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New small business owners often need funding to meet their goals. However, they frequently struggle to qualify for debt and equity financing because of a bad credit score or a limited operating history.

Revenue-based financing is an alternative method of raising capital that’s often more accessible. If you’re interested in the arrangement, here’s what you should know before you apply, including how it works and when it’s worth using.

What is revenue-based financing?

Revenue-based financing is another name for a business cash advance. Like a business loan, it provides a lump sum you can use to grow your company. You then repay the original amount plus a fee with daily or weekly bank account withdrawals based on a percentage of your monthly deposits.

Revenue-based financing arrangements are relatively accessible and can provide funding quickly, but they’re also expensive. As a result, they’re usually best for business owners who can’t access traditional sources of capital.

How does revenue-based financing work?

Revenue-based financing arrangements serve a similar purpose to business loans, but their structure and terms are significantly different. Here’s how they work.

Qualification requirements

Revenue-based financing is much easier to access than traditional forms of business funding. You typically only need to meet minimal personal credit score, time-in-business, and monthly bank deposit requirements to qualify for an account.

For example, Credibly’s business cash advance has the following eligibility criteria:

• 550+ personal credit score
• 6+ months in business
• $20,000+ average monthly bank deposits

Applying for revenue-based financing is also much faster than requesting other forms of funding. You can often complete your application in minutes, receive a response within a day, and have your funds in around 48 hours.

Financing terms

Terms vary between providers, but revenue-based financing can generate significant capital. Your proceeds primarily depend on your average monthly deposits. The more you earn, the more you can borrow. 

For example, Kapitus offers advances between $10,000 and $750,000, and Backd may offer up to $2 million. Your actual amount is typically between three and six times your gross monthly revenue.

Despite the high borrowing potential, revenue-based financing follows a much shorter repayment term than a small business loan. Most arrangements are between 3 and 18 months, though some can be as long as 36 months.

Meanwhile, financing charges are usually higher than with traditional funding options. In addition, they’re presented as a factor rate rather than an interest rate, and you can expect them to range from around 1.2 to 1.5.

In other words, if you borrow $100,000, you’ll usually repay between $120,000 and $150,000.

Repayment process

Another notable difference between revenue-based financing and a business loan is the repayment process. Instead of making fixed monthly principal and interest payments, you let your funder take a portion of your sales.

Typically, they’ll withdraw a fixed percentage of your average monthly revenue directly from your bank account, either daily or weekly.

For example, your business earns $30,000 monthly, and you take out a $100,000 business cash advance. Your funder takes 10% per month, which equals $3,000. Assuming each month has 20 business days, they withdraw $150 daily.

When is revenue-based financing worth using?

Revenue-based financing is worth considering when traditional business financing options are unsuitable for your situation. Typically, that's because you can’t qualify for them due to your credit scores or time in business.

New small business owners and startup founders often face this issue because traditional financial institutions usually want to see at least two years of business history. They may check your business credit score too, which also takes time to establish.

As a result, a business cash advance is often an attractive funding option in the early years. However, because revenue-based financing is expensive, consider all your other options first.

If you can’t get a business loan from a bank or credit union, an online lender may still be willing to work with you. They have less rigorous qualification requirements that are closer to those of revenue-based funders.

Alternatively, you can consider equity financing options, such as angel investors and venture capitalists. These require that you give up a portion of your company ownership, but they also provide you with valuable allies who can help you grow.

Pros and cons of revenue-based financing

Like all financing options, revenue-based financing comes with its own set of advantages and disadvantages. Understanding these can help you make a more informed decision about whether it's the right choice for your business.

Pros of revenue-based financing

1. Easy to Qualify: One of the major advantages of revenue-based financing is its low qualification requirements. New businesses or those with poor credit scores can easily qualify for this type of financing as the primary focus is on the business's revenues and not its credit history.
2. Quick Funding: Businesses can apply and get approved for revenue-based financing within a matter of days. This speed can be crucial for businesses needing to address urgent cash flow needs.
3. Flexible Repayment: The repayment plan is proportional to your income. This means in slower months, you'll pay less, and in more profitable months, you'll contribute more, ensuring the repayment does not strain your business cash flow.

Cons of revenue-based financing

1. High Cost: The convenience and accessibility of revenue-based financing come at a price. The factor rates can be significantly higher than conventional financing options, making it a more expensive choice in the long run.
2. Shorter Repayment Term: While the repayment amount is flexible, the term is not. Most revenue-based financing options require full repayment within 18 months, which can be a challenge for businesses with inconsistent revenues.
3. Regular Withdrawals: The lender will make daily or weekly withdrawals from your bank account, which could potentially disrupt your cash flow if not properly managed.

Comparing financing options.

When it comes to raising capital, business owners have a plethora of options, each with its own merits and demerits. Here, we'll delve into a comparison of revenue-based financing, debt financing, and equity financing.

Revenue-based financing

As discussed, revenue-based financing is a method where business owners receive an upfront capital injection, repaying with a percentage of future revenues. It's relatively accessible, quick to secure, and provides flexible repayment terms correlated with your sales. However, it's often a steeply-priced option with short repayment terms and regular withdrawals that may disrupt cash flow.

Debt financing

Debt financing involves borrowing money, typically from a lender such as a bank, with an agreement to repay the principal along with interest over a predetermined timeframe. The advantage of debt financing is that you maintain total ownership of your business. However, it requires a good credit score, stable business history, and collateral, making it less accessible for new or struggling businesses. You're also obligated to repay the loan regardless of whether your business is profitable or not.

Equity financing

Equity financing includes raising capital by selling shares of your company to investors, like angel investors and venture capitalists. The primary advantage is that there's no obligation to repay investors; they make money when the company is successful. Furthermore, you can benefit from their expertise and networks. On the downside, you will have to share your profits with your investors and may lose some control over the business as they will have voting rights.

When choosing a financing option, it's crucial to carefully consider your business's financial situation, growth stage, and long-term goals.

Explore your options with Lendio.

Revenue-based financing can be an effective alternative to traditional debt and equity options, especially for new small business owners with bad credit scores. You can quickly access a significant amount of capital and use it to grow your business.If you’re a good fit for revenue-based financing, use Lendio to find the best cash advance provider for your needs. Sign up to compare offers from multiple funders and apply for financing today!

Starting a business can be a daunting task, especially if you lack the capital to get it off the ground. Finding the funding to start a business is one of the biggest hurdles you'll face as a small business owner.

