Financing

A small business line of credit is one of the most common forms of financing available: a lender extends credit, and a borrower can draw as much as needed up to a designated limit. Once the lender receives repayment of the borrowed funds, it replenishes the credit line so the business owner can draw from it again. This revolving credit line thus acts much like a credit card. Business lines of credit fall into three categories: unsecured, secured, and personal. Lenders have varying requirements for each, with the biggest differentiator being the need for collateral like real estate or equipment with secured lines of credit. Lenders also offer unsecured lines of credit that don’t require collateral. While unsecured lines of credit are easier to qualify for, they also have shorter repayment terms and typically charge higher interest rates. The best business lines of credit allow higher flexibility, offer competitive rates, and let borrowers draw money as needed. Who a Small Business Line of Credit Is Right For A small business line of credit is a great financing tool for businesses as it can be used for ongoing expenses. It may also be used to smooth out cash flow in slow seasons or to help expand a business. Small business lines of credit can be used by: Small businesses with recurring expenses: Business owners use small business lines of credit to cover expenses like rent, utilities, and payroll. Short-term business lines of credit are a popular option. Companies planning for an emergency: Financial advisors recommend that business owners apply for financing before a need arises to get better rates and terms. Seasonal businesses: Businesses such as restaurants rely on lines of credit to cover expenses in the off-season and to buy inventory in advance of their busiest times of the year. Businesses seeking some type of equipment purchase: Equipment with short lifespans or items that cannot be claimed for depreciation can be purchased with business lines of credit. If you’re looking to purchase vehicles or larger capital equipment, an equipment loan with a fixed term arguably makes more sense. Startups and newer businesses seeking to inject capital: Startups and businesses in the early stages of development or expansion sometimes require the owners to inject some liquidity. Business owners can get low rates by using their homes as collateral for a home equity line of credit (HELOC), and startup founders can get personal lines of credit. Types of Small Business Lines of Credit Once a business owner identifies why they need a line of credit, they should determine what type of line to get. Unsecured lines of credit don’t require collateral but have short repayment terms and higher rates than the other options. Secured lines of credit require collateral but offer lower rates and longer repayment terms. Unsecured Small Business Line of Credit Unsecured small business lines of credit have short repayment terms and charge higher rates than secured options. However, this type of funding is useful in an emergency and has much lower requirements for qualification. Businesses can often apply online. Types of unsecured lines of credit include: Short-term: This type of line of credit has repayment terms that last up to two years, with weekly or monthly payments. Funding amounts are $250,000 or lower and are best used by small businesses or for recurring expenses such as inventory. Medium-term: This is a small business line of credit that offers up to five years for repayment and funding up to $500,000. Business owners use these loans for seasonal expenses and variable-cost projects. Banks and some alternative lenders offer this type of line of credit. Business credit card: Credit cards are the most common form of personal and business financing. Qualification standards are often easier compared to secured lines of credit, and credit limits can be up to $100,000. Business credit cards are a good option in a small business financing toolkit. Many cards offer rewards to small business owners for spending. Unsecured Small Business Line of Credit Requirements Short-term lines of credit have fairly relaxed requirements for financing, making them a viable option for business owners with low credit scores and cash flow issues. However, these products carry higher interest rates and lower credit limits than secured lines of credit. Unsecured Small Business Line of Credit Rates and Fees Business owners should note that while short-term funding carries a higher annual percentage rate (APR), the total cost of borrowing also factors in how long it takes to repay debt. A short-term draw repaid in one year at 25% APR will cost less than a medium-term draw repaid over two years with a 15% APR. Unsecured Small Business Line of Credit Terms Funding speed and credit limit are two important factors to consider when choosing a lender, followed by how long you’re allowed to repay borrowed funds. When business owners encounter a funding emergency, they need funds right away and can’t risk only being approved for part of what they need. Business owners should anticipate that, in most cases, a business will qualify for less than the amount they apply for. A great unsecured line of credit is available with . Bluevine offers lines of credit of up to $250,000 for businesses with at least a 625 credit score. The application takes only minutes and funding can occur within a matter of 24 hours. Secured Small Business