Without strong cash flow and positive working capital, most companies will struggle to meet day-to-day overhead expenses as well as the many other costs typically or not so typically incurred in the course of business.
Many business owners find that they need to seek outside sources for the capital required to keep operations running smoothly. Not surprisingly, the first place many turn to is their bank.
However, before approaching any lender, including your bank, it's a good idea to get up to speed on the different types of loan products out there. They aren't all the same — different products are designed to meet different capital needs.
Options to Consider
Commercial loan products come in a variety of shapes and sizes. Some of the most widely used ones include:
Term (or "installment") loans. These are typical business loans issued for a specified period. They're repaid with interest over a set number of months or years and used mainly to buy fixed assets such as property, plant and equipment.
Federal loan programs. The Small Business Administration's (SBA's) loan programs have historically been quite popular with smaller companies in need of capital. These include the SBA 7(a), 504 and Microloan programs. The SBA guarantees a portion of these loans, which means they come with competitive terms, lower down payments and flexible overhead requirements. Some loan programs offer counseling and education as well.
Lines of credit. This is perhaps the most common commercial loan product, primarily because of its simplicity and flexibility. Once your business is approved for a line of credit, you can borrow up to your credit limit whenever you like without having to reapply. You must pay interest on only the amount of funds actively borrowed — not the entire principal as with a traditional loan. It's often a good idea to apply for a line of credit before you need capital so you can easily tap your line when a need arises.
Commercial mortgages. This is a specific type of term loan that's used to buy new or existing commercial property, including retail store space, industrial warehouses and office buildings.
Equipment leases. When it comes to acquiring equipment, leasing is often a better capital option than borrowing money to buy the asset or assets in question. This is especially true for equipment with built-in obsolescence, such as many computing devices, because they can be replaced or upgraded when the lease is up. Leasing is 100% financing, which frees up cash flow and may offer tax benefits.
It's important to know precisely why you need capital, so your lender can suggest the right type of loan product to meet your financing needs. For example, if you need a capital infusion to meet periodic cash flow shortfalls or fund accounts receivable, a line of credit is probably the right way to go. But you typically wouldn't use a line of credit to buy equipment or real estate — a term loan or commercial mortgage is generally the right type of loan product for these capital needs.
Alternative Financing Providers
Eons ago, banks were the only reputable game in town when it came to commercial loans. Nowadays there are a variety of alternative lending sources to consider. These include:
Commercial finance companies. These firms provide alternative financing solutions such as factoring, in which you receive an advance against uncollected receivables. Many also offer asset-based and accounts receivable loans, under which real estate, equipment, inventory and receivables are pledged to secure capital.
Peer-to-peer (P2P) lenders. These have become a popular way for businesses to access capital via the internet. P2P lenders are financial institutions that allow borrowers to obtain commercial, personal and student loans through an online platform, which handles loan origination functions such as underwriting, servicing and collections.
The Best Choice
As you can see, if you need to access capital for your business, there are a variety of products to consider. Again, make sure you know — with as much specificity as possible — why you need the funds and how you intend to use them before applying. Your CPA can help you better understand your company's regularly incurred expenses, projected costs and overall financial situation so you can make the best choice.