According to a Lendio survey, 54% of SMB owners started their business with personal funds with 79% needing less than $100,000 to start their business and 43% needing less than $10,000.Fortunately, there are plenty of funding options available to help you get started. In this blog post, we'll explore some of the most popular choices for how to get money to start a business. Let's dive in.

Bootstrapping

Bootstrapping is the process of funding your business using your own money and resources. It's a great way to keep you in control of your finances and avoid taking on debt. This method usually requires a lot of hard work, sacrifice, and creativity, but it can pay off in the long run. Examples of bootstrapping include working from home, relying on personal savings, using free or inexpensive marketing channels, and building your product or service in-house.

Crowdfunding

Crowdfunding is another popular option for raising money to start a business. You can set up a crowdfunding campaign on platforms like Kickstarter, Indiegogo, and GoFundMe. The idea is to offer incentives to people who donate to your campaign, such as early access to your product, a shoutout on social media, or even equity in your company. Crowdfunding can be a great way to get early validation from your target market and build a community around your brand.

Friends and family

Another common source of funding for starting a business is to seek help from friends and family. A lot of entrepreneurs initially turn to those they trust for financial assistance. This method can be beneficial as the terms are often more flexible and the interest rates more favorable than conventional loans. If you choose this route, it's crucial to make it professional: draft a formal business plan, clearly communicate repayment terms, and consider establishing an official loan agreement. 

By treating it as a business transaction, you can maintain healthy personal relationships while securing the capital needed to kickstart your business. But remember, borrowing from friends and family should be approached with caution, as it could potentially strain relationships if not managed professionally.

Small business grants

Depending on your industry and location, you may qualify for small business grants. These are usually offered by local or state governments, nonprofits, and private organizations. Small business grants come with fewer restrictions than loans, and you don't have to pay them back. However, they can be more difficult to obtain, and they often require a detailed business plan and proof of your project's potential impact.

To look for small business grants, you should begin by checking out your local and state government websites. They often have information about available grants and instructions on how to apply. Online platforms like GrantWatch and Grants.gov can also be helpful resources. These websites aggregate thousands of active grant opportunities from federal, state, and local governments, as well as private foundations.

Credit cards

Credit cards are another potential source of business funds that is especially useful for smaller, frequent expenses or as a short-term cash flow solution. Business credit cards often come with benefits like cash back, travel rewards, and special rates for specific categories of purchases. Importantly, using a credit card for business expenses can help you build your business credit, which can aid in securing larger financing down the line. 

However, credit cards should be used judiciously, as high interest rates can add to your debt if the balance isn't cleared promptly. Always consider the interest rates, fees, and repayment terms before opting for this method, and strive to pay off your balance in full each month to avoid accumulating debt.

Personal loans

You can apply for personal loans from banks, credit unions, or online lenders. Because these loans are based on your personal creditworthiness, they can be easier to obtain than business loans, especially for new businesses. However, it's important to note that—since the loan is tied to your personal finances—you will be personally responsible for the repayment. Failure to repay can impact your personal credit score. 

As such, while personal loans can be a good option for initial funding, they should be considered carefully, and you should ensure you have a solid plan for repayment before opting for this route.

Business loans

If you haven't yet started your business and started generating revenue, you'll have a hard time qualifying for a business loan. Once you've been in business for six months, you can start to qualify for financing options like a business cash advance, invoice factoring, or equipment financing. After a year or two, you can start to qualify for a term loan, SBA loan, or line of credit. You can get a business loan from a bank, a credit union, or an online lender. With Lendio, it's easy to compare multiple lenders and loan types at once.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, is another viable option for securing funds to start your business, especially if you're a homeowner with substantial equity in your home. HELOC works somewhat like a credit card, where you are given a credit limit based on the amount of equity you have in your home. You can borrow up to this limit during a draw period, typically 5-10 years. 

What's advantageous about HELOC is that you pay interest only on the amount you borrow, not the total equity available to you. Plus, the interest rates are usually lower than those of credit cards, making it a more affordable option. However, keep in mind that your home serves as collateral and failure to repay the loan could put your home at risk. Therefore, like with all other funding options, it's important to have a solid repayment plan in place when considering a HELOC.

Retirement savings

Tapping into your retirement savings is another way to fund your startup. If you have money saved in a 401(k) or an IRA, you might consider using some of it to launch your business. This method has its pros and cons, so it's important to weigh them carefully. On the plus side, you're essentially borrowing from yourself—which means you won't have to go through a credit check or application process—and you won't incur any debt. Additionally, you might have access to a substantial amount of money, depending on how much you've saved. 

However, the downside is that you're risking your financial future. If your business doesn't succeed, you could lose a significant portion of your retirement savings. And even if your business does succeed, you'll still have to make up for the money you've withdrawn from your retirement account. Before you decide to use this method, consider consulting with a financial advisor to understand the potential risks involved.

Angel investors

Angel investors are affluent individuals who provide capital for a business startup, usually in exchange for convertible debt or ownership equity. They can provide much-needed seed funding to get your business off the ground. Angel investors may also provide valuable mentorship and access to their business networks. Websites such as AngelList and SeedInvest make it easier to connect with potential angel investors.

Venture capital

Venture capital is a type of equity financing typically provided by firms to startups and early-stage companies that have been deemed to have high growth potential. Venture capitalists take a share of the company in return for their investment, and they may also require some level of managerial and strategic control. Getting venture capital can be a competitive process, but it can provide significant funding and valuable business expertise.

Business incubators and accelerators

These are programs designed to support the successful development of entrepreneurial companies through an array of business support resources and services. Business incubators focus on the early stage of a startup, providing entrepreneurs with the skills and advisors necessary to grow their business. Accelerators, on the other hand, typically focus on scaling a business and helping it grow fast.

Partnerships

Forming a strategic partnership with another business can provide valuable funding. In return for funding, partners can receive equity, a percentage of sales, or the option to merge or acquire your company in the future. Choose your partners carefully as they'll have a large influence on your business.

Government programs

Various government entities offer programs to support small businesses. The U.S. Small Business Administration (SBA) has several funding programs for startups, including the Microloan program and the SBA Community Advantage Program.

Customers

You may be able to secure funding through your customers. Pre-selling your product or service, and asking for deposits or subscriptions can provide you with the funds to start or grow your business. This method also validates your business idea, proving that there's a market for your product or service.

Conclusion

If you're wondering how to get money to start a business, there are plenty of options available to you. Keep in mind that each method has its pros and cons, and it's up to you to decide which one fits your needs and goals best. Learn more about startup business loans.

