Covid-19 has taken a toll on us all and many business owners are wondering how to navigate future variants and lockdowns. Due to the severe impact on the economy, you may be wondering how to generate liquidity for your small-business and stay strong through the pandemic.
Fortunately, if you know your loan options, you have fantastic opportunities to borrow the money you need to drive your business forward. All you need is the knowledge to navigate your liquidity options and the resources to set you up with the appropriate loan provider.
This article will cover the most popular loan options for small business owners looking to generate liquidity during Covid-19. We will cover six options for gaining access to short-to mid-term capital, listing the advantages and disadvantages of each.
Short-Term Loans
Short-term loans offer versatility and flexibility for small-business owners. With this option, businesses borrow money according to the cash flow they plan to repay at regular intervals with interest. In general, short-term loans need to be paid off within three to 15 months and range from $2,500 to $500,000.
As an unsecured loan, short-term loans don”™t require collateral and allow small business owners many options with how they use their added liquidity. However, due to being unsecured, these loans have higher interest, offer less money, and are more challenging to get from traditional banks.
On one hand, short-term loans are low risk for the borrower because they generally do not require collateral. Additionally, these loans offer flexibility in spending cash, such as purchasing equipment, managing cash flow, or paying off credit cards to improve credit. But on the other hand, higher interest rates and a short time to pay back the loan are the main trade-offs for the versatility of short-term loans. And traditional banks often avoid offering these loans to business owners due to their risk, although alternative lenders are less risk averse.
Mid-Term Loans
Unlike short-term loans, mid-term loans aren”™t as flexible but allow repayment over two to five years. Generally, these loans have a fixed interest rate with monthly payments, and the borrower must agree to the lender”™s payback terms before receiving the loan. While the interest rate isn”™t as high as short-term loans, depending on the length of the loan and amount borrowed, rates could vary between 5% and 30%.
Mid-term loans are best for businesses with good credit who have already established themselves and are ready to grow. The payback period and flexible interest rates allow small business owners looking to scale a unique opportunity to get the liquidity they need.
The positive aspect of this strategy is a flexible repayment period allows for consistent repayment of the loan, and borrowers can prepay the loan off with no penalties. Additionally, fixed interest rates throughout the repayment period offer even more consistency for repayment.
However, businesses generally need at least two years in operation, a 650+ credit score and $250,000 in annual revenue, and banks are also not rushing to offer these products to businesses.
Line of Credit
Business lines of credit (LOC) offer the most flexibility in terms of liquidity. Rather than taking out a loan at a fixed rate, borrowers have a pool of capital to draw from and payback as they need it. You can tap into the money at any time, and you only need to pay back what you borrowed at the agreed-upon rate.
Because of the unforeseen toll Covid-19 has taken on businesses, access to LOCs makes it a desirable option for entrepreneurs ”” and LOCs are easier to qualify for than traditional loans. Unfortunately, LOCs offer higher interest rates, lower cash funds, and higher risk for the lender.
They also require good credit score and annual revenue, or collateral, in order to qualify, and they may require setup fees and ongoing paperwork to ensure your business is in good standing.
Personal Loans for Your Business
Similar to LOCs, personal loans are an excellent option to cover short-term expenses and cover emergency liquidity needs. The main difference is these are loans with a fixed withdrawal amount and payback plan. Because personal loans are unsecured and don”™t require collateral, they are more challenging to qualify for and have higher interest rates than longer-term loans.
Despite this, as long as you qualify, you can receive the money within days and have the flexibility to use your liquidity on whatever your business needs. However, these loans require a 700+ credit score and at least $50,000 in yearly personal income, and the interest rates are higher because they offer more risk to the lender.
Equipment Financing
For businesses that use a lot of equipment and frequently upgrade and replace that equipment, equipment financing is a great way to add in much-needed liquidity. These loans are specifically designed for significant equipment such as vehicles, printers, or restaurant ovens.
Equipment financing involves taking out a loan for the equipment in question and using the equipment as collateral for the loan. If, for example, you are approved for 75% of the equipment cost, you can buy the equipment for 25% value and pay off the amount borrowed with interest and principal.
With this strategy, business owners can be approved for loans up to 100% of equipment value with low-interest rates and be funded within 48 hours, and borrowers can repay equipment financing up to 10 years or more. But be aware that a failure to pay on loan will lead to repossession of said equipment, and these loans often require a minimum credit score and outstanding revenue for two or more years.
Stacking 0% Business Credit Cards
Stacking business cards can be an excellent way to gain access to and move around liquidity, depending on your credit. Rather than acquiring a sizeable unsecured line of credit, you apply for multiple credit cards at 0% interest then put your business expenses on those cards where you can pay them back without interest. You can even use this method to pay off loans with high interest ahead of time and build up your credit quickly.
This strategy enables the borrower to enjoy flexibility in moving around your money to pay off multiple expenses. And it can be an effective way for savvy business owners to build credit and pay off larger loans without interest.
There is one big drawback: credit card stacking can temporarily lower your credit score while multiple lines are open, and failure to pay them off can result in a significant drop in score.
Jake Labate is president and Michael C. Davies is creative copywriter at Labate.io, a Westport-based marketing solutions firm. An earlier version appeared on the BitX Funding blog.