Line of Credit A secured business line of credit is a good choice for business owners who have significant collateral to pledge and need access to larger amounts of capital. Funding is available for up to $25 million, rates are low, and repayment terms extend up to 10 years. Secured line of credit types include: Bank-issued: These small business lines of credit can have credit limits as high as $5 million. Many banks will utilize the Small Business Administration (SBA) CAPLine program. Interest rates tend to fall below 10% with repayment terms of up to 10 years, making them best for larger projects and larger businesses. Equipment-backed: Lenders offer equipment-backed lines of credit up to $25 million. These are best used to finance the purchase of several vehicles for a fleet or to finance construction equipment to complete a project. Equipment-backed lines of credit have repayment terms up to the useful life of the equipment. Invoice-backed: Invoice-backed lines of credit are similar to invoice factoring. However, business owners don’t sell invoices, and the line of credit amounts can reach $10 million. There are also no repayment terms because as lenders collect invoices, they apply payments toward their line of credit balance. Secured Small Business Line of Credit Requirements Secured lines of credit are more difficult to qualify for and have longer application, approval, and funding times than unsecured lines of credit. Business owners must have extensive operational history and relatively high annual revenue to qualify. For bank-issued and equipment-backed lines of credit, business owners must also have good credit. Invoice-backed lines of credit are sometimes an exception to those more stringent requirements as credit score plays a smaller role in underwriting. Secured Small Business Line of Credit Rates and Fees Secured business lines of credit can offer borrowers lower rates because loans require collateral, so lenders have something to take if borrowers default. This can be a major benefit to business owners seeking to borrow larger dollar amounts. Origination and maintenance fees vary across secured lines of credit based on the type of collateral and also by the lender. Secured Small Business Line of Credit Terms Secured lines of credit from a bank can be as large as $5 million, depending on the individual bank’s lending policy. Repayment terms can be as long as 10 years, but your line of credit will likely be reviewed annually by your lender. However, funding speeds are typically slower because of the higher business line of credit requirements and more due diligence for collateral. Secured lines of credit are ideally suited for businesses that do not need fast funding or are higher-revenue businesses in need of a larger credit limit. Personal Line of Credit for Business Startup small businesses that need capital often rely on personal financing from the business owners. A personal line of credit does not require any business information but will require good credit. Types of personal lines of credit include: Personal: Banks and online lenders offer personal unsecured lines of credit without consideration for business qualifications. These credit lines go up to $100,000 and are best used by startups and low-revenue businesses whose owners have good credit and require a quick capital injection. HELOC: Business owners and entrepreneurs can also access a HELOC to fund their business. It’s important to note that lenders base the size of a home equity line of credit on available home equity. A HELOC also puts the home at risk in the event of non-payment but offers much lower interest rates. Personal Line of Credit Requirements Personal lines of credit have high minimum credit score requirements because lenders will rely on this metric in underwriting. Startups and new business owners with good credit can take advantage of the lack of time-in-business and annual-revenue requirements. Personal Line of Credit Rates and Fees Borrowing money with a personal line of credit or HELOC has the benefit of low fees and interest rates. Business owners can access capital and pay it back quickly to lower the cost of borrowing. However, business owners must make sure that they have the budget and cash flow to cover financing in case their business performs below expectations. Personal Line of Credit Terms Personal line of credit limits can vary by lender and are typically no more than $100,000. However, a HELOC can be as high as available home equity, making it a great option for business owners with sufficient equity that need startup capital. HELOC repayment terms also extend up to 30 years, with up to 10 years to draw from the line and make interest repayments, plus up to 20 years for amortized repayment. If you’re considering using a personal loan to finance your business, you may want to consider . With its online marketplace, LendingTree allows you to compare rates and offers from various lenders to find the financing option that’s right for you. Pros & Cons of a Small Business Line of Credit Bottom Line Business owners use lines of credit to finance recurring expenses. Business line of credit requirements vary based on whether the line is secured with collateral or if a personal line of credit is being used for business needs. Business owners should have a strong credit score, solid revenue, and established time in business, but there are options available for any business.