A traditional business loan can be difficult to get without collateral. Many lenders may be unwilling to approve you for a business loan unless you can offer some sort of asset—such as real estate or equipment—which you agree to surrender if you’re unable to repay the funds you borrow. 

However, not all borrowers have assets to provide as collateral. And even those who have available assets they could offer to secure loans might not want to use them.

Read on to learn more about startup business loans you can get without collateral. These loans have the potential to help you turn your business startup dreams into reality without putting your personal and business assets at risk to secure financing.

What are business loans with no collateral? 

A business loan with no collateral is a funding option for which you don’t need to pledge an asset that a lender could seize if you fail to repay the debt. Another term for this type of financing is an unsecured business loan. 

It is important to point out that the lender’s risk is higher with an unsecured loan since it has no assets to take possession of in the event of a default. Because no collateral business loans involve more risk for lenders, these loans tend to be less common. And when you find lenders that offer these loans, they also tend to cost more. Business loans with no collateral may feature higher interest rates and fees compared with other business financing options. 

Even without collateral requirements, you may still have to provide a personal guarantee when you take out an unsecured business loan. A personal guarantee is an agreement between you (the business owner) and a creditor stating you agree to repay a debt yourself if your business fails to do so. In essence, a personal guarantee makes you a co-signer when your business borrows money. 

Startup business loan options with no collateral.

Below are some options to consider if you’re looking for a business loan with no collateral.

SBA microloan

There are numerous types of SBA loans that business owners can seek when they need financial assistance. Almost all of these loans require some sort of collateral. However, the SBA offers microloans that do not require collateral. Instead, they require a personal guarantee.

Microloans are available for up to $50,000. But the average microloan a business receives is around $13,000. You can use an SBA microloan to purchase inventory, supplies, equipment, furniture, or machinery, to fulfill working capital needs, and more. 

Unsecured business line of credit

An unsecured business line of credit is a flexible financing solution that your business can rely on multiple times. With a revolving business line of credit, you can borrow up to the credit limit on your account, repay some or all of the money borrowed, and access the credit line again. This setup differs from a traditional business loan where you receive the loan proceeds you borrow in a single disbursement, but lack the ability to borrow again from the same source in the future. 

You do not have to provide collateral for unsecured business lines of credit. However, many lenders require a personal guarantee. 

Unsecured business term loan

While uncommon, some banks and online lenders offer unsecured business term loans. These loans will typically still require a personal guarantee and will have more stringent qualification criteria including a longer minimum time in business requirement.

Alternative financing options.

Aside from the options mentioned earlier, alternative financing methods can offer a practical solution for business owners in need of capital.

Equipment financing

An equipment loan or equipment leasing is a collateral-based loan. In general, the equipment you purchase serves as some or all of the collateral. In the case of equipment leasing, only the equipment being leased is used as collateral with no prior existing asset required. 

For many business owners, this arrangement feels very different from a loan that uses the borrower’s personal property as a guarantee or asks for additional business assets as collateral. Yet the lender can still reduce its risk with this type of loan since there is an asset to seize and resell in the event of a default. 

Invoice factoring

Technically, invoice factoring does require collateral, but instead of putting up real estate or personal assets, the lender accepts your unpaid invoices as collateral. This type of financing can be easier to qualify for since the creditworthiness of your customers, rather than you or your business, is a major factor in the approval process. 

With invoice factoring, a lender advances you money against your unpaid invoices. Then it collects payments from your customers on those invoices and remits the balance minus its fees to you.

Inventory financing

Similar to invoice factoring, inventory financing uses your business’s inventory as collateral instead of requiring you to secure your loan with other assets. With inventory financing, you can receive a loan or line of credit to purchase more inventory, expand your business, increase cash flow, and more.

The lender will assess the value of the business's existing inventory through a process known as auditing. They'll look into aspects like the type of inventory in question, its market value, its scalability, its condition, and its age. Based on this audit, the lender determines the amount they are willing to lend.

Business cash advance

A business cash advance refers to a type of financing you can use to borrow against future revenue that your business will earn. With a business cash advance, a lender provides you money up front and takes repayment via an automatic deduction of a percentage of your business’s future sales. 

Your company might be eligible for this type of financing once it has at least four to six months of acceptable revenue history that a cash advance provider can review. And while a business cash advance can be more expensive than a traditional business loan, this financing solution could work well for a startup with no collateral and even those without good credit. 

Alternatives to business loans with no collateral.

As a business owner, you may need various types of startup funding to achieve your goals. Here are four alternatives to collateral-free business loans to consider.

Business credit cards

A small business credit card is another financing option that can benefit startups and established businesses. It offers perks such as building business credit, separating personal and business finances, and providing short-term cash flow solutions. Depending on the account type, you may earn rewards or cash back on necessary business purchases.

If your personal credit score is 690 or higher, you may qualify for an unsecured business credit card without a cash security deposit. Note that most business credit card issuers require a personal guarantee from the business owner.

Crowdfunding

Small business owners with strong social networks might consider crowdsourcing to raise money for their startup goals. Crowdfunding allows small businesses to raise funds from multiple investors or donors without repayment obligations.

Unlike a loan, crowdfunding doesn't require collateral. However, other considerations exist when using rewards-based, donor, or equity crowdfunding for business funding.

Personal savings

The majority of startups don’t seek financing. According to the SCOREFoundation, powered by the SBA, 78% of startups rely on personal savings or income from another job. 

If you decide to use personal funds to start a new business, it’s important to exercise caution. Draining emergency savings or retirement funds is risky. So, you should consider how you might cope if you lost those funds and make sure you have a plan that you can live with before moving forward with such a high-risk investment.

Requirements for a startup loan without collateral.

To qualify for a business loan with no collateral, you will need to meet the lender’s eligibility criteria. Some factors that lenders may consider are your credit score, time in business, revenue and cash flow, debt-to-income ratio or EBITDA margin, personal financial strength, industry risk level, and how you plan to use the funds.

Since the loan is unsecured the lender may also require the following to help reduce their risk:

Personal guarantee

Instead of putting assets at risk to start your business, some lenders may accept a personal guarantee from the business owner as added security when you apply for startup funding. A personal guarantee states that you as the individual will be responsible for the loan in the event that your business cannot repay the debt.

A personal guarantee can be valuable to a lender if you have existing credit and personal assets. A high credit score indicates to lenders that you are trustworthy and likely to repay the money you borrow as promised. 

Blanket UCC lien

A blanket UCC lien states that if your business defaults on its loan, the lender can seize all of its assets—including equipment and accounts payable. A blanket UCC lien lets you use your entire business as collateral, even if you haven’t built it yet. 

