of credit is the most appropriate options. A construction company is just one of many instances where merchants benefit from a business line of credit. In short the factors to look at are, the use of funds, return time on use of funds, the flexibility of use and avoided locking in funding for a long period during stages of growth.
It is a very common for new potentials clients to ask the question: how do I get a line of credit for my business?
The first thing to understand is that there several different business lines of credit. Identifying which type of business line of credit works best for a particular merchant.
There are three general types of business lines of credit
An unsecured business line of credit is now one of the most popular financial tools used by small businesses for growth. An unsecured line of credit is a revolving line that is not backed by any particular assets. Qualifying for this type of line of credit is based solely on the financial health of the business.
An equipment line of credit is a pre-approved line used solely to purchase equipment. Keep in mind that equipment not only includes things such as machinery and hard yellow. Also included in this category are software, computer hardware, servers, furnishings, telephone systems, POS systems and more. An approved draw is not only based on the financial health of the merchant, but also based on the type of equipment and its use related to that type of business. In other words, the equipment must be used in the normal course of business for that industry.
An asset-based line of credit is a type of secured line of credit. This line is secured by assets that have already been acquired by the merchants. These assets could include items such as equipment, receivables, inventory, etc.
Once I identify the type of line of credit that is right for my business we go back to the original question: How do I get a line of credit for my business.
An Equipment Line of Credit and an Assets Based Line of Credit each share a common characteristic in that they both are secured with assets. The most significant difference is that an Equipment Line of Credit can be set up without a specific use in mind, whereas a general Asset-Based Line of Credit is set up backed by certain specified assets. The reason for the difference is that generally the merchant is given access to that the ABL Line once the proper assets have been properly secured. On the other hand, the Equipment Line is approved up to a specified amount but is only accessed once the merchant has chosen to acquire the asset. In other words, there is a second step to the process, where the invoice, vendor, and equipment still need to be approved before the draw is funded.
For an asset-based line of credit, we generally like to like look at not only the credit strength of the business but also we examine the financials of the company. If that is all acceptable, we then value the assets to understand how much we are comfortable funding given the value of the security interest pledged.
For an equipment line of credit, we base the approved line amount initial on three factors. We examine the credit of the business, we examine the creditworthiness of the business owner or owners, and we examine the affordability aspect for the merchant. Once the line has been established, the second step in the approval process is to examine the type of equipment, approve the seller of that equipment and ensure that the equipment is applicable to that particular business. This is a fast process that allows the vendor to get paid quickly…many times even before the equipment has been delivered.
An unsecured line of credit is rapidly becoming the most common line of credit. Although this type of funding was commonly offered in the past, this instrument was scaled back during the most recent recession. Now we are seeing a better, smarter product hitting the market. It is likely that if your business is asking ‘how do I get a business line of credit’ this is the product that will fit your small to medium-sized business.
To qualify for an unsecured business line of credit, we generally analyze the creditworthiness of the business, as well as 3 to 6 months of bank statements. We usually only need three months but additional bank statements may create a clearer picture and help secure better funding terms.
As we see there are many options when obtaining business credit lines. When trying to answer ‘how do I get a business line of credit’, the best first step is always to consult a business funding specialist whom you trust.
What is the average interest rate for a business line of credit?
This is a great question and yet still one the most difficult to answer. Though our rates start at 4.8%, there is no average rate because business funding can vary based on industry, annual revenue, geography, cash flow, credit, business credit, security interest, no security interest, and lots more.
Four major areas can affect the rate for which a business line of credit is approved.
What is the difference between secured and unsecured funding and why are the rates different?
Secured funding will always have a lower interest rate than unsecured funding. However, there are more options in the realm of unsecured funding when looking for a business line of credit. Secured funding must be backed some sort of asset. This could be anything from hard equipment to receivables. The issue for many businesses is that they do not have the types of assets which are attractive to a provider of a line of credit. The other is issue is that once the business line of credit is issued, the assets become encumbered.
An unsecured business line of credit is more common since all business have the potential to qualify. However, since the line of credit is not backed with collateral, there is more risk involved. As a result of the increased risk the rates will usually be higher than a collateralized line.
So, what is the average interest rate for a business line of credit? Now that we have established the difference between a secured and an unsecured line of credit, we are closer to the answer. Please keep in mind that although unsecured lines are riskier, the still can have a low cost depending on the other factors.
Does Industry play a factor in the average interest rate for a business line of credit?
The next factory to consider is industry type. For each industry, what is the average interest rate for a business line of credit? This is an excellent question. The reality is that some sectors perform better than others. Some industries fluctuate more with economic and political decisions (energy for example). Some industries are better served with a different financial vehicle than a line of credit.
