3 Business Loan Alternatives You Can Use
Whether a small or large business, here are some ways to keep your cash flow in order.
Cash tends to flow out quicker than flowing in. It’s an instance that normally happens in every business, especially in startups. If there’s uneven cash flow, any business might encounter discrepancies in pay.
The owner or the person responsible for the payroll might then end up looking for convenient access to financing so they can pay their employees in full and on time. In this article, we’ve rounded up the best three loan alternatives you can use to cover salary payments in times of a payroll crunch.
1. Line of Credit (LOC)
A business line of credit is one of the most flexible financing solutions you can opt for. It’s primarily accessed by most businesses, mainly by small companies, for short-term funding, such as increasing inventory or funding operational expenses.
LOC is a credit loan that lets business owners borrow any amount of money at a given time, but the desired loan amount should be within their credit limit. For small businesses, owners may only typically get relatively low borrowing amounts.
If you’re up for an expansion project or any investment that has a considerably expensive cost, LOC isn’t a good option. Again, LOC functions well for ‘short-term’ financing or cash flow shortages, say, for financing payroll and supplies.
Further, borrowers are only responsible for paying for the interests on the amount that they used and had drawn out from their business line of credit. The best part is after borrowers have fully paid the loan and its interest, they can access the full credit line once again.
While this financing source can have a pay-as-you-go format, it’s still comprised of disadvantages that any borrower should mind. These cons involve a longer application process with a lot of requirements, extra charges and fees, low borrowing limits (due to a borrower’s credit limit, as mentioned), and potential for misuse.
2. Invoice Factoring
In every business, there are clients who don’t pay invoices in full and worse fall behind on payment due dates. Consequently, one’s business’ operation flow will be disrupted, which, in turn, hinders payroll obligations.
This issue is what invoice factoring should solve. It advances a business with a part of its clients’ existing balances. Borrowers can access the outstanding invoice value that they needed as soon as possible, potentially within a day. What’s more, it’s best recommended for borrowers with low credit scores.
Invoice factoring doesn’t pay too much attention to a borrower’s loan history, collateral, credit score, and the like, unlike those of line of credit. The factoring company is more concerned with a borrower’s payment history of his/her customers, instead.
With invoice factoring, maintaining cash flow won’t be an issue, as well. The borrower doesn’t need to wait for invoices to be paid every month before they have money in their bank account. It’s because invoice factoring doesn’t have to be a one-time financing alternative.
If invoice factoring makes sense in a borrower’s business, then they can build and eventually continue financial rapport with their factoring company. Though, It still has disadvantages.
A factoring company typically charges between 1-5% of the total invoice amount in service charges. Considering this, a business owner should think twice whether this said loss is more worthwhile than waiting for the customers’ payments.
3. Short-Term Business Loans
Like the line of credit and invoice factoring, a short-term business loan’s main advantage is having efficient access to fast capital for any business’ operations. It requires fewer credentials and is more lenient than other traditional bank loans, likewise to invoice factoring. The approval process is fast, as well.
However, it has a shorter repayment term. Lenders of this loan would typically require a borrower to pay within three-18 months on a daily or weekly basis. Considering this, it functions almost the same as other financial options that offer quick cash, too, like personal and payday loans.
A borrower should also keep in mind that the repayment structure of short-term business loans can worsen cash flow because, as mentioned, it’s fast-paced and highly-priced. Repaying the said loan as soon as possible is recommended to prevent further financial risks.
In a nutshell, if you have a bad credit score, a line of credit isn’t the best option. Having a tight budget makes invoice factoring useless, as well. Finally, if you’re looking for financial sources that aren’t time-sensitive, a short-term business loan isn’t a great alternative.
Manage financial resources wisely. Every business owner should keep an eye on the ebbs and flows of their cash flow, as well as the business’ profit and loss statement. Doing so would allow an owner to generate realistic projections for the future and eventually prevent opting for financial solutions for additional working capital.