There is, of course, risk involved when you agree to a blanket UCC lien. If you can’t repay a business debt, the lender might decide that it’s better off taking money you have in the company and selling your equipment rather than continuing to wait for you to make another payment. 

Adjusted loan terms

If you’re struggling to find unsecured loans on your desired terms, consider changing your expectations. Look for ways to reduce the lender’s risk, so they are more likely to approve your funding application. 

In general, lenders see shorter term lengths as less risky since they get their money back sooner and there are fewer potential events that could lead to a default. 

If you are still hitting roadblocks during the loan application process, consider taking out a smaller business loan. For example, instead of requesting $30,000 in business financing, you could ask for $5,000.

Next steps 

At Lendio, our job is to help businesses find the right financing at the best rates. If you are looking to fund your startup, turn to our lending center. Learn about your options for taking out a small business loan without putting your assets up as collateral.

The information in this blog is for informational purposes. It should not be used as legal, business, tax, or financial advice. The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (October 26, 2023). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.

When running a medical practice, cash flow is often a top concern. Waiting for insurance companies to pay can cause significant delays in receiving payments for services provided. This is where medical factoring comes in as a potential solution.

But what exactly is medical factoring? Let's dive into the details.

What is medical factoring?

Simply put, medical factoring is a financial transaction where a medical practice sells its invoices or accounts receivable to a third party at a discounted rate. This third party, known as a factor, then advances the medical practice with immediate cash for these outstanding invoices. In return, the factor collects payment from the insurance companies on behalf of the medical practice.

In other words, medical factoring allows medical practices to receive payment for services rendered immediately, instead of waiting for insurance companies to pay. This can help improve cash flow and allow medical practices to meet their financial obligations in a timely manner.

How does medical factoring work?

Medical factoring involves three parties: the medical practice (also known as the client), the factor, and the insurance companies. The process usually goes as follows:

1. The medical practice provides services to patients and submits claims to insurance companies.
2. The medical practice sells its outstanding invoices or accounts receivable to a factor at a discounted rate.
3. The factor advances the medical practice with immediate cash, typically around 70% to 80% of the total value of the invoices.
4. The factor collects payment from the insurance companies on behalf of the medical practice.
5. Once the insurance companies pay, the factor deducts their fees and returns the remaining amount to the medical practice.
6. The process repeats, as necessary, for ongoing cash flow needs.

Who qualifies for medical factoring?

Medical factoring is not available to all types of medical practices. Factors typically work with healthcare providers, such as hospitals, nursing homes, home health agencies, and physician practices.

In addition to the type of practice, factors also consider the following criteria when determining eligibility:

• The total amount of outstanding invoices
• Average claim size
• Payment terms with insurance companies
• Length of time in business (usually at least one year)
• Creditworthiness of the medical practice

Factors will also assess the collectibility of the invoices and may require a certain percentage to be insured against non-payment. This is known as medical receivables financing.

Benefits of medical factoring.

Medical factoring offers several benefits for medical practices, including:

1. Improved cash flow - By receiving immediate payment for services rendered, medical practices can improve cash flow and meet their financial obligations in a timely manner.
2. No debt - Medical factoring is not considered a loan, so there is no debt incurred by the medical practice. This can be beneficial for practices with existing loans or those looking to avoid taking on additional debt.
3. Flexibility - Medical factoring allows medical practices to choose which invoices to sell, giving them more control over their cash flow.
4. Faster payments - Factors have the resources and expertise to collect payments from insurance companies in a timely manner, which can help medical practices avoid lengthy delays in receiving payments.
5. Reduced administrative burden - By outsourcing the collection of payments, medical practices can save time and resources that would otherwise be spent on managing accounts receivable.

Medical factoring can be a valuable tool for medical practices struggling with cash flow issues. However, it is important to carefully consider the fees and terms associated with different factors before choosing one to work with.

Factoring Medicare and Medicaid claims.

Working with Medicare and Medicaid can often be a complicated dance for medical practices. These government insurance programs are known for their lengthy payment cycles, which can significantly impact a practice's cash flow. But, did you know medical factoring can offer a solution for this too? Absolutely!

With medical factoring, practices can sell their Medicare and Medicaid receivables to a factor, just as they would with private insurance claims. This means you don't have to wait for these programs to remit payment. Instead, you'll get an advance from the factor, typically around 70% to 80% of the claim value, providing immediate cash flow relief.

However, it's essential to be aware that factoring Medicare and Medicaid claims requires a sound understanding of these programs' unique rules and requirements. Factors with experience in these claims have the know-how to navigate the complex landscape and can help your practice receive payments quicker, relieving the financial pressure that comes from slow-paying insurance claims.

While medical factoring can provide an effective solution to the cash flow challenges posed by Medicare and Medicaid's slow payment cycles, it's still important to consider the associated fees and terms to ensure they align with your practice's needs and financial capabilities.

Conclusion

Medical factoring is a financial tool that can provide immediate cash flow relief for medical practices. By selling outstanding invoices at a discounted rate, factors can provide medical practices with immediate funds to meet their financial obligations. However, it's crucial to carefully consider the fees and terms associated with different factors before making a decision.

Thinking about solutions to manage your medical practice's finances? Check out medical practice loan options and find the one that suits your needs best.

When it comes to small business loans, the US Small Business Administration (SBA) isn’t just a federal agency. It’s an institution. For example, in 2017 the SBA helped connect entrepreneurs with 68,000 loans through the 7(a) and 504 loan programs alone. These two programs provided a total of $30 billion to American small businesses.

SBA loans are highly sought after because of their favorable rates and terms. An SBA loan is on par with the most lucrative financial products from big banks but is easier to acquire and more compatible for those beginning in business. The reason for this is that banks will want to see an established track record before approving a loan, while that’s not necessarily an SBA loan requirement.

This entrepreneur-friendly approach is no accident. The federal government set up the SBA to help more small businesses get up and running, which, as any entrepreneur knows, is a challenging thing to do. So the SBA serves as a spark plug for small businesses, which in turn strengthens our national economy.

How SBA Loans Work

With a traditional loan, you directly approach a lender and request financing. If the lender approves, they’ll give you the money. The SBA, on the other hand, serves as a mediator between you and a lender. You’ll work through the SBA to find a potential lender, who will then consider your request.

The kicker is that once you’re approved, the SBA guarantees a sizable portion of the loan, reducing the lender’s risk. Because they know they’ll get paid even if you were to default, lenders are much more willing to be generous with you. The SBA’s incentive means lenders will even compete for your business.

