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Tag Archive for: invoice factoring

How to Use a Business Loan to Hire Employees

Financing, Manage Your Money
by Vince Calio7 minutes / February 29, 2024
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Needing new employees because your business is growing is a great spot to be

One of the most exciting times for any small business is when it has the opportunity to grow – be it from better-than-expected sales; the development of a new product or service; or physical expansion such as getting a bigger space or a second location. Business growth, however, usually requires the hiring of additional staff, which can be expensive. 

Fortunately, small business owners have a wide array of financing options that can help them expand their staff and facilitate their growth plans. Depending on your credit score and the strength of your business plan, a small business loan, a business line of credit, or even an SBA loan can help you hire the team that you need to meet your growth expectations. 

Types of Financing

If you’re looking to take your small business to the next level and need to hire additional employees, several types of financing options could be right for you depending on your specific situation. 

SBA 7(a) loans

SBA 7(a) loans are perhaps the best financing option when it comes to growing your business and hiring new employees because they generally offer the lowest interest rates and are flexible when it comes to the duration of the loan. Take note, though, that the SBA does not directly administer the loans, rather, they guarantee a large portion of loans given by qualified lenders. 

Keep in Mind: These loans require an excellent credit score, a strong business plan, and an excellent cash flow history. They can also take weeks to fund once you’ve been approved, so if you are planning to apply for an SBA 7(a) loan, make sure you have the qualifications beforehand and that you’re not in a hurry to receive the funds. 

Traditional loans

Traditional loans, or term loans, are similar to SBA 7(a) loans but they aren’t guaranteed by the SBA. They are offered by both traditional banks and alternative lenders, and like the 7(a) loan, they offer a lump sum of cash upfront to be paid back over a predetermined time frame and a pre-agreed upon interest rate. 

Keep in Mind: Traditional banks may require a business plan, especially if you’re borrowing for long-term growth, as well as excellent credit, and will charge an interest rate that is generally higher than a SBA 7(a) loan. An alternative lender won’t require a business plan and may grant you a loan with a lesser credit score than a bank, but if approved, will charge a higher cost of capital. 

Business line of credit

A business line of credit is, perhaps, the most flexible financing tool for small business owners seeking to hire new employees as part of their growth plan. A line of credit gives you quick access to cash that can be used to hire new employees as your growth plan progresses – and you’re only charged interest on the amount you borrow. 

Keep in Mind:  A business line of credit may charge a higher interest rate than a bank loan, and payback and renewal terms can be complicated, so really examine the terms of the line of credit before you sign up for one. You may be able to get a higher line of credit and a lower interest rate with a traditional bank if you secure your line of credit with collateral. 

Short-term Loans 

Short-term loans, also known as working capital loans, are typically loans with a 6-month duration or less. These types of loans can help you quickly hire new employees as you grow. They are almost exclusively offered by alternative lenders, so the requirements for these loans are usually not as strict as for a bank loan. 

Keep in Mind: Short-term loans often charge a higher interest rate than your standard bank loan. Additionally, if you believe a short-term loan is best for you,  carefully research the lender, as there are some bad actors in the online lending space.

Define Your Needs Beforehand!

If you’re seeking to expand your business by hiring new employees, there are several types of lending products for you to consider. But, before you begin evaluating your different options,  it’s important that you carefully define what your needs are. Doing so beforehand can help you determine factors such as the loan amount you are seeking, whether a traditional bank or online lender is best for you, and the type of financing you need. 

The factors you need to define before you delve into the lending market are:

  • How many new employees do you need to hire and what will they cost? This seems straightforward, but keep in mind that you shouldn’t just consider what you’re going to pay them, you also need to factor in payroll taxes, whether they will be full-time, part-time, or contracted workers, and any benefits you may want to offer them. This should help you determine how much you need to borrow. 
  • Do you have a strong growth plan? In other words, can you make a strong case that your growth plan will succeed with the addition of new employees? If you plan to apply for a business term loan with a traditional bank or go to an SBA lender for a SBA 7(a) loan, they are going to want to see a convincing business plan that demonstrates how you plan to grow your business and that you’re going to make money to cover the cost of your loan. 
  • What is your credit score? The strength of your credit will be a determining factor in the cost of capital for your loan. Put simply, the higher your score, the lower the interest rate you’re going to have to pay, no matter what type of financing you’re seeking. Check your credit score with all three credit bureaus (Experian, Transunion, and Equifax), as well as your business score with Dun & Bradstreet. If it’s low, examine ways you can improve it, or determine if you have collateral in case a lender will only offer you a secured loan or line of credit. 
  • How strong is your cash flow? If you’re seeking to hire temporary seasonal workers, that means your business probably has an uneven cash flow. If you decide to take out financing to pay for seasonal workers, make sure that your cash flow is strong enough during your busy season to justify taking on that debt. 
  • What type of business do you own? The type of business you operate is important because some types of small businesses are considered riskier than others. Restaurants, transportation companies, and real estate brokerages are generally considered among the riskiest industries, and if your business fits in one of these industries, you may have trouble securing a loan with a reasonable interest rate. If you are in any of these industries, it’s especially important to make sure you have an excellent business plan, a strong cash flow and that you can demonstrate future success with your growth plan. 

A great small business starts with great planning. Defining your needs before you look to financing will help you select the best financing option as well as keep your cash flow strong while you grow your team. 

