Businesses now have more options than ever when it comes to getting financing. While there are many forms of business financing available, including a growing number of non-bank financing options after the great recession, choosing which option is best for your business can be an overwhelming – and even daunting – experience. Our purpose is to share what you need to know to decide between three of the most popular options: business credit cards, business loans and lastly, invoice factoring. So hold on to your balance sheets, there’s a lot of good info below.
There are many benefits to obtaining a business card for your company. The primary benefits, as noted by Credit Karma, include:
There are many business credit card options available. To start your search for the best business credit card, it’s important that you be clear on the purpose of the card. Questions to ask of your business include:
Short-Term vs. Long-Term Purchases
If you are looking to use your card as a way to finance long-term purchases, the first qualifier should be the APR (annual percentage rate), or the yearly cost of funds if you carry a balance. The average APR for a business card is about 15 percent. If your business credit is high, you can even get as low as 13 percent, on average.
Cards with a higher APR are less ideal for businesses that are looking to carry a considerable balance, even if the card comes with desired perks. Conversely, businesses that need a card for one-off purchases have a bit more flexibility when it comes to the APR, particularly those businesses that do not carry a balance. These companies have far more options, which could result in better perks.
We want perks! Wait. How much do I have to spend to earn a mile?
If your business has a need for frequent travel, then the ideal perk you would want for a business credit card is to earn miles. Yet, there are many kinds of perks available, including:
It’s important for you to decide if the perk your business could benefit from is profitable. For example, consider the amount your business would need to spend on the card in order to gain an impactful perk, and compare that to the fees you will pay if your business carries a balance on the card. Have your finance guru work up some numbers on what makes the most sense for your business, and go from there.
There’s a fee for that?
The answer is yes. There’s always a fee. Unless of course there aren’t any fees.
Once again, if you are looking for a way to finance purchases and are likely to carry a balance, knowing the APR and the fees for the card are critical for you to make sense of getting a business credit card. Consider how you make your purchases: the frequency, the amount and the number of transactions can all play into certain transaction fees. Cards without fees could have higher APRs.
Business credit cards are an excellent option for companies that have tight controls on how they are spending. For these businesses, using a business credit card is a great way to take advantage of perks. Yet for many businesses, carrying a balance can result in mounting debt, which in the long term, can impact your ability to get financing elsewhere, and in some cases can cause financial distress and cash-flow issues. Our recommendation would be to carefully consider your business controls, spending habits and business needs before using a business credit card as a means of getting financing, as it is mostly a short-term solution.
A business line of credit can be obtained from traditional lenders, such as a bank or a local credit union, and nowadays even from online lenders (sounds crazy, but this is a growing trend!). Before you choose a financier for your business, you must make important considerations as to your business needs, even more than with a business credit card. The average interest rate can vary anywhere from five to 13 percent.
What are your capital needs? Here are some starters:
Answers to these questions could steer in the direction of a business loan or a business line of credit.
How is your bank relationship?
A great place to start learning about your business line of credit options is through your existing bank or credit union. Even if you know that they aren’t able to meet your financing needs – for reasons pertaining to credit availability, cap or otherwise – your business banker should be able to give you insight on how these bank products work. This is an excellent opportunity to arm yourself with questions for your research about the best option for your business.
How is your business credit history?
In general, banks are not known for their ability to be flexible when it comes to underwriting. Take a hard look at your financial situation. In general, only the best borrowers with the most established businesses will be able to get a business line from a traditional lender such as a bank, according to FitSmallBusiness.com.
In a marketplace with an ever-growing number of options, it is critical as a business owner that you read the fine print when it comes to getting a business loan or line of credit.
With online lenders, there can be an increased chance that you are not fully aware of the terms of your loan. To avoid putting your company in a default position, and risking losing everything you are working to build and grow, get to know your lender options first. Read reviews, look through social media- do some digging before you do some signing.
Invoice factoring has been around for ages and is an option that many businesses choose that do not qualify for a bank loan or line of credit or would not benefit from obtaining a business credit card. The process for invoice factoring is generally as follows:
That’s it. And by that’s it, we mean that’s your financing. As a non-bank, non-traditional lender, a factoring company is not held to the same lending requirements as banks. In real terms, that means that factoring companies can work with businesses in a number of unique industries and financial positions.
Invoice factoring is approved based on the creditworthiness of your customers. Banks are required to take a deep dive on your business finances, credit history, and available collateral; with factoring, it is not so.
If you are working for creditworthy customers, your ability to receive ongoing financing will grow as you grow. Every step of the way, you will have the cash flow to continue operations and meet your business needs. At TCI Business Capital, we have a direct line to our free credit service desk. When you are in growth mode and bringing on new customers, we can assist you right away in determining if they are worth your time and effort.
Bank loans and business lines of credit are approved for a specific amount. While the rates might be lower with a bank, your ability to grow will be capped. For some businesses, particularly in industries that are growing rapidly, this can mean the difference between exponential growth and shuttering its doors.
How’s your back office? If the answer to this question is “what back office?” then you might consider factoring as an ideal option.
Why? Most factoring companies offer some form of back-office support with their services. This translates into direct savings for your business, as your collections and receivables management needs can be lessened, giving you the option of allocating your resources into other pressing business needs.
Once you’ve invoiced, send them directly to your factoring company. It’s as simple as that. The advance on the invoice total will be deposited into your bank account for your use.
You have an almost limitless number of options available to you as a business owner when it comes to getting financing. Sounds great, right? In actuality, the number of options, combined with the number of requirements, benefits, and costs of each can be overwhelming.
What you need is a business partner that can provide a simple form of business financing. At TCI Business Capital, we have provided non-bank financing to businesses across the continent from a wide spectrum of both industries and sizes. We know needs, and we know what works: we give you the options.
Our customized accounts-receivable programs provide consistent cash flow, back-office support and a number of value-added services to help your business focus on what’s most important: your future.
TCI Business Capital is an invoice factoring company serving businesses across the United States. For more information on factoring, call (800) 707-4845 for a free, no-obligation consultation and quote.