Because SBA loans are so beneficial for borrowers, they’re increasingly popular with entrepreneurs. Securing a loan with monthly payments, fixed interest rates, and generous repayment terms is rare indeed. And the process of paying off an SBA loan builds your credit, which improves your options when you need to pursue additional financing in the future.

General SBA Loan Qualifications

Since the SBA was created to serve a specific purpose, there are certain eligibility requirements a business must meet. These include:

• Be a for-profit business
• Operate within the United States or its territories
• Be unable to secure financing through other non-government means, excluding personal funds as of Aug. 1, 2023.
• Have sufficient equity to invest
• Meet size requirements for a "small business" as defined by the SBA
• Be in an eligible industry
• Demonstrate ability to repay the loan through a combination of credit score, earnings, and equity or collateral

To calculate your estimated monthly payment, visit our SBA loan calculator.

Your business won’t qualify if it’s involved in loan packaging, investment or lending, multi-sales distribution, speculation, gambling, or if the owner is on parole. Other excluded businesses include dealers of rare coins and stamps, charitable or religious nonprofits, and government-owned corporations.

Lender-Specific Requirements

In addition to the eligibility requirements outlined by the SBA, lenders will have their own requirements to qualify for an SBA loan. While these requirements will vary, minimum requirements generally start at:

• Minimum two years time in business
• Credit score of 650+
• Varying monthly revenue requirements
• Varying down payment requirements

Required Documentation

• Six months of business bank statements
• Driver's license or state ID
• Voided check from your business account
• Month-to-date transactions
• Two years of business tax returns
• Two years of personal tax returns from any owners with 20% or more ownership
• Debt schedule
• Year-to-date profit and loss statement
• Year-to-date balance sheet

SBA 7(a) Loan Requirements

In the world of SBA financing, these loans are the rockstars. Because these loans have remained popular for decades and have actual worth, they’re much more like the Eagles than Nickelback. Each year, more entrepreneurs use the 7(a) program than any other offering from the agency.

These loans are tailor-made for those who have been turned down for loans in the past, providing generous rates and terms. Another benefit is their flexibility, as they can be used for diverse purposes, including purchasing machinery, working capital, or buying real estate. As of May 2023, a 7a loan can also be used for a partial change of ownership. In this scenario, the original owner must stay on as an owner, officer, employee, or stockholder of the business.

The good news is that most small businesses meet the SBA 7(a) loan requirements:

• General qualifying criteria as listed above
• Collateral must be provided for loans greater than $50,000
• 10% equity injection (down payment) for 7(a) loans above $500k that will be used for complete changes of ownership
• Down payment requirements based on the lender's criteria for similarly-sized loans
• For partial changes of ownership, the applicant's debt-to-worth ratio can't exceed 9:1

SBA Express Loan Requirements

While 7(a) loans offer many stellar benefits, there are times when they’re not quite fast enough for your needs. As stated earlier, SBA loans are like the molasses of the financial world. So if you need capital fast, they’re probably not a good fit for the situation.

The SBA is aware that small business moves fast, so they’ve created the SBA Express Loan to better fill that void. These loans are part of the 7(a) program but are on a streamlined timeline. Less paperwork is needed and the waiting period is shorter. As is often the case with expedited loans, the maximum dollar amount is lower than with other programs and the SBA only guarantees up to 50% of the loan.

Of course, this loan is still through the SBA, so don’t be overly optimistic and think the money will appear in your bank account overnight. If approved, it’ll still probably take a month or so for you to receive the money.

SBA Express Loan Requirements Include:

• Maximum loan amount of $500,000
• Follow lender's existing collateral policy for loans over $50,000
• No collateral requirements for loans up to $50,000

To meet the SBA loan requirements for usage, you’ll need to apply the funds toward increasing working capital, financing equipment, or debt consolidation. As long as your plan lines up with those uses and adheres to the program’s other requirements, you should be in great shape.

SBA 504 Loan Requirements

These loans are intended for small business owners who want to expand their operations. In a nutshell, 504 loans (aka Certified Development Company loans) are 7(a) loans that are laser-focused on real estate.

Here are the uses approved for an SBA 504 loan:

• Purchasing existing buildings
• Purchasing land and land improvements such as grading, street improvements, utilities, parking lots, and landscaping
• Constructing new facilities
• Modernizing, renovating, or converting existing facilities
• Purchasing long-term machinery
• Refinancing debt as part of an expansion of your business through new or renovated facilities or equipment

The terms for these loans depend on what you’ll spend the money on. If you are purchasing land or structures, the term will be in the neighborhood of 20 years. If it’s machinery or equipment you’re buying, the term will often be half that.

To qualify, your business must have a tangible net worth of less than $15 million. Additionally, you’ll need to prove that in the past 2 years, you’ve had an average net income of $5 million or less after federal income taxes. If your business is engaged in nonprofit, passive, or speculative activities, you probably won’t qualify. And, as always, use the SBA’s size standards to ensure you are eligible.

SBA Disaster Loans

An SBA disaster loan is a low-interest way to recover from the physical and economic damage caused by declared disasters. These loans are open to a more diverse range of businesses than other SBA programs. There are no size restrictions, and private nonprofit organizations, homeowners, and renters can qualify.

You can use a disaster loan for repairing or replacing personal property, real estate, equipment, machinery, inventory, and business assets. Basically, these loans are meant to help you get your operation back where it was before the disaster struck. You’re not allowed to use the funds to try expanding your business beyond where it was pre-disaster.

Here are the 4 main types of disaster loans:

1. Home and Personal Property Loans
To qualify for one of these loans, you aren’t required to own a business. Instead, this program is meant to help a wide variety of victims of a disaster.

2. Business Physical Disaster Loans
For times when a business or organization sustains damage during a disaster, these loans offer up to $2 million to assist in replacing and restoring damaged property. To qualify, you must live in the declared disaster area.

3. Economic Injury Disaster Loans
Not all damage from disasters is of the physical kind. These loans are meant to assist those who may not have experienced physical damage but have still been negatively impacted. If you qualify, you’ll get as much as $2 million to pay for expenses you would’ve been able to handle if not for the disaster.

4. Military Reservists Economic Injury Loans
These loans are meant for business owners who are employing one or more military reservists called to active duty. The SBA provides financing that makes it possible to continue your business operations.

If you have questions about whether or not you are in a presidential and SBA-declared disaster area, you can search by state and territory with the SBA’s online database. Common examples of disasters added to the database include fires, tornadoes, flooding, earthquakes, and drought.