Vince Calio

Vince Calio

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https://kapstaging.com/wp-content/uploads/2024/02/Business-Loans-for-Hiring-scaled-1.jpg 1824 2560 Vince Calio https://kapitus.com/wp-content/uploads/2024/01/Kapitus_Logo_white-220.webp Vince Calio2024-02-29 13:36:242024-02-29 13:36:24How to Use a Business Loan to Hire Employees

6 Business Alternatives for Bank Loans and When They Make Sense

Financing, Manage Your Money
by [email protected]6 minutes / July 22, 2019
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Picture of money and mini shopping cart

Need financing for your business but can’t qualify at a bank? There are various financing alternatives to keep your operations running.

Borrowing money is an essential part of building a small business. But when you need a loan, traditional lenders like the bank might not be an option. They tend to have strict small business lending standards. For example, you need established business credit, collateral and detailed financial statements for bank loan approval. This is a difficult hurdle for companies that have only been around for a couple years.  Fortunately, as a business owner, you have other options, with a number of business alternatives for bank loans on the market today.

These alternative options can be your financing lifeline until you build enough of a financial track record to qualify for more traditional financial products.

LET’S TAKE A LOOK AT THESE BUSINESS ALTERNATIVES FOR BANK LOANS AND WHEN THEY MAKE THE MOST SENSE.

1 – Online Loans

Banks aren’t the only ones lending money. Alternative and online lenders are also a quality source of small business financing. They offer stand-alone cash flow loans that you can invest into your business and spend however you choose. If you want more flexibility, you could also open a line of credit.  A line of credit lets you borrow, pay the money back and re-borrow again as many times as you want.

It’s easier to qualify for loans from alternative lenders because their requirements are not as strict as with banks. Another advantage is you often don’t have to secure the loan with your future business revenue or other collateral. However, your business will need to meet some standards like stable revenue and a good business plan for how you will use the loan proceeds.

Best fit for: A business with stable revenue looking to borrow cash quickly, without putting up collateral.

2 – SBA Loans

Another way to borrow is through the Small Business Association. This government organization assists small business owners and one of their services is to help them qualify for loans. The SBA doesn’t actually lend money. Instead they agree to back a certain percentage of the loan, guaranteeing repayment to the lender. This makes the lenders more likely to accept your application.

SBA loans can be a great tool provided you can qualify. The process does take time and you’ll need to submit, at minimum, similar documents that you would include as part of a bank loan application – such as a business plan, bank statements and your credit report.

Understanding the SBA system can improve your chances of qualifying so be sure to work with a lender that regularly works with these types of loans.

Best fit for: A business that can meet the SBA standards for a loan and also knows a lender that understands the application process.

3 – Equipment Financing

If your small business needs money specifically to buy a new piece of equipment or machinery, then equipment financing could be the answer. These small business loans can only be used to buy an asset, which also counts as the loan’s collateral. This makes it easier to qualify because if you end up not paying off the debt, the lender can take back the equipment as repayment.

With this type of financing, you can often buy new equipment with no money down but you’ll still receive the full tax break for the business investment, as if you bought the equipment with cash. You can also set up the financing as a lease which would let you replace the equipment earlier with new versions as they come out.

Best fit for: Buying or leasing new equipment for your business.

4 – Purchase Order Financing

A lack of cash can put even thriving businesses in trouble. 52% of small business owners had to forgo a project or sales worth $10,000 because of insufficient cash, according to an Intuit Quickbooks survey (slide 2). If you’ve got a project lined up but need some extra money to make it happen, purchase order financing could be the answer.

These short-term loans cover up to 100% of your supplier costs if you can show that you’ve got an order that will turn things around. Once you make the sale, the lender will deduct their fees from the proceeds. That way you still fulfill your order without taking on any extra debt. And since you can prove that you’ll be able to pay the money back quickly this financing is easier to qualify for. You just need to prove the upcoming purchase order.

Best fit for: When you’ve almost completed a sale and need a quick cash infusion to reach the finish line.

5 – Invoice Factoring

After you make a sale, your job still isn’t done because you you’ll need to collect payment. This can take between 30 to 90 days, depending on your payment terms.  And, as many know, it could take even longer when customers miss payment deadlines.  Not to mention there’s always the risk they don’t pay.

If your invoices are piling up and you need cash, invoice factoring could be the solution. You transfer over an unpaid invoice to a financing company, called the factor, and they’ll give you an advance on the payment.

From there, the factor takes over collecting from your clients. Once they get paid, they’ll give you the rest of the invoice amount minus their fee, which could be as little as 1.5% of the invoice amount.

Best fit for: A business with unpaid client invoices that wants to improve cash flow.

6 – Revenue Based Financing

Revenue based financing is the last of our business alternatives for bank loans. These loans have a simplified and fast application process, a great solution if your business needs money now. Lenders can approve this financing quickly because they just look at your historic revenue and how long you’ve been in business. They use this to forecast your future cash flow.

Based on that, they’ll give you a lump sum of cash. The lender will then collect a set percentage of your future sales on a daily or weekly basis.

Best fit for: A business with a proven history of revenue that needs money but does not want to go through a lengthy loan application process.

Don’t let a bank loan rejection discourage you from raising the money your business needs. As you can see, there are plenty of alternatives. If you have any questions to figure out which of these solutions is the right fit, reach out to a loan specialist today.

wrivera@kapitus.com

[email protected]

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