As you know, we have a recurring weekly category on raising capital, and for the most part we focus on changes in the environment of raising equity capital from investors. But not all capital is equity capital. The vast majority of capital that businesses use is debt capital, and that can be loans of various types. So here’s a quick summary of types of loans available to small businesses.
In the last few years, there have been some new types, but the traditional ones are:
A business line of credit. These are usually secured by business assets, accounts receivable, inventory, and a personal guarantee by the owner.
There’s invoice financing, which sometimes takes the form of factoring, which might mean another party may buy your receivable from you and give you cash now. Then they wait on your customer to pay them.
There’s equipment financing. Very simply, you’re buying a new copier, then you get a loan on that copier. You’re buying a big press machine for your factory, then you get a loan for that press. That can get cumbersome if you use a lot of different pieces of equipment.
There are many many types of personal loans out there for your business, but think hard before you do this because if your business is a corporation or another legal entity such as an LLC, you’re now borrowing money in your name and putting it in your business. That’s okay with some people. Other people have concerns with that, especially if you have other partners in your business. There’s been a huge explosion of this type where you can get a high interest short-term loan. Based upon your score and income level, they will be repayable anywhere from three months, six months, twelve months, even up to 36 months, although those are rare.
These are very much like another type of revenue based loan, called a merchant cash advance, which is based completely upon your credit card sales, or they’ll look at your bank statements and look at your daily deposits. Usually in this type of loan, they will loan you about one month’s worth of your revenue, and like the personal loans, they are usually very quick paybacks, so you have to have a fairly high margin business to be able to consider one of these. So it’s a fast in, fast out. Now, their deal is about three or four months in they want to re-up you on that and keep that rolling, so you that you always have a a weekly or a daily payment going on with them.
Then there are also small business credit cards for those with really good scores. These can be in the business name, but usually they’re doing it still on your personal credit. This is a lot more traditional, and you can get card upon card upon card, or just a couple of ten to twenty-five thousand dollar limit cards. Of course, cards can’t be used for for everything, as we know.
Anyway, those are the types of business capital. At Harvard Grace, we do a lot of helping our clients place debt financing, and if we can help you, let us know.