Does business or personal credit determine the average interest rate for a business line of credit?
The third factor is creditworthiness. Many businesses qualify for a line of credit. However, these lines of credit may look different from business to business. There are many different lines of credit for the different qualifying factors. A business with more time in business might get a better rate than an identical younger business. The creditworthiness and history of the business owners is a factor. The credit of the business plays probably the largest role. Just like with consumer financing, a business line of credit will depend on the credit and risk factors. A business that scores as a lower risk will be offered more favorable terms.
If my company has a strong gross profit margin, will that make a difference in determining the interest rate on a business line of credit?
Financial strength is the final piece of the puzzle that plays a major role in answering what is the average interest rate on a business line of credit. Outside of the credit of the business, the other equally major determining factor is affordability. A business obviously must be able to afford the repayment of the line of credit. Better the cash flow for business probably means a lower interest rate will be offered.
So, what is the average interest rate for a business line of credit? The answer is…
We wish there were a more straightforward answer. We all would like to be able to provide the same response to every potential client. The reality is that, if we could answer ‘what is the average interest rate for a business line of credit?’, It would probably mean we are not servicing a large segment of the business community. All businesses are different. The best thing to do is carve out 10 minutes and have a discussion with business finance professional. Then you will probably be able to get an answer to “what is the average interest rate for a business line of credit?”.
In an environment where businesses have a hard time getting a traditional bank loan, revenue loans have become all the rage. You might have heard about them or gotten calls to your business offering them.
The industry is booming and while they often get a bad rap, revenue loans can do wonders for your business if used correctly. Here are a few key benefits of revenue loans that you can take advantage of to grow your business:
- Cash Fast!
While planning in advance is always best, sometimes life happens and you need funding fast. Revenue loans are most famous for their quick turn around time. From start to end, if you have all your ducks in a row (aka all your documentation at hand), you can get your funding in as little as two days. Even the fastest bank loan will take a minimum of two weeks.
This means if you’re really struggling or have the perfect growth opportunity that needs to happen quickly, you can get a cash injection pretty quickly. For some businesses, this is a real lifesaver.
- No Long-Term Debt
For a business, carrying long-term debt can be a hassle. While having relatively lower monthly payments over 5 or 10 years can be appealing when it comes to things like building a new wing of your business, for certain uses, long-term debt just doesn’t make sense. Why pay off your 2015 inventory in 2025?
You might need funding again in 2016 to sure up some inventory or hire new staff. Having a 5 or 10 year loan on your balance sheet will make it difficult to get additional funding. However, a short-term loan that you know you will be able to pay off in 6-12 months makes more sense for short-term expenses that will boost revenues.
- Grow Your Fledgling Business
What do you do when you’re 10 months into your business and it’s booming? You need more cash to grow, but a bank won’t lend you money because they still consider you a startup. This is where revenue loans are prefect. Banks generally require two years of business tax returns, while most revenue lenders require only 6 months of business bank statements.
While not perfect for brand new startups, you don’t need that much time in business to show your business can repay the loan. This could be great for those businesses with cash flow issues and not enough time in business for a traditional loan.
When it comes to all funding, and revenue loans is no different, the key is to make sure your return on investment will allow you to repay the loan and grow your business. Keeping that in mind, revenue loans is the solution to many business’s cash flow troubles and could be a life saver for yours too.
The Best Time to Get Funding for Your Business
The best time to get funding for your business is before you need it. That doesn’t mean you need to be frivolous with your business funding. It means you need to be prepared, and you need to understand a few of the realities of business funding.
Reality #1: It’s easier to get funding when you don’t need it.
This sounds counterintuitive, but lenders love to give money to those who don’t really need it. The reason is when you aren’t hurting for money, you have a higher chance of repayment. If you’re strapped for cash, you’re ultimately less likely to pay it back. It’s really just about the lender’s risk.
That’s why, it’s a good idea to get funding while you still have some cash reserves and you’re planning ahead. That doesn’t mean you can’t get funding when you’re in dire needs of funds but showing strong repayment ability generally leads to higher funding amounts and better rates.
Reality #2: Funding takes time.
You might have received emails, calls, or letters from companies telling you they can get you funding in 2 days. This might lead you to believe that all funding can happen that fast, and in some cases it can. But really, the whole process takes a bit longer than that. Most people have a hard time getting together all their financial documents, which are essential to funding. 2 days isn’t the most realistic.
Most funding will take anywhere from two weeks to a month from start to finish. While this process can be much faster if you have all your financial documents in order and you have help from an expert, there are often hiccups along the way that slow the process down. You don’t want a bump in the road to ruin your business, get your funding before you really need it so you’re ready to go when sales are calling.