A merchant cash advance (MCA) is a business financing product that allows companies to receive a lump-sum advance payment in exchange for a fixed percentage of their daily credit card receipts. MCAs are an expensive form of credit and should only be used as a last resort by businesses that cannot qualify for other forms of financing. The size of an MCA is based on the amount a lender is willing to advance based on the daily credit card sales of a business. The lender collects repayment using a holdback percentage or a portion of the daily credit card receivables. The total cost of the loan is calculated using a factor percentage of the cash advance. For example, a $10,000 MCA with a 1.25x factor rate would have a total repayment of $12,500. Daily payments will be taken until the loan is repaid. If a business experiences slow periods, it could extend the repayment term, or the MCA provider might require the business owner to make up the difference. There are many other types of business financing that are much more affordable. Lendio offers a variety of business financing options. Before moving forward with a merchant cash advance, visit website to see if you qualify for a more affordable business financing product. Pros & Cons of a Merchant Cash Advance Who Merchant Cash Advances Are Right For Scenarios in which a merchant cash advance is the best or only option include: Business owners unable to qualify for other financing: Almost any other type of business financing will be more affordable than merchant cash advances. An MCA should be a last resort. Businesses with unpredictable revenue: If business revenue fluctuates greatly, an MCA and its variable repayment structure may be preferable to a fixed repayment plan. However, a business owner should calculate daily payments by taking the holdback percentage and multiplying it by the average daily credit card receivables to determine the true cash flow impact of an MCA. Business owners with bad personal credit: If a business is turned down for other types of loans due to the owner’s credit score, it might be able to qualify for an MCA. However, business owners should check out other bad credit business loans, which likely will be more affordable, before considering an MCA. When to Avoid Getting a Merchant Cash Advance If you can qualify for a more affordable type of business financing, you should avoid getting a merchant cash advance. Other types of financing typically have fixed repayment terms that are easier to budget. Alternatives to a Merchant Cash Advance Before considering a merchant cash advance, look at the following types of business funding. Short-term Business Loans Short-term business loans have a quick application process, simple repayment plans, fast funding, and a lower annual percentage rate than MCAs. Business Lines of Credit A business line of credit allows business owners to draw against an established credit limit as needed rather than receiving the full amount of the loan upfront. Interest is charged on the amount used, and borrowers repay in installments. Invoice Factoring Invoice factoring is a good way for businesses that invoice their customers to receive funding quickly when cash is needed. Unpaid invoices are assigned to a factoring company, which will advance approximately 80% of the invoice upfront. The customer repays the factoring company instead of your company. Once the invoice is satisfied, the remainder of the invoice, minus fees, is distributed to your company. Equipment Loans An equipment loan is fixed financing from a lender which can be used to either purchase or refinance vehicles and heavy equipment. The purchased collateral secures the loan. Equipment loans can be secured from many sources, including banks and nontraditional lenders. Because of the strong collateral, lenders offer low rates on equipment loans, ranging from 6% to 9%. Home Equity Loans or Lines of Credit A business owner can use personal finances through either a home equity line of credit (HELOC) or a home equity loan (HEL). HELOCs and HELs use the equity in your property―usually a primary residence―as collateral for the loan. These funds can then be used for the business. In general, you’ll need to have equity in the residence, a debt-to-income (DTI) ratio of 50% or lower, and a credit score of at least 650 to qualify. Business Credit Cards Because of the high annual percentage rate (APR) involved with a merchant cash advance, even a business credit card would be a better option due to the lower APR. Business credit cards help with cash flow management and can offer perks and rewards for the business. However, they’re still best used for small recurring charges rather than large capital expenses. While they’re a more affordable credit option than MCAs, business credit cards can become expensive if debts are large or carried for a long time. Merchant Cash Advance Costs, Terms & Qualifications Merchant Cash Advance Cost Example In this example, a business owner qualifies to borrow $100,000 at a factor rate of 1.2x with a 20% holdback percentage. The business has $200,000 in monthly credit card receivables, which means the average daily credit card receivables is $6,667. If you multiply the average daily credit card receivables by the holdback percentage (20%), you get $1,333.33, which is the daily payment made on the advance. The advance will take 91 days to repay at an APR of 486.67%. Factors that increase the APR of the loan include: Borrowing more money Higher factor rates Higher holdback percentages Increases in revenue Merchant Cash Advance Providers If you find yourself in need of a merchant cash advance, it’s a good idea to shop around for the best rates and terms. Here’s our buyer’s guide with some options. Merchant Cash Advance Application Process The application process for an MCA is simple and can be completed online in a matter of minutes, allowing you access to funds in as little as one day. If you have decided to move forward with a merchant cash advance, follow these five steps. 1. Fill Out an Online Application Most MCA applications are one to two pages long and are usually found online. Once the application is submitted, the MCA provider will request additional information. An MCA application includes: Social Security number Business tax ID General information about the business Additional documentation for an MCA application includes: At least two months of credit card processing data At least two months of business bank statements Evidence of at least two years of accepting credit cards 2. Get Approved for an MCA The approval process for an MCA usually takes 24 hours or less. Once approved, the provider will notify you as to how large an advance you qualify for, the factor rate, and the required holdback percentage. At this point, take the time to determine the true costs of the merchant cash advance and consider other options before accepting the offer. Also, determine if your credit card processor will work with the MCA provider or whether you’ll have to switch processors before accepting the merchant cash advance. 3. Set Up Credit Card Processing Once the MCA is accepted, set up the merchant cash advance with your credit card processor. 4. Receive the Lump Sum Cash Advance Once the credit card processing is set up, the MCA provider will deposit the lump sum cash advance. 5. Make Daily Payments From the Merchant Account The merchant cash advance provider will begin taking a percentage of the daily credit card receipts as payment. The repayment period is variable and depends on the company’s average daily credit card receipts. Typically, it’s between 12 and 14 months. Bottom Line Merchant cash advances are an expensive form of business credit that should be seen as a last resort unless the business cannot qualify for any other type of credit. However, if you decide that an MCA is your only option, we recommend checking out merchant cash advance product.