For those who qualify, it’s important to follow the SBA loan requirements as carefully as possible. The first step is registering with the Federal Emergency Management Agency (FEMA). You can do this by calling FEMA at 1-800-621-3362 or visiting DisasterAssistance.gov. Once you’ve received a FEMA registration number, you’ll be eligible to fill out the SBA online application.

Before starting the application, make sure you have this additional information on hand:

• Contact information for all applicants
• Social Security numbers for all applicants
• Employer Identification Number for business applicants
• Deed or lease
• Insurance information
• Business income
• Business account balances
• Business monthly expenses

Once you’ve clicked submit on the application, you’ll need to sit back and wait for the SBA to review your documents and dispatch an inspector. Following an on-site evaluation from the inspector, the SBA will have an estimate for the cost of your damage. You should know that the SBA considers disaster loans a priority, so if you qualify, you’ll get the good news in as little as 3 weeks.

SBA Express Bridge Loans (EBLs)

The Express Bridge Loan (EBL) Pilot Program was created to complement the other disaster loans provided by the SBA. It empowers 7(a) lenders to provide financing on an emergency basis. Of course, the only way to qualify is if the need is tied to a disaster-related purpose.

The key words in the name are “express” and “bridge.” Essentially, these loans provide expedited money to businesses hurt by presidentially-declared disasters. These loans are smaller than most, tapping out around $25,000. The idea is that they help you bridge the gap between the disaster and the arrival of more substantial loans.

This SBA loan program requires that you are located in a primary county or contiguous county that’s been presidentially-declared a disaster area, your business had established a banking relationship with the lender as of the date of the disaster, the funds are used for the survival or reopening of your business, and that the application process must be concluded within 6 months of the qualifying disaster.

SBA Loans Aren’t Your Only Option

While SBA loans are undeniably great, always account for the fact that they take extra time and effort to obtain. You can’t simply stroll along and expect positive results. Do your homework to find the best option, then meticulously gather all the required documents.

Ultimately, the biggest SBA loan requirement is patience. If time is limited and you don’t want to wait for the lengthy SBA approval process, there are other excellent loans you may want to consider. These alternatives include short-term loans, cash advances, equipment financing, and accounts receivable financing.

Each loan product has its pros and cons, which is why it can be helpful to get an expert’s opinion. For questions about a broader range of loan products, including short-term loans and other non-SBA options, feel free to talk to the experts at Lendio. We can answer any questions you have and guide you to the best choice for your needs.

Many entrepreneurs need some type of funding to get their business ideas off the ground. But you might be surprised to learn that nearly 54% of small business owners use personal finances in the startup phase. 

Of course, not everyone has the ability or the desire to self-fund. So, some business owners may consider an alternative way to use their personal assets to their advantage. Instead of using your own cash to fund your business initiative, you could consider using personal assets as collateral to help secure more affordable financing solutions. 
One potential funding option that some small businesses owners use is a home equity loan. Because you use the value in your home as collateral to secure this type of financing, home equity loans are often a cheaper way to borrow money compared with other loan options. Yet there are drawbacks to putting your home equity on the line for your business as well.

How To Use A Home Equity Loan For Your Business

Home equity is the difference between how much you owe on your home (aka your mortgage balance) and its market value. Between 2021 and 2022, accessible homeowner equity in the United States rose by 18%. Many homeowners took advantage of their increasing home values, and, in 2022, home equity loan originations in the U.S. went up by 47%, according to TransUnion. This increase represented the largest volume of home equity loans on record in over a decade. 

Homeowners can use the equity in their homes to secure affordable financing in the form of a second mortgage. Debt consolidation, home improvement projects, and big-ticket purchases are some of the most popular reasons people take out home equity loans (and home equity lines of credit, as well). Yet it’s not uncommon for entrepreneurs to sometimes take advantage of the value they have built up in their homes for business-related goals, too. 

If you want to use a home equity loan as a source of business financing you’ll need to first find a lender that allows you to use the loan proceeds for business purposes. From there, you must satisfy the lender’s qualification requirements to receive a loan. 

Qualifying For A Home Equity Loan

Every lender has different requirements that applicants must satisfy when they apply for financing. But if your goal is to take out a home equity loan for your business, here are some of the general requirements a lender may expect you to meet. 

• A credit score that satisfies its mandatory minimum cutoff point
• Proof of your ability to repay the loan 
• A satisfactory debt-to-income ratio
• A satisfactory loan-to-value ratio (LTV)

Understanding LTV

LTV is a measurement of your property’s value compared to its mortgage amount. Many home equity providers may let you borrow up to 80% of the value of your home, though exact LTV limits can vary. 

Here’s how LTV can impact your borrowing limits with a home equity loan. Imagine you owe $300,000 on a home that appraises for $400,000. In this scenario you have $100,000 worth of equity, but you wouldn’t be able to borrow that amount. If a lender limits LTV to 80%, you might qualify to borrow up to $20,000. The $300,000 you owe on your first mortgage, plus the $20,000 you want to borrow on the second mortgage ($320,000 total), would equal 80% of the current value of the home. 

Pros And Cons Of Using A Home Equity Loan For Your Business

Before you tap into your home equity as a funding source for your business, it’s important to take a close look at the benefits and drawbacks of this type of financing. 

Pros

• Easier approval criteria - Home equity loans tend to be easier to qualify for compared with traditional business loans or SBA loans. 
• Lower interest rates - Because you’re pledging your home as collateral, there’s less risk involved for the lender. This typically translates into lower interest rates for the borrower by extension. 
• Higher loan amount - Depending on how much equity you have available in your home, you might be able to qualify for a larger loan amount with a home equity loan than you could with another source of business financing. 
• Longer repayment period - Home equity loans often feature lengthier repayment periods compared with other business financing options. 

Cons

• Your house at risk - If you’re unable to make the payments on your home equity loan, the lender could foreclose on your home and resell it to recuperate its loss. And with around 65% of small businesses failing by their tenth year in business, according to the U.S. Bureau of Labor Statistics, using a home equity loan to finance your business is a big gamble to take as a small business owner. 
• Good personal credit needed - If you hope to qualify for the most attractive interest rates and borrowing terms, you’ll typically need good personal credit to receive these offers from lenders. Bad personal credit, meanwhile, could lead to a loan denial.
• No business credit building - Taking out a home equity loan won’t help you establish business credit for your company. 

