At some point in its existence, a business will need some extra capital. This can be for any number of reasons: a downturn in the industry, a random accident, routine fluctuation, a new marketing campaign, general expansion, replacing worn-out equipment, among many other reasons. If you’re a business owner wondering if you can get financing for your business, and what type to choose, fear not. There are many different types of business loans, and each of them aims to fit a different business need and situation.
Equipment Financing and Capital Equipment Financing
Whether it’s a new startup trying to get off the ground or a successful operation with years of experience under its belt, all businesses need equipment. Everything from software to heavy machinery can be a big difference-maker. However, some pieces of equipment can be quite expensive. Making these significant expenditures can cost your business valuable working capital. Fortunately, there are equipment loans. Otherwise referred to as equipment financing, these types of loans are a way for your business to get the equipment it needs while avoiding large upfront expenses. They’re also some of the most common loans, and qualifying is easier than you might think.
Most business loans require a borrower to have an asset of value to be used as collateral to secure the loan. With equipment loans, the equipment itself is used as collateral, so in most cases, the borrower is not required to provide anything else. Your business’s credit score is a lesser factor; therefore, lenders are virtually just as likely to approve a younger company as they would be to approve an older one with more experience. Also, applying for equipment financing features less paperwork than applying for a regular business loan, so the application and approval processes are usually quick.
Capital equipment financing boasts the benefits of business equipment leasing while also being geared toward the kinds of equipment and scale of use for bigger companies.
Equipment financing allows you to own the equipment at the end of the term; however, with equipment leasing, you make monthly payments for the ability to use the equipment for a limited amount of time. This set amount of time makes leasing a more cost-effective option for equipment that you only need to borrow temporarily. Equipment financing is better suited for things that your business needs for an ongoing and extensive amount of time.
Equipment leasing is similar to an equipment loan in that you receive financing for a piece of equipment for your business. With equipment leasing, you make monthly payments for the ability to use the equipment for a limited amount of time. This set amount of time makes leasing a more cost-effective option for equipment that you only need to borrow temporarily.
Once you've reached the end of the initial agreement, you have the option to renew or terminate the lease. In some cases, you may have the opportunity to purchase the equipment you’ve been leasing for its market value.
Equipment Lines of Credit
How many times have businesses missed out on purchasing the perfect equipment because financing was not in place? You sit around waiting for answers while the equipment you need sits in a warehouse, or worse, in the hands of your competition. An equipment line of credit can help your business move forward with getting the equipment it needs. Simply set up an equipment line of a credit and you’re on your way.
With an equipment line of credit, you get access to a pool of funds which you can draw from whenever you need capital. Unlike a traditional loan, you have the flexibility to borrow up to a specific, set amount. Then you repay only the amount you withdrew, with interest. Equipment lines of credit are conveniently available whenever needed, so you can use it to get the equipment you need.
If you’re in the business of selling large pieces of equipment or technology to businesses, you know that closing a sale with cash is often a tough sell. Customers usually don’t want to go through the hassle of applying for a bank loan, and no business likes laying out a large amount of cash for a purchase that pays for itself over time. That’s where vendor financing programs can help.
Vendor financing is a method of funding in which a vendor lends capital to a customer who then uses it to purchase the vendor's inventory or services. First, the business partners with the lender. Then, the business allows the lender to integrate with their website. When a customer applies for financing, the lender takes the sale on behalf of the borrower. Your company gets a check for the purchase price upfront, and your customer makes payment to the lender.
Commercial lending is a form of debt financing which helps common business expenses like working capital, lines of credit and more. Business lenders offer various types of commercial financing, including commercial equipment financing, commercial lease lines of credit, and commercial capital loans. Each form of commercial financing works differently and has different commercial loan rates, eligibility requirements, and repayment terms. While offering similar types of loans as small business financing, commercial financing is scaled to fit the needs of larger companies.
Lines of Credit (Business and Commercial)
A business line of credit is a revolving line of credit that one can draw against whenever you need it. It's usually used for short-term working capital to help improve cash flow or to finance the costs of surprise expenses. A small business line of credit is revolving, and this is the primary distinguishing characteristic. Also, subsequent draw(s) taken after the initial funding are only restricted by the approval amount and not a pay-down requirement. In other words, the small business can access the line of credit as long as the small business has not hit its high credit limit. Also, you repay only the amount you withdrew, with interest. Business lines of credit are conveniently available whenever needed, so you can use it to handle gaps in cash flow, get more working capital, or address almost any other emergency or opportunity. As we mentioned before, one of its main attractions is its flexibility. Commercial lines of credit share these benefits while being tailored to the unique needs of larger corporations.
