You can’t build a house with just a hammer, you need multiple different tools based on what you need to get done. The same goes for a business. You need to use the right programs to build your business and unlock growth in revenue AND profits! This will serve as a cheatsheet for you to use.
LONG TERM NEEDS VS SHORT TERM NEEDS
When you are using money for growth it is important to consider if this is a short term or long term need. For example marketing, adding staff, supplies, inventory are all short term needs. This means that the business needs this daily, weekly and monthly because it is based on utilization. You need to purchase inventory after it’s sold. You spend money on marketing daily/weekly/monthly. Your business needs supplies constantly. The business may need a cushion to add employees until they are up and running. Examples of long term expenses would be equipment, purchasing a building or buying a business. Equipment usually lasts 5+ years. Buildings should last a lifetime. 
The reason this is so important is that you should structure the financing you use over the life or frequency of what it’s going to be used for. If it’s something that is used daily, weekly or monthly then short term financing makes sense. Short term financing is 6-24 months. Business lines of credit and working capital lines are short term financing options. Let’s break down the differences between a line of credit and working capital.
BUT WHAT IS IT AND WHAT IS IT BASED ON?
A business line of credit is based on your business revenue. The line has a maximum approved amount and you can draw up to that total. A business only pays on what’s drawn. The payment is based on the length of the line of credit and how much is drawn. Lines of credit are simple interest bearing. For example if you opened up a 12 month line of credit for $100,000 at 12% simple interest and drew the entire line you would pay back a maximum of $112,000. Now let’s say you draw the full $100,000 and pay in 6 months you would only repay $106,000 saving $6,000 in interest. Every business should have a line of credit because:
-The build business credit
-Give you access to cash to take advantage of opportunities
– Provides a security blanket in case of emergencies
The best time to apply for a line of credit is when you don’t need it because you’ll have great credit and cash flow.
HOW TO UTILIZE LONGER TERM FINANCING PROGRAMS
Working Capital Lines are based on your business revenue. They are quick to set up and work with most credit types. They are the easiest financing program to qualify for and they are usually the most expensive. Working Capital Lines usually run 6-24 months and have small weekly payments or Monday – Friday micro payments. If used properly they can help an entrepreneur grow and scale their business. WCL’s should be used when you need funds fast to grow your business or to get you out of one off jam.
Let’s dig into some of the longer term programs and how best to utilize them. The first program I’d like to highlight is a term loan. They only go off of your credit and provable income(W2). Anyone can apply for these, not just business owners. If you have at least 660 and make at least $50,000/year or more you may qualify. They are typically 3-6 year terms with monthly payments and simple interest. These are great for consolidating debt, starting a business under $150,000 and getting longer term financing without going through the SBA. These usually take only 3-5 days to process and fund. A lot of clients have used these to clear up credit card debt to boost their credit scores.
Equipment Financing is the best program to purchase new and used equipment. Terms are usually 3-6 years with monthly payments. Underwriters look at personal and business credit along with cash flow and time in business to make a decision. Equipment usually lasts 5-10 years so financing it over 3-6 years helps increase cash flow. The other benefit of equipment financing is that when you finance equipment you build comparable debt which helps get you approved for larger equipment financing and better terms. Once you make 12 monthly payments the equipment loan counts toward your comparable debt. When you finance equipment properly it should only show up on your business credit, not your personal credit. This keeps your personal debt to income ratio lower.
SBA Loans are the longer and cheapest business loans you can access. They are also usually the hardest to qualify for and take the longest to process. SBA Loans usually go at least 10 years and some even go 25 if you are buying a business or a building. The loans can be used to consolidate business debt to save on interest and increase cash flow. SBA loans are also ideal to purchase a business or a building. To qualify for an SBA Loan all applicants must have at least 680 credit and the business needs to be profitable. The only exception to this is the new loan through Integrated Business Financing that will be covered later. SBA Loans usually take 30-120 days and require a lot of documentation. To give you a better idea of how SBA loans work, for every $45,000 in profit a business claims on their taxes they should qualify for $350,000 over 10 years with a SBA Loan. So if a business profited $90,000 on their most recent tax return they may qualify for $700,000 over ten years. SBA Loans typically have variable interest rates based on prime. This means that they adjust quarterly. Typically SBA Loans cost prime plus 2.75%, as of November 2022 the interest rate is around 10%.
The quicker and easier SBA Loan through Integrated is a great way to weather this recession. It has minimal documentation and can fund in as little as 15 days. This SBALoan is still a 7A SBA Loan which means it goes out 10 years and is prime plus 2.75%. The loan is based off prior years top line revenue instead of profit margins. Entrepreneurs need 700+ credit and good business credit and at least $90,000 in business revenue on the prior years tax return. Underwriters are approving the loan at 30% of prior years top line revenue up to a maximum of $150,000. For example if a business had $500,000 of revenue in the prior year they would qualify for the full $150,000. If the business has more revenue they can re-apply in 3-6 months for more funds. A business can apply 3 times for a maximum of $450,000. This is the fastest and easiest SBA I’ve seen.
Invoice Factoring is one of the most misunderstood programs for small to medium size businesses that is used by most larger businesses. Invoice Factoring helps businesses grow and eases cash flow concerns by getting invoices paid in 24 hours. Any business that is net 7, net 15, net 30 or net 45 should utilize invoice factoring for growth. As long as the company is business to business or business to government and doesn’t utilize progress billing it should be a great fit. For example let’s say there’s a manufacturing company Widge Co, that produces widgets and sells the widgets to ABC Co. Once the widgets are delivered the company invoices ABC co and it’s due in 30 days(net 30). Now Widge Co has to wait 30 days to be paid after they laid out money for materials, marketing, payroll etc and as this company takes on more clients it can cause them to run short on cash or turn away new orders. If they borrow money through a loan or line of credit it only helps temporarily. The fundamental challenge is still there only now there’s an added payment. With Factoring Widge Co would submit the ABC co invoice to be factored. Let’s say it’s for $10,000. Widge Co would receive $9,000 and the factor would hold the other $1,000 in reserve until ABC Co pays the factor directly. Once ABC co pays the factor would release the reserve minus their fee of 2%, Wide Co would receive $800. Essentially it only cost Widge Co $200 to have their cash the next day. This helps them grow and scale without taking on debt.
Project Funding is a very unique program designed for commercial contractors and manufacturing companies to finance upcoming jobs/contracts. This program isn’t found at a bank. The program gives the company funds to start the work based on the contract/job. Only funds that are drawn are charged. This helps these companies start more work or bid on larger jobs that they might not have been able to because they didn’t have the funds to start. Typically a company can take/draw up to 20% of the total contract. They are charged 5%/30 days on only what’s drawn. For example ABC co just signed a $2,000,000 contract with DEF co. ABC co submits their agreement and needs money to start the job. They can draw up to $400,000. ABC co only draw’s $200,000 and starts work. They finish their first milestone and the DEF co pays the underwriters holding account $300,000 on day 29. The underwriter takes the $200,000 that was drawn and the fee of $10,000 then ABC receives the other $90,000 to complete the project. This helps ABC co without cutting into their margin.
