Whether you want to grow your business or just improve your month-to-month cash flow, a business line of credit can be a flexible business financing tool. Here’s what you need to know about obtaining and using a business line of credit.
What is a business line of credit?
A business line of credit is a flexible way to borrow the amount of money you need, when you need it, up to a set credit limit. It’s like a credit card for your business, except it will usually have a higher credit limit and a more competitive interest rate. Unlike a conventional business loan, you are not required to make set payments, and when you do make a payment, it replenishes your available credit.
Each lender and lending platform has its own rules, but at Advance Funds Network, we offer business lines of credit with daily or weekly payments and terms ranging from one to 12 months.
How does short-term business financing work?
Short-term business financing requires an agreement between you and a finance company willing to advance you cash against your expected future sales. Here are some of the features of the contract:
- The advance amount is how much money the finance company will advance to you upfront.
- The payback amount is how much you will have to repay. This is often expressed as a factor rate. For example, a factor rate of 1.3 means you have to repay the advance plus 30%.
- The term within which to repay most short-term business financing advances is 12 months or less.
- The holdback is the amount that the finance company will require you to repay, typically daily or weekly. It will be based on your projected sales volume. If sales slow unexpectedly, you may be able to use a true-up to lower your payments.
Here’s an example:
Yoel’s Yoga needed $20,000 in short-term business financing to move to another location and get everything set up. Yoel agreed to a factor rate of 1.3, meaning that he will have to pay back the $20,000 advance plus 30%. That works out to $26,000. He also agreed to a holdback of $1,000 per week. At that rate, it will take him six months to repay the advance. However, his business slowed down by roughly half in the month of the move, so Yoel asked to true-up his repayment schedule. His payments were temporarily reduced to just $500 per week, as he was still on track to fully repay the advance within 12 months.
How is short-term business financing different than a loan?
Short-term business financing is fundamentally different than a loan. With a loan, you are signing a contract saying that you will repay a certain amount of money in a certain amount of time with a certain payment schedule and interest rate. But with short-term business financing, you are agreeing to sell a portion of your future sales to a finance company. It is not a loan at all.
Here’s a comparison of a loan versus short-term business financing:
Carl’s Contracting took out a business loan for $50,000. Carl signed a loan agreement with the bank saying that he would pay the loan back over 36 months at 10% interest. Every month, Carl must make the same monthly payment. Even if business slows down in the future, he must keep up that payment, or else his loan will be in arrears and his credit score could take a hit.
Across town, Bonnie’s Building obtained short-term business financing for $50,000. Bonnie signed an agreement with a finance company saying that she would remit a portion of her future sales every week until she has paid back $65,000. The finance company set her weekly payment based on her historical average weekly sales. However, if business slows down in the future, she can notify the finance company and they can agree to reduce her payments.
Bonnie will likely have a higher total cost of financing than Carl, however, she will also have an easier and faster time obtaining her funding and more flexibility with her payments if she needs it.
What is a short-term business financing true-up?
The term “true-up” is used to refer to the reconciliation or readjustment clause within a short-term business financing contract. This clause is one of the main reasons that short-term business financing arrangements are not considered loans. It essentially states that if your daily or weekly revenues decline, you have the right to true-up your daily or weekly payments by adjusting them to more accurately reflect your current revenue.
Is my business a good fit for short-term business financing?
Short-term business financing can be a good solution if fast access to funding is a priority and your business has predictable monthly sales. Short-term business financing can often be obtained quickly without the need for a strong credit score or having to provide collateral like real estate or other property. Although it may not be the least expensive form of financing, it offers unique flexibility with the ability to true-up payments based on your business revenues.
What can short-term business financing be used for?
There are no restrictions on how you use short-term business financing. Here are some common examples:
- Acquiring a new piece of equipment
- Repairing an existing piece of equipment
- Renovating or repairing physical premises
- Restocking inventory
- Obtaining raw inputs needed for manufacturing
- Investing in a timely sponsorship or marketing opportunity
- Hiring a key person who can impact the business
- Covering an unexpected or rush expense
How do I qualify for short-term business financing?
The main qualification for short-term business financing is an operating business with a track record of sales. Not all financing platforms are the same, but at Advance Funds Network, there are three minimum requirements for short-term business financing:
- 3 months or more in business
- 500 or higher personal credit score
- $10,000 or moe in monthly business revenue
Keep in mind that the lending criteria for conventional business loans will likely involve a higher credit score and, in many cases, the requirement for tangible collateral, such as real estate, vehicles or machinery.
Can I qualify for short-term business financing with bad credit?
Yes, you may still be able to qualify for short-term business financing even if you have bad credit. Short-term business financing is not a loan, but a cash advance against your future sales. For this reason, the typical underwriting associated with loans does not apply.