Commercial Real Estate Financing
Commercial real estate financing provides business owners with capital for either renovating or investing in commercial real estate. The real estate that the borrower renovates or purchases will act as collateral for the loan itself.
Commercial Aircraft Financing & Leasing
Commercial aircraft financing allows for a customer to finance the use or purchase of a commercial aircraft. There are three main methods of commercial aircraft financing:
- Secured loan – This is a traditional amortized loan, like a mortgage, where the lender lends all or part of the money to purchase an aircraft upfront. The borrower takes title of the aircraft and can deduct depreciation for tax purposes, but if the borrower defaults on the loan payments, Crestmont has a security interest in the plane as collateral.
- Capital lease – In this arrangement, sometimes called a “finance lease,” we acquire the title to the aircraft, not the borrower. However, in many ways the borrower acts as the aircraft owner: The aircraft must be capitalized on the operator’s balance sheet, and the operator can still take depreciation for tax purposes.
- Operating lease – This structure is usually favored by operators that intend to hold the aircraft for a shorter period (five to 10 years), or otherwise want to limit their residual-value risk. Like a traditional lease, the lender retains the title. In general, the aircraft is not capitalized on the lessee’s balance sheet and the lease payments are treated as operating expenses, similar to fuel. Aircraft tax depreciation deductions are usually not available to the lessee.
Small Business Lending
It seems like small businesses are everywhere nowadays. While these businesses are operating and expanding, they sometimes might not have the capital or equipment necessary to reach their goals. The diverse financing options under the umbrella of small business lending can help those businesses acquire what they need to succeed. These include SBA Loans, Traditional Term Loans, Business Lines of Credit (which we covered earlier), Unsecured Working Capital Loans, Startup Business Loans, and Merchant Cash Advances (or MCA’s). Each of these aims to fill a specific small business need. Let’s discuss what each one is.
SBA loans are the cream of the crop of small business loans. The Small Business Administration partially guarantees SBA loans, and because of this, lenders are willing to lend to small businesses more often and with better terms. SBA loans come with exceptionally ideal terms, but they also come with the most stringent qualifications.
Traditional Term Loans
Term loans offer a straightforward, affordable funding solution for small businesses. When someone thinks of a business loan in the general sense, they’ll likely think of a traditional term loan. A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The set repayment term length will typically be one to five years long. Most business owners use the proceeds of term loans to finance a specific, one-time investment for their small business. Furthermore, traditional term loans are versatile, and companies often use them to fit a variety of needs.
Unsecured Working Capital Loans
Unsecured working capital helps businesses with their daily costs. Sometimes, businesses experience lapses in working capital which affect their ability to maintain daily operations. Unsecured working capital is a method of financing that can keep things running. It can be used for things like expansion, marketing, project bridge financing, payroll, inventory and taxes. Once you receive your funding, it leaves you free to do what you’d actually like to be doing, running your business.
Startup Business Loans
It’s a great feeling to open up a new business, especially after all the planning, implementing and hard work. It’s not as much fun when you lack capital. Fortunately, startup business loans can get some momentum going for a new business so it can get off the ground. These loans are, as the name would suggest, geared toward younger companies, so many have high approval ratings and low rates.
Merchant Cash Advance (MCA)
Sometimes, businesses need fast cash. Often, going through the process of procuring a traditional loan will take too long, and the requirements are stringent. In these cases, merchant cash advances (MCA’s) can come in handy.
An MCA isn’t technically a loan; it’s an advance. With this option, we will advance your business’s future credit and debit card revenues that you will repay in a predetermined daily percentage of your business’s credit and debit card revenues. In a nutshell, you will receive an upfront sum of cash in exchange for a percentage of your future sales. Fortunately, they’re some of the easiest and quickest loans to acquire.
Asset-based lending (ABL) is an excellent solution for businesses that have needs that are outside the realm of what traditional banks can offer. Whether it’s greater leverage, softer covenants, or more flexibility, asset-based structures can be customized to meet the needs of each company.
