Lines of Credit Vs Loans – Small Business

Loans or Lines of Credit: What’s best for your business?When you own a small business, finding the right type of financing is the key to growth. There are many options available today, but the two most common options are: business loans and business lines of credit.Answer these questions before selecting the best way to finance your business:
What is the purpose of the loan?

How much money do you need?

When do you need the money?

How long will it take you to pay it back?

How long have you been in business?

What is your credit score?

What do your current finances (personal & business) look like?

If you need collateral, do you have any to put up for the loan?

Do you have a business plan?

You may want to gather some materials beforehand and make sure you have a strong business plan. Some of the items you may need to include are:
Executive Summary

Company Description

Industry Overview

Description of organization/business overview

Description of products and services

Funding Request

Projection of finance for next 3-5 years

Financial statements and assumptions

Credit history (business/business owner)

Resume of any investors or any other affiliations

You should understand the differences as well as any advantages/disadvantages of each and you should have a clear understanding of why you need to borrow money.A Business Loan (BL) is where you borrow a substantial sum of money for specific business purposes. The sum is paid to you all at once and you are required to return it within a specific amount of time.A SBA Guarantee is where banks and other lending institutions offer many Small Business Administration (SBA) loan programs to assist small businesses. The SBA does not make loans, it does guarantee loans made to small businesses by private and other institutions.A Line of Credit (LOC) is like your personal line of credit, such as credit cards. This allows you to withdrawal funds up to a predetermined amount and pay monthly payments and pay interest charges on the outstanding balance.Let’s look at the differences, advantages, and disadvantages of each:1. Timing: When you apply for a loan or a line of credit, you need to know when you are going to use it. A loan is something you get when you need it, and for specific purposes. In contrast, a line of credit is usually set up before you need it and can serve multiple purposes.2. Monthly Payments: With a loan, your monthly payments begin immediately and don’t change from month to month, whether you are using all the money or not. With a line of credit, your payments only reflect the amount of money you’ve borrowed and you only make payments on the amount you borrowed.

3. Renewals: Business loans do not renew at the end of the terms, you must reapply. While a loan of credit is revolving, you can use it multiple times.4. Long-term vs Short-term: Loans are usually paid off in 2 to 6 years. Lines of credit can solve short- term problems.5. Interest Rates: With a business loan, you are likely to have higher interest rates that are fixed, whereas a line of credit may offer lower variable rates. With a line of credit, if you are late on a payment or exceed your credit limit, your interest rates will increase.With such a wide range of financial options available to small business owners, it can be difficult to choose the right one. But, knowing the difference between two of the most common financing solutions can help paint a bigger picture to what you are really looking for. You want to make the best decisions so that you can make the money work for your business.

Alternative Sources of Business Growth Finance: There Is More Than One Way to Fund Growth

Talk to any business owner or read the business section of any newspaper and you’re likely to come across stories of struggles to access sufficient finance to grow or maintain their business. But we are beginning to witness a change in how business owners access finance with many now actively seeking out alternative sources.

A survey carried out by the UK’s Forum of Private Business found that 26% of businesses were hunting out alternative financial products, with 21% seeking them outside of the traditional main High Street lenders. In fact, in another survey undertaken by the Federation of Small Businesses, it was discovered that only 35% of respondents used a traditional overdraft facility in 2011.

So, if banks are continually reluctant to lend to all but the lowest risk businesses, how can the remainder of the UK’s business population finance growth? Here are some of the increasingly popular alternative sources of finance to investigate.

Better Management of Working Capital

This may appear to be an odd source of finance but very often businesses are sitting on undiscovered cash reserves which can be used to finance growth. A report issued by Deloitte in 2011 revealed that the UK’s largest businesses were sitting on £60 billion of unproductive working capital. Inefficiencies in how working capital (debtors, stock and creditors) is handled can unnecessarily tie up your cash. Cash can be unlocked and released back in to the system thereby allowing self-financed growth plans by taking a close look at credit procedures, how credit terms are granted and how outstanding payments are chased.

Ensuring that stock is kept at an optimum level via better inventory management is another area where cash can be released to support and finance growth. Take a good look at your inventory management process and identify areas where cash is trapped.