Reality #3: Whatever you need funding for probably takes longer than you think.
Let’s say you need funding for the holidays, to stock up your inventory, create a great marketing campaign and hire some employees. You might be thinking you can start all this on November 1st and be good to go for Thanksgiving, but you’d be massively behind. You can’t just throw together a marketing campaign. It needs to be appealing and well-timed. You can’t just hire employees and expect them to have all the experience they need to succeed. Allow plenty of time to get the funding you need and make sure you’re working to meet the goals of your company.
If you run a seasonal business, you know that making the bulk of your income only a few times a year can be a challenge. Or at least that’s what everyone wants to tell you. But let’s take a minute to see the glass as half full. Having a seasonal business also means plenty of opportunities for growth.
Here are a few things you can do to make the best of your seasonal business.
- Make the Most of Your Time. If your business is only really running certain times of the year, this means you have a lot of down time. This is the perfect opportunity to plan. Brainstorm new marketing ideas, improve your product or service, research new markets. You have plenty of time to kick it up a notch and be action-oriented. Take advantage of the fact that you’re busy only certain times of the year by making those times the absolute best you can make them.
- Diversify Your Income Sources. Having extra time to plan, also means you have time to explore new sources of income. Whether that means developing new products in your downtime (when you’re not planning, that is) or finding new ways to adapt your seasonal product or service to everyday lives. Diversifying your income source so you’re not only relying on a few months of sales is smart business. Get creative and think outside the box.
- Get Funding to Grow. Funding can help as you’re leading up to a season when sales will begin. Hiring, inventory and marketing all require extra cash, until you’re able to make some sales. Revenue loans can be a great source of funding for seasonable businesses because of the short-term nature of the loan. You don’t have consistent cash flow twelve months of the year, so why be stuck with monthly payments for 5 years when you can pay it all back in 6 months with your uptick in seasonal sales? Remember it’s important to start the funding process early.
The key to running a successful seasonal business is in the planning. You want to make sure you have enough capital to succeed without drowning yourself in long-term debt. Finding the right funding solution to get you through cash crunches is the best way to grow your seasonal business while keeping your business fresh and thriving.
Credit is the primary method through which most businesses obtain the funds to get started and to continue to grow. Business owners are in a unique situation; having an opportunity to acquire both personal and business credit. Knowing the difference between the two is important if you want to maximize the value and creditworthiness of your business.
Many first time business owners will rely heavily on their personal credit in the beginning stages of starting their business. Some sole proprietors may choose to use personal credit cards and apply for lines of credit to pay for start-up expenses. These start-up and solopreneurs may not realize the importance of building business credit, or the negative impact these actions can have on their own personal credit.
Using personal credit to obtain business funding can have a negative impact on your personal credit. A business owner will typically far exceed the number of credit inquiries and obligations that a regular consumer averages each year. These additional inquiries and credit obligations can have a negative impact on the personal credit score of the business owner.
Using personal credit also denies a business owner the opportunity to start building business credit. Business credit is very different from personal credit. Personal credit scores range from 300 to 850, with a score of 680 or higher considered an excellent rating. Business credit scores range from 0 to 100, with a score of 75 or higher considered excellent.
Aside from the obvious benefit of clearly separating personal and business expenses, there are other reasons why building business credit is important.Here are three benefits of business credit, as outlined by the Small Business Administration (SBA).
- Businesses have greater credit capacity than personal. As a creditworthy business, you have 10 to 100 times the credit capacity compared to personal credit.
- Business credit protects personal credit. As previously discussed, business credit eliminates the need for additional credit inquiries and obligations that can lower your personal score.
- Business credit increases company value. The creditworthiness and finance ability of a business is a transferable asset that will increase its value to a potential investor or buyer.
In order to start building business credit and protecting your personal credit, your business will need to incorporate and obtain a Federal Tax ID number. Once your business has its own Tax ID number, it is considered a separate entity to the IRS and state agencies; it can file its own taxes and register with a business credit bureau. Before you register, make sure that all of your business licenses are up to date and that you have a business phone number.
It may seem like a lot of work to begin building separate business credit, however the obvious benefits of preserving your personal credit, increasing the credit capacity, and increasing the value of your business make it a smart choice.
If you have questions about the fundability of your business, want information on alternative business financing options, or want to know more about how your personal credit can affect your business credit, contact an expert at the Crestmont Capital for a personal recommendation that will best benefit your specific business funding needs.
How to Calculate Your Marketing Budget
Marketing and advertising are a crucial part of driving your company’s growth and expansion. Determining how much money to spend in these arenas can often be a daunting task for a small business owner.
Spend too little and you risk stalling your business, spend too much and you can eat away at your profit margins.