Asset-based lending offers more flexibility than other methods of financing and is a fast, cost-effective way to obtain working capital. Unlike some financial products, there’s no giving up equity in your company with an asset-based lending relationship. ABL gives your company the flexibility it needs to grow, recapitalize, take advantage of supplier discounts, buyout shareholders, or fund payroll. It can increase or decrease based on your current business size and needs, and you’ll have daily and weekly access to your line of credit when you request it.
Methods of asset-based financing include invoice financing, inventory financing, recourse factoring, traditional factoring, and accounts receivable factoring. We’ll cover how each works in the following sections.
Invoice financing is an accessible option for most businesses. It works by taking an outstanding invoice that a business is waiting on as a form of collateral. In other words, invoice financing allows businesses to borrow money against the amounts due from its customers. The business lender can advance your company up to 90 percent of an outstanding invoice’s value. The catch is that the lender will not lend you this cash advance for free. For every week that the invoice is outstanding, the lender will charge you interest. This can become more expensive as more days pass since the invoice fulfillment day. On the plus side, invoice financing is a self-secure form of business funding, so the qualifications aren’t rigorous.
Inventory financing is a form of asset-based lending that allows businesses to use inventory as collateral to obtain a revolving line of credit. This line of credit can be used to purchase additional inventory or to help a business get through seasonal fluctuations in cash flow, among other situations.
Inventory financing can be beneficial for small to midsize businesses in the retail and wholesale industries. This method of financing is great because it can help keep warehouses and shelves stocked, but also provide businesses with, capital in times of declining cash flow.
Recourse Factoring is when a company sells its invoices to a factor while promising that the company will buy back any untouched invoices. The factor does not take the risk of any uncollected invoices, so the business is responsible and must repurchase them.
Discount factoring, also known as recourse factoring, provides your business with flexible and immediate cash that will allow you to grow, restructure, take advantage of supplier discounts through volume purchases or early payments, or even to fund payroll. Many companies need additional cash flow to support seasonal demands, growth, and more. Discount factoring is a widely accepted method of business financing in use by many large well-known companies. It is less expensive than traditional factoring, but, like traditional factoring, it is less restrictive than equity financing, allows you to access cash without having to give up company share, and gives you daily and weekly access to your availability when you request it. Discount factoring can also increase and decrease based on your current business size and needs, and allows you to gain administrative support to manage your receivables without additional staff.
Non-recourse factoring is a method of factoring in which the factoring company assumes the risk of non-payment if the customer does not pay the invoice due to insolvency during the factoring period. Essentially, the factor is assuming more risk, as opposed to recourse factoring.
Traditional factoring, also known as non-recourse factoring, is available for both domestic and import/export situations and provides your business with outsourced credit and collection services as well as discretionary funding. Many companies need additional cash flow to support seasonal demands, growth, and more. Traditional factoring is one of the oldest forms of business financing in use by many large, well-known companies and is an option that offers extended protection from credit risk of your approved customer or account debtor.
Accounts Receivable Financing
Accounts receivable financing allows businesses to get early payment on their outstanding invoices. A company using this method of funding sends some of its unpaid invoices to a funder for advance payment in return for a fee.
Accounts receivable financing (A/R financing), sometimes known as a ledgered line of credit or invoice financing, is a great solution for businesses that need more funding that is not available from traditional lenders. Many companies need additional cash flow to support seasonal demands, growth, business opportunities or solve a short-term cash need. Accounts receivable financing provides your business with flexible and immediate cash that will give your business the opportunity to grow, restructure, take advantage of supplier discounts, hire additional employees, or even to fund payroll. With our accounts receivable financing options, you can access cash without having to give up equity in your company, and it is less restrictive and expensive than equity financing. A/R financing can increase or decrease based on your current business size and needs, allow you to gain administrative support to manage your receivables without additional staff, and give you access to cash when you request it (based on your eligible accounts receivable).
As you can see, there is a wide array of business financing options. In fact, there are even more than we have covered here in this article, but these are the main methods of business funding. Each option serves to provide businesses with a type of funding that best fits their unique needs and situations. It’s important to research these and speak with a financial adviser before applying. Of course, you are welcome to contact us at Crestmont Capital and we can help you get the information or funding you need. Also, feel free to fill out a quick quote on our website and we can provide you with customized financing options.