Home Equity Loan Vs. HELOC

When you research home equity loans, you’re sure to come across a similar home-equity based financing product, the home equity line of credit (HELOC). HELOCs are another type of financing that is secured by the equity you have built up in your home. But HELOCs and home equity loans have a few key differences that you’ll want to understand. 

• Fixed vs. variable interest - In general, home equity loans feature fixed interest rates. This provides borrowers with a predictable, unchanging payment amount throughout the life of their loan. In contrast, HELOCs usually have variable interest rates that can go up or down with the market. 
• Lump sum loan amount vs. credit limit - When you take out a home equity loan, you receive a lump sum amount from a lender to use as you see fit (as long as you don’t violate any of the lender’s terms). A HELOC, by comparison, works more like a credit card. With a HELOC, a lender extends a line of credit that you can access up to a certain amount (aka your credit limit). As you repay the debt you owe (plus any interest and fees you owe), you can borrow against the same line of credit again up to the credit limit. 
• Collateral and risk - As a borrower, you pledge the equity in your home to secure both home equity loans and HELOCs. So, if something goes wrong and you fail to repay either type of debt, you risk losing your home to the lender.

Alternatives to Using a Home Equity Loan For Your Business

Using a home equity loan to finance your business could be an affordable way to secure the funding you need. However, it’s also a high-risk decision as a borrower. If you have any doubts about your ability to repay the full debt, it’s not a good idea to put your home on the line for your business. 
The good news is, there are many other types of business loans that could help you accomplish your goals. Even if you’re in need of a first-time business loan for your company, you have numerous options to consider. As you research loan choices, be sure to compare offers from multiple lenders to make sure you find the right fit for your business.

The term ‘mergers and acquisitions’ refers to the combination of two or more companies into a single business entity. This joining-together of multiple companies can take place when two or more businesses form a new legal business entity (aka a merger) or when one company purchases another and absorbs its resources into an existing business entity (aka an acquisition). Acquisitions are the far more common of the two M&A options. 

Whether you’re forming a new entity or preparing to combine an existing business with your own, the M&A process can be complex. But if you execute mergers and acquisitions properly, they could represent a chance to accelerate your company’s growth and add value to your business at a much faster rate than you might be able to accomplish on your own. 

Below is an overview of 10 basic steps in the merger and acquisition process that could set you up for success. You can use the broad details below as an inspiration to conduct deeper research.

1. Acquisition strategy

Before you begin the M&A process, it’s important to define the goals you’re trying to achieve. Write out details about what the ideal business acquisition looks like for your company. For example, how much capital is your company is willing (and able) to invest to acquire another business? What benefits and assets does your business expect to gain in return for purchasing another company?  
Perhaps your business wants to expand its product line or broaden its access to new markets in an effort to boost its profits. Or maybe your company desires to eliminate the competition it’s facing in a particular area. Whatever your acquisition motivations may be, take the time to define them on paper so you’ll know what you’re looking for in advance.

2. Evaluating potential targets.

Next, it’s time to outline the criteria you would like potential acquisition targets to meet. As you make a profile of potential companies you might want to consider for acquisition, here are some key details to consider. 

• Customer base
• Geographic location
• Profit margins
• Company size
• Products and services offered
• Company culture

Once you have a list of companies that meet your criteria, you can perform an initial evaluation of those businesses. From there, you (or a representative on your behalf) can reach out to your top choices to gauge potential interest. 

You’ll also need to decide whether you’re open to the possibility of hostile acquisitions. A hostile acquisition involves making an offer to the company’s shareholders without the knowledge of the company’s board of directors (also known as a tender offer). Hostile acquisitions can be more difficult to navigate in the post-closing phase of the M&A process. So, it’s an important detail to consider.

3. Letter of intent.

If one of your target companies expresses sincere interest in a purchase, the next step in the M&A process is typically to send over a letter of intent (LOI). This document expresses your official interest in moving forward with a merger or acquisition and may provide a summary of your initial proposed offer. 

At this stage most acquiring businesses will also request additional financial details from the target companies with which they’re negotiating, as well. And it’s standard for both parties to sign a confidentiality agreement that agrees not to disclose details of the M&A offer nor the company’s financial information with the public. 

4. Valuation

Once the business you’re interested in acquiring provides its current financial details, you’ll be in a better position to assess the value of the target company. In addition to financial data, you should also consider any external factors that might impact the success of the deal and whether the target company would be a good fit with your existing company culture.

Valuation of a merger or acquisition can be complex. Nonetheless, it’s one of the most important steps in the M&A process. For that reason, many companies seek expert assistance and may hire outside consultants to perform or assist with the valuation process. 

5. Making an offer.

After completing the valuation process, you may be ready to make an initial offer to the shareholders of your target company. The offer you present might propose a cash purchase, stock ownership, or some combination of the two. 

The selling party will take some time to review your M&A offer and may present a counter offer of its own. Negotiations could go back and forth for some time until both parties agree on terms that everyone can accept or the deal falls apart.

6. Due diligence

Assuming negotiations are successful and the selling party accepts your purchase offer, the next step in the M&A process is due diligence. Due diligence is a review period that often lasts 30 to 60 days (sometimes longer). You can (and should) use this review period to confirm that every aspect of the deal is in order before you move into the final steps of purchasing another business. 

As you perform due diligence of a target company, you’ll want to review details such as:

• Financial statements
• Assets, liabilities, and equity
• Products and services
• Key performance indicators
• Customer base
• Human resources
• Company operations
• Etc.

It’s important to leave no stone unturned during the due diligence process. Your goal should be to verify that there are no inconsistencies in the information the seller provided you earlier in the M&A process—the information on which you based your offer. 

If you discover any conflicting details—such as financial statements that don’t match up with the information you were given, for example—it might be cause for an adjustment in your offer. In extreme cases, problems that arise during the due diligence phase might result in a decision to walk away from the transaction altogether.

7. Purchase agreement

Once the due diligence process is complete (and assuming there are no issues), you can begin to draft a purchase agreement. The purchase agreement should detail the cash and/or stock that shareholders of the target company will receive once the sale is complete. The document should also outline when said assets would transfer to the target shareholders. 

It’s important to confirm that your agreement complies with all federal and state regulations and doesn’t violate any antitrust laws. Some M&A transactions may require approval from the state and/or federal government before you can finalize your purchase agreement. So, you may want to consult with an attorney with experience in M&A transactions for guidance. 

8. Closing the deal.

Assuming you receive government approval of your purchase agreement (if it’s necessary), you should be ready to close your M&A transaction. All of the parties involved will need to sign the purchase and sale documents for the deal to be considered closed. At this point, ownership of the target company should officially transfer to the acquiring company.

