Types of Funding: Pro’s and Con’s

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There are many different types of small business loans, various ways in which a small business loan can be acquired, and a small business loan does not have to be lent through a bank as many may have been be misled to believe.

One of the most popular types of small business loans are SBA loans, loans that are distributed through private lenders such as banks, credit unions, etc., and are backed by the Small Business Administration. Since banks are usually the lenders of these loans, they typically come with strict requirements including excellent credit scores, collateral, and fixed monthly payments. These requirements are to ensure that the borrower holds up his/her end of the deal, and repays the loan in a timely manner. A small business owner who has excellent credit, collateral, and a well thought-out and put together business plan and presentation may be able to receive a sufficient amount of money through an SBA loan.

1. Business Line of Credit

A business line of credit is like a credit card for one’s business. A business line of credit offers revolving credit with lines that typically range from $10,000 to $100,000.

Requirements: Many different banks offer business lines of credit. Requirements may vary depending on the lender that you are working with.

Pros: You have accessible cash on hand anytime you want. Also, many lenders do not require borrowers to have collateral to receive a business line of credit.

Cons: Like a personal credit card, you must pay interest on the outstanding monthly balance.

2. Merchant Cash Advance

A Merchant cash advance involve buying of a business future credit card receivables. Borrowers normally receive upfront lump sum and in return, a small percentage from their business’s credit card sales is deducted and used to repay the advance.

Requirements: Most merchant cash advance lenders require that the borrower has a business that has been in operation for at least four months, and then business creates a minimum of $2,500 per month in credit card sales. Borrowers have to provide lenders with atleast the four recent months for their business’s credit card statements.

Pros: Borrowers do not need to have collateral to receive a merchant cash advance. There is no interest on the advance, and there are no fixed monthly payments. There are also no penalties for repaying the advance slower or faster than expected. Also, there are no restrictions on how your business cash advance can be used.

Cons: Business cash advances can not be used to fund start-ups, as the borrower must have owned his/her business for at least four months to be eligible to receive the advance. Also, only merchant businesses that process credit card transactions are eligible to receive business cash advances, as the payments are taken as a small percentage from a business’s daily credit card sales.

3. Secured Working Capital Loans
These small business loans are secured by collateral.

Requirements: The lender will take a security interest in your property. If you do not pay the loan back the lender has the right to seize your collateral.

Pro: Easy to acquire since most lenders will only require collateral to secure a small business loan.

Cons: Lenders will not lend you more than 100 percent of the value of your collateral and will usually only lend you 60 to 80 percent of its value.
4. Unsecured Working Capital Loans
Requirements: These are small business loans that are not secured by any collateral. Credit cards, while not technically loans, are the most common example of unsecured debt.

Pros: Having good reputation and credit worthiness acquiring is easy.

Cons: It is very rare to find a lender willing to give you an unsecured loan for a new business. Because you have no track record for them to work from.

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