One of the biggest misconceptions about small business financing is when you should use it.
Many people think a business loan is for companies that need to get out of a cash flow jam, or to make a business-saving fix. The truth is, the most effective and affordable use of financing is to help a successful business grow even further. It’s for businesses doing well, not those that are struggling. (Having it available when you need it in an emergency is good too, but lenders that offer quick capital tend to charge higher rates, with shorter repayment periods.)
The problem is, when your business is doing well, you may not see an immediate need for additional capital—and taking out a loan “just to do it” is never a good idea. You need business financing that’s available when you want it.
On-demand financing that doesn’t cost you anything is the dream. Fortunately, there are some options like this available for small business owners. Let’s review your options.
Business Lines Of Credit
Business lines of credit (LOCs) are one of the most sought-after forms of financing on the market, primarily due to their flexibility. They’re a bit of a cross between a business term loan (which extends you a large chunk of cash) and a credit card (which you can use continuously, ad infinitum).
Essentially, these are pools of funds that you can draw on over and over again, paying off each draw to replenish the pool. And in some situations, as we’ll discuss below, you can simply keep your LOC in your back pocket until it’s time to use it—usually without incurring a fee or charge of any kind.
Imagine having a credit card with, potentially, a $1 million limit. That’s the power of a line of credit.
Keeping in mind our goal here—financing that you can keep handy for free—there are two types of LOCs to look out for.
When You’re Approved, You’re Approved
When you go through the application process for acquiring a business line of credit, whether with a bank or online lender, that lender will review your qualifications for financing. This includes your time in business, business and personal credit histories, annual revenue, and other factors.
For certain types of lenders—on the online side, these currently include Kabbage and Fundbox; for traditional lenders like banks, it will depend on the institution—once they approve you for a line of credit, that’s it. You are approved, and the line of credit is yours for the using, or not using.
That means you can keep your line of credit at your disposal, without utilizing it, without incurring any additional fees. So if you find an excellent opportunity for growth or expansion—a great bulk deal on inventory appears, or the perfect second location comes on the market—you can jump on it right away, no questions asked.
There is one catch: Your access to your line of credit may be contingent on your business continuing to perform at or near the level of success you had when you were first approved.
Lenders will be able to monitor your business bank account after approving you for a loan (syncing with the lender is how you’ll access your funding when you need it), and if your business takes a dive, the lender may be much less inclined to extend you hundreds of thousands of dollars.
This is the best-case scenario, of course, but your other typical LOC option isn’t bad either.
Draw To Lock It In
Other lenders, such as BlueVine, Fundation, and Idea Financial, will also let you keep your line of credit in your pocket—provided you “lock it in” first with a minimum draw.
Once you make your first draw on your line—in some cases as little as $500, occasionally upwards of $5,000—your line of credit will remain at your disposal for the remainder of your business’ life.
Keep in mind that lenders may still be able to rescind access to your line of credit, or alter the terms, depending on how your business does. The occasional dip in revenue or ding of your credit score won’t make a difference, but if your business is in a tailspin, don’t expect to rely on your LOC to bail you out.
Business Credit Cards
Many people don’t think of a credit card as a form of financing, but what is a credit card if not a (very) short-term loan?
Of course, carrying a balance on your business credit card is a quick way to rack up interest and late fees and sink your profits. Your best bet in this regard is to qualify for a 0% introductory APR credit card.
These elite credit card charge you no interest on your purchases through the length of your intro period (typically 12 months). You can also do balance transfers on some cards, bringing your existing credit card debt onto your 0% APR deal to make payments more manageable.
Of course, once your introductory period ends, your rates will revert back to your agreed-upon rates, based on the market and your credit history. But during this introductory period, you can finance important business purchases (inventory, equipment, supplies) without paying a cent for the right to pay them off over many months. No other financing product can touch that kind of deal.
There is no perfect on-demand financing option. You will always be somewhat limited by how your business is currently doing, the ups and downs of your industry, and your needs and goals in the short- and long-term. That being said, the above options represent your best chance at paying the very least to obtain the very most flexibility.