Good management of working capital is not just about better control of debtors and stock, it is also about maximising the terms given by creditors. Are you too eager to maintain a first class relationship with your suppliers by paying well before the due date? You can positively impact your cash position by taking full advantage of terms offered by your suppliers. Have you fully leveraged your position by seeking an extensive of terms from say 30 days to 45 days?

Being more efficient in how working capital is managed can release sufficient funds to self-finance growth plans.

Personal Resources

With traditional avenues of funding being more difficult to access business owners are now looking to their personal resources to fund growth. Whether it be drawing on cash savings, using personal credit cards or taking additional mortgages on residential properties, such sources are an instant solution. A survey by the Federation of Small Businesses found that 33% of respondents had utilised their savings to fund growth. As well as being more immediately accessible using personal resources is often a cheaper source of finance.

Family and Friends

Sometimes referred to as the three F’s – family, friends and fools – this can appear to be a less stressful way of raising finance. In some ways it can but it can also be a journey fraught with danger. Tapping into their personal network business owners source finance by either seeking a loan and offering to pay an interest rate higher than that on offer on a High Street savings account, or offering a slice of equity in the business in return for investment.

Raising finance in this way can be relatively easy because the request and fulfilment is very much based on personal trust. Typically a Business Plan would be presented highlighting both the investment opportunity and the risks but at the end of the day success is down to the depth of the relationship and level of trust.

The danger in raising funds this way is that the nature of the relationship will change from that of a personal nature to a business transaction. Failure to regularly pay as per agreed terms, or even total failure to pay, can irreparably damage the relationship so tread with care.

Asset Finance

The Asset Finance industry is based on the concept of either preserving cash or speeding up access to it. Asset finance, which consists of invoice discounting, factoring and funding of asset purchases, has been available as a source of finance for many years, yet it’s only now gaining more recognition. Figures released by the Asset Based Finance Association, a trade association representing the industry, show that to the third quarter of 2011 the amount financed by the Association’s members increased by 9% compared to the same period in the previous year. Whilst the increase may not seem significant it is against the backdrop of a fall in traditional bank lending.

In a world where ‘cash is king’ asset financiers help preserve cash by financing the purchase of assets such as vehicles, machinery and equipment. Because the financier is looking to the underlying asset as security there is usually no requirement for additional collateral. According to the Asset Finance and Leasing Association one in three UK businesses that have external finance now utilise asset finance.

Asset financiers can help speed up the flow of cash within a business by allowing quicker access to cash tied up in the debtor book. An invoice discounting and factoring facility gives businesses the ability to immediately access up to 80% of an invoice instead of waiting for the agreed credit terms to run their course. Such finance facilities will speed up the velocity of cash within the business thereby allowing the business to fund a high rate of growth.

New players such as Market Invoice are entering the market to allow businesses to raise finance against selected invoices. Tapping into high net worth individuals and funds Market Invoice acts as an auction house with funders ‘bidding’ to advance against certain invoices.

Crowfunding and Peer-to-Peer

A relatively new phenomenon is the concept of raising finance by tapping into the power of the crowd. The historically low rates of interest payable on savings have led to depositors seeking out new ways to increase their returns. With business owners struggling to raise the funding they need it’s only natural that a market would be created to bring these two parties together.

CrowdCube entered the market in 2010 to match private investors seeking to be Dragons with those businesses looking to raise capital. Once a business passes the initial review stage their proposal is posted on the site and potential investors indicate the level of investment they wish to make with the minimum amount being as low as £10.

Businesses looking for a more traditional loan should consider Funding Circle. Established in 2010 Funding Circle also matches individual investors looking for a better return with those businesses seeking additional finance. Businesses can apply for funding between £5,000 and £250,000 for a period of 1, 3 or 5 years. As a minimum the business has to have submitted two years Accounts with Companies House and be assessed in order to arrive at a risk rating which guides potential investors.

As the crowd sourcing concept matures we are likely to see more players enter this market to capitalise on the need for better investor returns and easier access to business finance.

There is More Than One Way to Fund Growth

Accessing finance to fund growth plans does not have to be difficult if you are prepared to seek out alternative providers. Funding growth is now no longer the exclusive preserve of the traditional High Street bank and it’s now down to business owners to seek out the alternative routes.