How do I apply for short-term business financing?
Not every provider is the same, but at Advance Funds Network, you can apply online in minutes, speak to a dedicated Financial Advisor almost any time of the day or night, and potentially receive funding in just a few business days.
Here are the typical steps to apply for short-term business financing:
- Application. You’ll be asked to provide a social insurance number, your CRA business number, and basic information about your business. You’ll need to have been in business for at least three months, have sales of at least $10,000 per month, and have a personal credit score of 500 or higher.
- Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider.
- Funding. Your cash advance will be deposited to your business bank account and, depending on the terms of your financing, you will start to pay back the advance on a daily or weekly basis.
What are the advantages of short-term business financing?
Short-term business financing is known for being one of the fastest ways to secure funding for your business. Here are some of the main advantages:
- Speedy funding. You can potentially receive funds within a few business days.
- Simple process. Repayment is automatically debited on a daily or weekly basis.
- Accessible to many. Anyone with a sufficient history of sales can potentially qualify, even if you don’t have a good credit score or collateral to offer.
Flexible usage and payments. You can spend the advance however you wish, and if your sales slow down, you can usually decrease your payments.
What are the disadvantages of short-term business financing?
Despite its benefits, short-term business financing is not perfect. Here are some of the main disadvantages:
- Cost of borrowing. Depending on the terms of your advance, it may work out to a high cost of borrowing
- Short-term nature. As the name implies, short-term business financing is short-term in nature and the advance will generally need to be repaid within 12 months.
- Doesn’t build credit. Short-term business financing is an advance, not a loan, so it does not help you improve your credit score.
Can I use short-term business financing for CEBA loan forgiveness?
Yes, you can use short-term business financing pay back part of your CEBA loan and be forgiven up to $20,000 as long as you first applied for refinancing at your original financial institution by January 18, 2024. If you applied for refinancing by that deadline and were declined, short-term business financing could be a good alternative to refinance your CEBA loan. Even if you applied and were approved, you can still consider using short-term business financing to pay your CEBA loan instead. As long as you receive your short-term business financing and make the required minimum CEBA repayment by March 28, 2024, you can have some of your CEBA loan forgiven.
How much of my CEBA loan can be forgiven?
If your original CEBA loan was for $40,000, the maximum loan forgiveness amount is $10,000. To claim this amount, you will need to repay $30,000. If your original CEBA loan was for $60,000, the maximum loan forgiveness amount is $20,000. To claim this amount, you will need to repay $40,000. There is a formula to help you calculate your CEBA loan forgiveness amount.
If you applied for CEBA loan refinancing at the bank or financial institution that issued your original loan by January 18, 2024, you have until March 28, 2024 to receive your funding, make a repayment, and have part of your loan forgiven. Short-term business financing is one of the ways you can obtain the funding you need to refinance your CEBA loan.
What are some alternatives to short-term business financing?
As a business owner, you have many financing options, and some of them might be a better fit for you than short-term business financing, such as a secured business loan, an unsecured business loan, a line of credit, a credit card, or government financing sources, such as the CEBA loan program. Here are some of the main alternatives to consider:
Secured business loan
A secured business loan could be a lower-cost alternative to short-term business financing, however collateral will be required. The assets you pledge as security for the loan could be things like real estate, vehicles or equipment. The loan application process can be more complex and time-consuming, and your personal credit will be one of the main criteria used by the lender.
Unsecured business loan
An unsecured business loan does not require collateral and is generally more expensive than a secured business loan, but it could still be less expensive than short-term business financing. As with any conventional loan, it could take time and effort to obtain approval, and your business financial statements and personal credit history will be carefully assessed.
Line of credit
One advantage with a line of credit is that you may only be required to make interest payments, unlike a regular loan, which will require you to pay both principle and interest, or a short-term business financing, which will require you to remit a daily or weekly holdback. This can give you more flexibility with your cash flow. The cost of a line of credit will depend on whether it is secured by providing assets as collateral, or unsecured, meaning it is backed only by the creditworthiness of you and your business.
Business credit card
A business credit card can be very flexible, as you are free to spend up to your limit without the need for approvals. However, the limit may not be enough for your business funding needs and the rate of interest will generally be high. A business credit card can be handy, but it may not be sufficient to replace a short-term business financing or other forms of funding.
How can Advance Funds Network help with short-term business financing?
Advance Funds Network is your gateway to business funding solutions of all kinds. If your business has been running for at least three months and has sales of $15,000 or more per month, you could qualify for short-term business financing. But why wonder? Apply online in minutes and you’ll hear from us soon with the best available funding options. You can also connect with a dedicated Financial Advisor now at (866) 480-2611.