9. Financing strategy

As an interested M&A buyer, you should begin researching business acquisition loan options long before the ink dries on a purchase agreement with a company you want to buy. However, you will likely finalize the details of your business financing terms after you sign those purchase and sale documents. 

10. Post-closing

After a business acquisition closes, the management teams of the target company (aka the seller) and the acquiring company (aka the buyer) will cooperate together during the transition process. The teams will work to combine the two companies into one—merging finances, organizational structures, company culture, and more. This integration process can take months or even years to facilitate, and you should closely monitor for any potential hiccups along the way. 

Are you ready for your first business acquisition?

Business owners are motivated to consider mergers and acquisitions for a variety of reasons. Whether you’re interested in buying out a business partner, acquiring new technology, removing a competitor from the marketplace, or finding a unique way to expand your company’s geographical footprint, the right M&A deal could present plenty of potential benefits. 

At the same time, it’s important to approach the M&A process with eyes wide open to the possible downsides as well. Acquisitions and mergers can be time-consuming and often take months and sometimes years to complete. Not only can the M&A process be tedious and time-consuming, it involves a significant amount of risk as well. More than two-thirds of mergers and acquisitions fall short of producing their desired results according to PwC. 

Nonetheless, the right M&A deals could represent an opportunity to grow and expand your business at a faster rate. Consider the triumphs of famous acquisitions like Google and Android, Disney and Marvel, and Exxon and Mobil as examples. Analysts also point out that although M&A activity tends to decrease during seasons of market volatility, those times can often bring forth attractive value propositions for deal makers who are willing to take a risk. 

So, if you think you’re ready for your first business acquisition, be sure to do your homework. Take the time to learn from the examples of other mergers and acquisitions and review the guide above to help improve your odds of success. 

Key Takeaways on Factor Rates

• A factor rate is a simple calculation to indicate the total amount that a borrower will pay back on certain types of business financing. 

• To calculate payback, multiply the total borrowed by the factor rate (i.e., $10,000 borrowed x 1.5 factor rate = $15,000 total payback).

• Factor rates are used primarily in short-turnaround, higher-risk financing, like business cash advances.

What Is a Factor Rate?

A factor rate represents the total payback amount of specific types of business financing. Factor rates are expressed as a decimal number (ex: 1.5) and are typically used for business cash advances and other, similar business financing options. 

While both factor rates and interest rates help determine the cost of money borrowed, they’re not the same. 

• A factor rate is applied only to the original amount borrowed and acts as a flat fee for borrowing, which is then incorporated into the loan repayment schedule. 
• Interest rates “compound,” which means the amount of interest owed is calculated based on the remaining balance. The amount paid in interest varies somewhat through the life of the loan.

How Are Factor Rates Calculated?

When a business borrows, it owes the principal amount and whatever the lender charges to borrow that money. The factor rate is part of the formula that helps determine the total amount the borrower will pay back.

Borrowed Amount x Factor Rate = Total Payback Amount

For example, if a business takes out a $10,000 short-term small business loan (borrowed amount) with a factor rate of 1.3, the total repayment would be ($10,000 x 1.3) = $13,000 which means you’ll pay back a total of $13,000.

What’s the Difference Between Interest Rate and Factor Rate?

Interest rates and factor rates both relate to the amount a lender charges to borrow money. However, interest rates and factor rates differ as follows:

Factor Rates and Interest Rates are Expressed Differently

The most obvious difference between interest rates and factor rates is the way lenders display them. Factor rates are expressed as decimals (1.5) and interest rates as percentages (50%).

Factor Rates Don’t Change

One key difference between interest rates and factor rates for business loans is how—or if—they change. Factor rates are fixed and do not fluctuate during the life of the loan. Borrowers know up front exactly how much they’ll pay back, whether they pay early or on time.

Interest rates, however, can be either fixed or variable. When borrowing money with a variable interest rate such as a 10-year SBA loan, the variable interest rate will fluctuate as the prime interest rate changes. Additionally, total interest paid can be reduced through early payoff.

Compounding Interest Rates

Factor rates are static and based only on the amount borrowed.

Interest rates on business loans may be compounded daily or monthly or at other pre-disclosed intervals. Compounded interest is calculated by taking the percentage rate and dividing it by the number of times it “compounds.” For example, an annual interest rate of 10% that compounds daily would compound 365 times each year.

Compounded interest is calculated based on the total amount owed rather than the initial amount borrowed. So a $200,000 loan at 10% annual interest compounded daily would look like 

• Day 1: $200,000 owed
• Day 2: $200,000 + ($200,000 x .10/365) = $200,054 owed
• Day 3: $200,054 + ($200,054 x .10/365) = $200,108 owed

Remember, interest charges are based on the total amount owed. When a payment is made, total owed is reduced, which also reduces the amount of interest charged.

What Types of Business Financing Products Use Factor Rates?

Factor rates are often associated with less traditional, shorter-term, higher-risk financing, including the following:

Cash Advance (Business Cash Advance and Merchant Cash Advance)

Both business cash advances and merchant cash advances are common examples of financing products that use a factor rate. In both cases, lenders “advance” a business money based on future, anticipated income.

Business cash advances are tied to the overall financial performance of a business. Merchant cash advances are linked solely to credit card deposits. Both are paid back as a portion of daily sales, although a business cash advance’s specific repayment amount is calculated upfront and based on a “fixed daily percentage.” Payments can be structured as daily, weekly, or through other arrangements and are almost exclusively processed through an automated withdrawal of funds. 

Other Short-Term Business Loans

Other “short-term business loans” may use factor rates, if that’s how the lender structures the financing. Note, however, that financing will not use both a factor rate and an interest rate. 

Because the total payback amount can vary between factor rates, interest rates, and other repayment options, it’s important to fully understand the conditions of a short-term business loan before signing. Work with an expert, like a Lendio funding manager, to understand all of the terms, conditions, and payback amounts of each option presented.

Does Business Loans Charge an Interest Rate on Top of a Factor Rate?

Short answer: no. Business financing will not charge an interest rate on top of a factor rate. 

Note that the money you borrow with the help of a financing platform like Lendio, where a single application delivers your information to more than 75 different lenders, is required by law, in select states, to disclose all costs and fees upfront so you’re never wondering what you’ll pay.

If you have questions about financing offered through Lendio, please talk to your Account Executive, who can help you sort through the details, the overall cost to borrow, repayment schedules, and other information.