If you’re running a business, you’re well aware that to make more money, it oftens requires money upfront. Whether it’s for new hires, upgraded equipment, additional supplies or other related business expenses, there’s a lot that requires cash on hand to successfully (and seamlessly) fund your growing business.
There are many financing options available for small businesses to take advantage of, but they’re not all the same and it can be challenging to know which is the best choice for your B2B business’s unique needs. So where do you turn?
Here’s a helpful guide to show you the pros and cons associated with each option.
Option 1: Bank Loan
For many business owners, the first option often turned to is a traditional loan from a bank. Depending on the size of your business, credit score and a few other factors, bank loans may offer between $5,000 and $500,000, although many often average around $350,000.
Bank loans may be helpful in the short-term, but if you’re trying to pay the least amount possible for your cash advance, they might not be the most beneficial option for your business. Here’s why:
High Costs & Fees: Bank loans usually include a myriad of hidden or surprise charges that you might not be fully aware of at the beginning and can end up costing you significantly more than you originally thought it would. These charges might include an application fee, an origination fee, guaranty fee, monthly fees, an annual fee, late-payment fees, prepayment penalties, etc.
Lengthy Approval Process: Bank loans often have a lengthy approval process, averaging between 14 and 90 days, sometimes up to 3 months. If your business is in immediate need of funding, you can’t wait that long to receive your business cash advance.
Higher Credit Score Required: It’s not uncommon for lenders to require credit scores that lean on the higher side of the spectrum. Why? Because they want to ensure you’re responsible with your spending habits and that they’re likely to get their money back with interest over the course of the loan terms. Without a strong credit score, you may never be eligible for a business loan. Generally, a credit score of 730 or higher is preferred for this type of loan.
Lengthy Repayment Terms: Some loans come with a long repayment period, anywhere from three months to even 25 years, depending on the amount lent and terms of the loan. The longer your repayment period is, the more interest you’re paying over time.
Option 2: Credit Card
Another option business owners may turn to is a credit card. Credit cards allow you to pay for business expenses today, so you can start making more money tomorrow. The average cash advance you can receive is between 30 and 50% of the overall credit limit you have, and the turnaround time is pretty instantaneous (meaning you can get your funds ASAP via an ATM withdrawal, withdrawal from a bank or a cash advance convenience check).
Like a bank loan, using a credit card allows you to pay back your debts over time, which gives you more flexibility with where you can allocate money for your business.
Unfortunately, there are many negatives associated with depending on a credit card to help with immediate funding needs. Here are a few of the cons:
Credit Limits Can Be Difficult to Raise: Because credit card limits are based on your credit worthiness, once you reach your limit, it can be challenging to get a higher one if you currently owe too much already. Until you’ve paid down your balance, credit card companies might not give you the chance to obtain more money.
Excessive Fees: Like a bank loan, you may see a lot of fees pop up after using your business credit card.These fees include a balance-transfer fee, annual fees, a cash advance fee, a late payment fee, an over-the-limit fee and returned payment fees. To top it all off, interest charges on outstanding balances will also apply.
Good Credit Score Preferred: Typically, a score of 670 or higher is considered worthy of a credit card. If you’ve got a poor credit score (maybe due to unexpected business expenses or investing in something that didn’t pan out), this may be a barrier for you.
Repayment Can Happen Any Time: While at first glance this may seem like a good thing, it can actually be very costly. But the bad news is, the longer you take to pay off an outstanding balance on your credit card, the more money you end up paying in the long run. Ideally, you would want your debts to be paid off as early as possible to avoid interest being tacked on to your balance every month.
Option 3: Merchant Cash Advance
Another option business owners may turn to is a merchant cash advance (MCA), which averages between $5,000 and $500,000. You apply online, and with a relatively quick approval process, funding can be available as early as 48 hours.
This may sound like a better option compared to a bank loan or credit card — until you take a look at its:
High Costs & Fees: MCAs can cost between 30% and 50% of the principal amount. What’s more is that they also require daily payments drafted from your business account based on a predetermined amount by the MCA company.
Consent of Judgment Clause: MCAs employ a “Consent of Judgment” clause, which means that if payments aren’t made, a default judgment is automatically entered against your small business.
Option 4 (*Top Choice*): Invoice Factoring
Invoice factoring lets you sell your invoices to a factor to quickly get the cash you need to pay for your business expenses. It’s the only financing option that truly accompanies your business as it grows. It does this through the following benefits:
Up to 90% of Your Unpaid Invoices: At ei Funding, we offer 80 – 90% advances on invoice, whereas many competitors cap at 75-80%.
No Hidden Fees: Our fee structure is straightforward and includes the “discount rate” taken at the time of the advance. Other than the discount rate, there are no hidden fees, no APR and no surprises.
Your Factor Does the Collecting: In factoring, your factor handles collections. This leaves you free to focus on operations, prepping for business growth and more.
Rapid Funding: A growing business needs cash — we get that. That’s why at ei Funding, a majority of the funding we do is same-day, ensuring you get your money on the spot, when you need it.
High Credit Score Not Required: Other financing options require a good, or even high, credit score to be approved. While there is still a vetting process, with factoring, the credit criteria is less strict than other alternatives.
Not a Loan: Invoice factoring involves providing you advances on your invoices — so it’s basically your money. Also, the advances are paid for by your customer according to your credit terms, typically in around 30 days. As a result, you avoid long-term, monthly payback terms associated with loans or other financing instruments.
Let ei Funding Assist You With Your Business Cash Advance
If you need a business cash advance for your growing B2B business, invoice factoring with ei Funding could be your best bet. We provide up to 90% of the funds on your unpaid invoice and charge only a small fee. Unlike other factors, we have no hidden charges.
On top of invoice factoring, a professional factor can also help you reduce and consolidate your debt so you can keep focusing on expanding your company. At ei Funding, we offer debt consolidation and P.O. financing services as well.
Ready to Learn More About Invoice Factoring to Help Grow Your Small Business?
Invoice factoring provides a variety of benefits, including:
Quick funding to use toward growing expenses
Cash advances up to 90% of invoice amounts
Setup in as few as 24 hours from pre-approval
Personalized, attentive customer service
Access to a 24/7 online system & monthly reports
No annual APR, debts or hidden fees
Find out more about invoice factoring by taking our invoice factoring quiz or checking out our complete guide to invoice factoring. Learn how invoice factoring works, get helpful answers to frequently asked questions and see what other value a professional factor can provide your B2B business today.
Ernane Iung is a seasoned C-suite executive with a 28-year dynamic career across four continents, including two decades in São Paulo, Brazil, where he held key roles with renowned multinationals such as GE, Whirlpool, Philips and Oster.