How to Calculate Your Marketing Budget
Percentage of Gross Revenue
Setting a marketing budget as a percentage of your gross revenue is the most commonly used method for most companies, both large and small. According to the U.S. Small Business Administration, companies with revenues less than $5 million should allocate 7-8% of their revenue to marketing.
There are many factors to consider when looking at this number, however. This percentage assumes you have margins of 10-12% after the marketing budget and other expenses have been covered.
Additional Considerations for Determining Your Marketing Budget
While 7-8% of gross revenue is a good rule of thumb, there are many other things to consider when setting your marketing budget.
- Growth Stage – In the early years of business when you are trying to build a brand, spending up to 20- 50% of your gross revenue on marketing and advertising can be appropriate.
- Your Industry – Certain industries, such as retail, may spend significantly more on marketing than other industries. A good rule of thumb is to research what your competition is spending. Public companies in your industry may publish their marketing budget in their annual reports. Smaller, private companies in your industry will probably not readily give up that information, so you may have to spend some time looking at their marketing efforts to determine what they are spending.
- Volume vs. Margin – Is your business model set up to leverage volume or margin? A volume based business may spend less on advertising and marketing, knowing that the small percentage of a very large business can equal a sizable budget. Walmart, for example, only spends 0.4% on advertising. A margin driven company may have a smaller annual revenue base, and would spend a higher percentage on marketing.
What you do with that marketing budget is just as important as how much you allocate for it. Traditional marketing and advertising plans have now been joined by digital marketing. The Chief Marketing Officer (CMO) Council recently reported that U.S. marketers spend an average of 2.5% of their total company revenue on digital marketing activities (according to a new report by Gartner Inc). Having a savvy marketing plan that includes both traditional and digital marketing strategies is important for businesses to grow and thrive in today’s competitive marketplace. Whatever your marketing budget is, be sure to use it effectively to achieve your business goals.
Know Where to Go: The Importance of ROI
When you are running a small business, every dollar spent matters. This is true even when you just got some funding (or are looking to get some) and have some extra cash in the bank. Knowing where to allocate your fund to best increase return on investment (ROI) is crucial to your survival.
The best way to increase your ROI is to generate more revenue through sales, while making sure your costs don’t skyrocket along with it. Wondering which things can improve your ROI and increase your sales? Here are a few to consider:
Take it to the Net
The internet has changed the way business is done. You have an amazing opportunity to reach millions of potential customers through your website, social networking accounts, and email outreach at a relatively low cost. Investing in your online presence and marketing efforts is not a trend; it is a smart place to focus funds for continued growth.
Your Website is Your New Business Card
Your company’s website makes a valuable first impression on prospective clients. You only have seconds to capture the attention and trust of a new visitor to your website. Not only should your site be relevant, easy to navigate, and visually appealing, it also must be responsive.
94% of of buyers do some sort of online research before they buy, and more than half of those searches are done on a mobile device. Even if you have already invested in your initial website build, investing in regular updates can be a wise choice for funds to make sure users are happy with it.
Your web copy, blog, and content marketing efforts must be targeted and constantly updating. A blog is not enough to deliver ROI. You must know who your target audience is, and use the right language to speak to your ideal customers. Offering valuable content in the form of written and digital content that speaks to the pain points of your specific audience can help convert leads to sales. You may have a dedicated team of content creators on-staff, or you may outsource this task to a professional agency. Either way, effective content that converts is constantly analyzed, updated, and presented in a variety of forms and media.
Promoted Content Fuels Marketing Efforts
Promoted content like pay-per-click campaigns can help you reach a targeted segment of potential new clients. This can be an extremely cost effective way to fuel your marketing efforts and should be part of your marketing budget.
Direct Connect with Social Media
Having social media accounts for your business is not enough to bring in new leads from the internet. Using your social media accounts in the right way, however, can create additional exposure, help define your brand, and allow you to directly connect with current and potential new customers.
Social media has become a cornerstone of marketing strategy; it doesn’t matter what industry you’re in, social media is a tool you should be using everyday to interact with consumers.” –Hubspot.com
To effectively use social media, you need to listen to what your audience is saying. Time must be invested in starting relevant conversations, engaging with your community, and making your customers feel heard and valued. Posting on Facebook or LinkedIn a few times a day about your latest product or promotion will not turn social media into a successful lead generator. You need a dedicated staff member to engage and grow your audience, or you need to outsource this part of your online marketing efforts.
Investing in your online presence and marketing is as important as investing in the right people and equipment for your business. Regardless of what you want to do to grow your business, you need to make sure what you do is giving you the ROI you need to grow.
Do you know where to go to increase your business ROI? Find out what type of funding is available to you through the Crestmont Capital and you can be on your way to growing your business today.