Operating a small business is not for the faint of heart.
From the moment the business plan is conceptualized to the instant you lay the foundation and commence operations, you're overcome with a variety of emotions. And regardless of the industry, there are constant ups and downs, with the latter requiring perseverance to make it through.
Unfortunately, passion, smarts, motivation, and a tremendous work ethic will only get you so far. There always comes a time when you have to face the facts: You can’t do this alone.
During periods of economic instability, small business owners appeal to credible lending institutions to stabilize their operations. Loans of various types and sizes provide businesses with the wherewithal to address immediate needs and develop an effective turnaround.
Financial relief is incredibly important considering the sheer number of small businesses nationwide. According to the federal Small Business Administration, there were 30 million small businesses in the United States in 2015. Between 2000 and 2017, these modest operations were responsible for 8.4 million net new jobs, double that of large companies.
The data, however, isn’t completely rosy. It also indicates that even when the economy is unimpaired, about half of small businesses survive five years or longer, and only a third keep their doors open after a decade.
For businesses teetering on the edge, or those simply in need of a financial cushion, one option is a small-to-medium business loan. Otherwise known as SMB loans, these come in many forms and assist companies that have been locked out of traditional lending markets or require near-instant funding. According to data compiled by biz2credit.com, alternative lenders approved 55.9 percent of all small business loans in February of this year—a higher rate than small banks but about 10 percent less than traditional lending institutions.
If you need an emergency SMB loan, here are alternative finance options to consider:
Merchant Cash Advance
There’s a crucial distinction we need to identify immediately. A merchant cash advance is technically not a loan. Instead, it’s a lump-sum transfer of cash that’s paid back through future profits.
The advance is repaid through automatic debits that lenders refer to as an Automatic Clearing House (ACH) payment. It’s important to understand that these debits occur daily, and could have a significant impact on how much your business earns. So if you’re considering going this route, you need to be confident that you’ll receive steady business—or at least generate enough sales to have the debt repaid without defaulting, which could prove disastrous.
As you can tell, a merchant cash advance is usually reserved for late-stage financing and is generally viewed as a last-ditch effort for business owners struggling to raise capital. Along with a daily repayment schedule, the annual percentage rates (APRs) on advances are very high, and sometimes reach three figures, which you may find unsustainable.
As we’ve written about previously, if you’re in a mindset that there’s nothing else to lose, a merchant cash advance provides quick funding, potentially within days, and most are unsecured, meaning they don’t require collateral.
At the end of the day, you have to do what’s best for your business. If you’re in dire need of funding, then it may very well be your only option. To recap, be aware that this funding mechanism carries sometimes hefty APRs and your credit score could suffer considerably if you default. Do your due diligence before taking this leap.
Short-term loans are among the most common alternative lending options for small businesses seeking emergency relief. The application process isn’t considered onerous and funding can be made available in as little as 24 hours. Another hallmark of this type of funding is the truncated repayment schedule, which typically lasts a few months to a year—hence the origin of “short-term.”
So, why would a small business consider this type of loan? The reasons vary, depending on business needs, but can be put toward an emergency expense, increased hiring, to add inventory, or as a strategic measure to improve the company's credit score. Keep in mind that short-term small business loans boast high interest rates, so you need to have a plan to erase the debt during the repayment period.
If you truly need quick access to capital and have decent credit, however, a short-term loan is an attractive option.
Unlike the aforementioned small business funding options, installment loans are more akin to the type of financing you may get from a traditional lender. Installment loans for small businesses boast fixed payments for the length of the loan, which includes the principal and interest. And unlike a merchant cash advance or short-term loan, repayment is longer in duration.
It’s also important to be mindful that this is a secured loan, meaning it’s attached to a physical asset, such as the business itself. In essence, the building is used as collateral to secure the loan.
This is a popular option for small business owners seeking an emergency loan, because the application is generally processed quickly and borrowers can get their hands on the money within days. With fixed interest rates, there typically won’t be any surprises when you open the checkbook to pay each month’s bill.
As with any financing option, especially in an emergency scenario, the inability to pay off the loan can have serious negative consequences. And with this being a secured loan, defaulting may also mean losing the asset you put up as collateral. Even if you’re desperate for cash to jump-start your business, make sure this is worth the risk.
Revolving Line of Credit
If you’ve been operating a business for even a moderate period, you’re probably familiar with a line of credit. Well, a revolving line of credit works very much the same way, except for one significant difference: Once you repay the amount you borrow, your account is replenished in full, giving you access to funds yet again.
This is particularly attractive for anyone in an emergency scenario, because you’d be able to address one problem—make payroll, for example—and subsequently use the replenished balance for another important expense, such as adding inventory.
This is how it works. Let’s assume you were approved for a $40,000 revolving line of credit. You can use $10,000 to pay employees, and still have $30,000 available for another expenditure. If you don’t want to be burdened with too much debt at once, you can pay off the $10,000 credit, with interest, and make your account whole before dipping into it again. In effect, you can access this reservoir of funds repeatedly for as long as the revolving line of credit is active.
If you’re truly in a precarious predicament and have so-so credit, your best option might be a short-term revolving line of credit. You’ll likely have access to a significant amount of money, though not as much as a medium-term revolving line of credit, in a shorter amount of time. Similar to a business credit card, your credit limit—for example, $40,000—is non-negotiable, so you won’t be privy to more funds than you were allotted.
Business credit cards are also an option, but credit limits may not be sufficient for your purposes. However, credit cards are still hugely popular and could help you get out of a bind. But consider all funding options before you open a credit card, max out the balance, and open yet another to cover additional expenses.
This may sound elementary, but always be mindful that bills inevitably come due. Before taking on debt, scrutinize the lender's terms, and create a plan to repay everything you owe. After all is said and done, you don’t want your business worse off than when you started this incredibly consequential process.
Have additional questions about securing the best small business loan to meet your needs? At Original Funding, matching business owners with the right small loan product is our specialty. Apply now.