Financing Options for Small Business Owners

 

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Many small business owners find themselves needing external financing to help grow their business. With the different options available it can be confusing to know which product will best suit your needs. Below we explain the different financing options available so you can find the right product for your business. 

Term Loan

A term loan is when a lender gives you money for a specific amount of time. This period has a clear repayment schedule and a fixed or floating interest rate. Usually, these loans are often short term with terms of less than 3 years.

Usually small business owners use a term loan to:

  • Buy inventory
  • Buy or replace equipment
  • Higher more staff
  • run marketing and advertising promotions
  • Manage business expenses
  • renovate or expand production facilities
  • refinance existing debt


Some businesses borrow the cash they need to operate from month-to-month. Many online lenders created short-term loans to help small businesses this way.

Term loans carried a fixed rate. This is often based on:

  • A business owner's personal and business credit profile
  • A daily, weekly, bi-weekly repayment schedule
  • A set maturity date

Line of Credit 

A line of credit (LOC) is when a borrower has access to a revolving amount of credit that can be used as needed, paid back and borrowed again. The borrower can access the funds from the LOC as long as they don't exceed the limit set by the lender. The interest amount, size and frequency of payments, and other rules are set by the lender.

Some LOCs allow you to write cheques (drafts) while others include a type of credit or debit card. A LOC can be secured (by collateral) or unsecured. Typically, unsecured LOCs have higher interest rates.

The main advantage of a LOC is its built-in flexibility. Borrowers don’t have to use all the funds available which means they can tailor their spending based on their budget or cashflow. As a result, they only owe interest on the amount they draw, and not the entire credit limit.


Additionally, borrowers can adjust their repayments amounts based on their budget or cashflow. For example, they can repay the entire outstanding balance at once, or make the minimum monthly payments.

Merchant Cash Advance

A merchant cash advance (MCA) is a lump sum loan given to a business in exchange for a percentage of its future credit and/or debit card sales. MCAs usually have payment terms under 24 months and daily repayments.

They are often used by retail businesses as a last option because they are the most expensive form of financing. Small businesses use MCAs when they believe that the opportunity present will outweigh the cost of the MCA.

Invoice Factoring 

Invoice Factoring is when a business sells its accounts receivable (the invoice) to a third party (the factor) at a discount. A business will sometimes factor its receivable assets to meet its immediate cash needs. They may also factor their invoices to mitigate credit risk.


Factoring can also be referred to as:

  • Accounts Receivable Factoring
  • Invoice Factoring
  • Accounts Receivable Financing (However, this is more accurately describes a form of asset-based lending (ABL). The ABL utilizes a company’s accounts receivable as collateral.

Credit Card 

A credit card is a thin plastic card given that allows borrowers to borrow funds to pay for goods and services. Most businesses allow customers to make purchases using a credit card, thus making it one of the most popular payment methods.


Issuers pre-set borrowing limits based on an individual’s credit rating. The money borrowed must be repaid including interest and any extra charges.

The credit card provider may also grant a LOC to card holders, enabling them to borrow money in the form of cash advances.

About the Author

Lendified

Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.