You borrow a lump sum upfront and pay it back in fixed weekly, biweekly, or monthly payments throughout the term of the loan.
For example, Funding Circle offers term loans up to $1,000,000 with competitive interest rates, terms from 6 mos. to 5 years, and upfront set monthly payments.
- Established small business owners considering an investment that will generate a steady increased stream of cash inflows as a result of that initial investment.
- Among the advantages of term loans is their fast approval time, ranging from 2 days to 2 weeks. The actual APR of a term loan depends on several factors, including length of the loan, collateral to secure the loan, and the borrower’s credit history.
Like a business credit card, a credit line gives you access to cash flow financing that you can tap as you need to cover working capital needs or make investment opportunities.
Unlike business credit cards, credit lines are more formal agreements between financial institutions and borrowers and often require an existing relationship.
One advantage of credit lines is that they tend to charge a lower interest rate than a business credit card.
- Credit lines are very useful for small business owners that require capital to cover seasonal cash flow gaps on a rolling basis. It would be impractical to apply for a loan every single time you have a cash flow gap, so having access to a predetermined amount as needed saves the company time and money.
- Credit lines can also be useful for making periodic cash payments that vary in size to suppliers, vendors, or contractors that don’t accept credit card payments.
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Invoice financing is cash flow financing by borrowing money based on amounts due from customers. Providers of this type of financing are often financial institutions or the large corporations or government agencies themselves.
Keep in mind that lenders generally pay out about 70% to 80% of the value of qualifying accounts receivable (often those under 90 days, but requirements vary by lender).
- Small businesses that have a long history of making sales on credit and are able to collect the majority of accounts receivable within 60 to 90 days.
- Businesses that have achieved top-tiers of preferred vendor status with a large corporation or government agency and could qualify for invoice financing with that same organization.
Merchant Cash Advance
The merchant cash advance provider gives you a lump sum, which is then repaid automatically using a percentage of your daily credit card receipts.
Depending on the advance amount, terms may be as short as 90 days or as long as 18 months. Repayment begins immediately after the funds are received.
While there are instances where a merchant cash advance is the right financing option for a business, it is important that you understand the true cost of capital. Unlike a loan, a merchant cash advance isn’t assigned an annual percentage rate. Instead, business owners pay what’s known as a factor rate, which can be confusing.
- Small businesses that lack a strong business credit score, but that are able to demonstrate steady stream of cash inflows through credit card statements or payment processing platforms, such as Square, Paypal, or Shopify.