Restaurant business loans can be difficult to obtain because lenders perceive the industry as volatile. However, many lenders offer loans backed by the Small Business Administration (SBA) that can be used to buy an existing restaurant, open a new location, or obtain working capital. SBA loans have rates between 5% and 8% and repayment terms up to 25 years. This article outlines the five steps you’ll need to take to get an SBA restaurant loan as well as possible alternatives in case you do not qualify. 1. Determine Your Eligibility To get funded for an SBA loan, you’ll need to meet the qualification requirements of both the SBA and your lender. The lenders’ exact requirements will vary but, generally, you’ll be able to qualify for an SBA loan if you can meet these basic qualifications: Time in business: Typically, lenders will want the restaurant to be in operation for at least two years. However, startups owned by individuals with relevant industry experience may qualify. Personal credit: Lenders will normally require a score of 680 to qualify. However, a well-capitalized business may be able to qualify with a lower score. The SBA requires that borrowers don’t have any recent bankruptcies, debt delinquencies, or repossessions. Also, you can’t have any defaults on debt obligations to the United States, including student loans. Collateral: SBA loans don’t have to be fully collateralized, but most lenders will require you to put up collateral if you have it. Furthermore, SBA loans are typically guaranteed by the borrower personally, which means the lender can go after your personal assets in case of default. Down payment: The SBA will require at least 10%. However, lenders can ask you to put as much as 30% of the total project cost in as a down payment. Commercial real estate: Any commercial real estate you purchase will need to be at least 51% owner-occupied. 2. Create a Business Plan Once you determine if you are eligible for SBA financing, the next step is to create a business plan for a lender. A business plan is critical because it provides a strategic framework for how your business will operate. Taking the time to do research forces you to focus on areas of your restaurant operations that you may have otherwise overlooked. A good business plan contains information on market research, your sales strategy, background on you and your restaurant, the amount of financing you need, how you will spend that financing, and three years of financial projections for the restaurant. We have more detailed information on how to create a business plan, along with a template to assist you. 3. Gather Documentation SBA loan applications have other document requirements in addition to your business plan. At a minimum, the following documentation will be needed at the time of application: Three years of business and personal tax returns for all owners with 20% or more ownership Personal financial statement of each owner Year-to-date (YTD) balance sheet YTD profit-and-loss statement Proof of business ownership All business licenses Resumes of each owner Lenders may have additional requirements during their underwriting process. For instance, if you are using part of the loan proceeds to purchase restaurant equipment, your lender will likely ask for a description of that equipment. Having your loan paperwork ready in advance shows the lender you’re serious about your restaurant’s growth and about getting funded. The more detail you provide when you apply, the easier the underwriting process may be. 4. Find a Lender SBA loans are commonly offered by a mix of larger banks and online lenders. These institutions are required to adhere to the SBA’s minimum qualification standards but will also finance based on their own criteria. It’s important to note that SBA loans are not originated by the SBA but are financed by the banks. The SBA guarantees your loan and will pay the lender if your restaurant fails. Since your loan application is reviewed not only by the lender but by the SBA before funding, the application process can be very time-consuming. Some questions you should ask potential lenders before you apply for an SBA restaurant loan are: What fees are involved with originating and closing on the loan? What does your application process entail? How long does it take to get a decision? What additional paperwork is required with the application? Is there a prepayment penalty? There are two advantages to working with an SBA preferred lender. First, approval and funding may be quicker because the SBA delegates more authority to a preferred lender. The result is less back-and-forth between the SBA and the lender. Second, preferred lenders have processed a large number of SBA loans and better understand what the SBA is looking for in a loan application. The SBA loan process can be confusing for both lender and borrower, so it’s best to work with a lender that has a solid record of providing SBA loans. Read our article on the best 100 SBA lenders to learn more about which one you should work with. One of the lenders we recommend is , as they help simplify the complicated SBA loan process for you and help you get funded quickly. Qualified borrowers can get an SBA Express loan of up to $350,000, with fast approval in as soon as 30 days. 5. Submit Your SBA Loan Application Once you’ve collected all of your documentation and written your business plan, submit your application to the lender of your choice. The time each lender takes to process your application will vary, but SBA loans can take three to four months before they’re fully approved and funded. To learn more about the SBA loan process, you can read our article about applying for an SBA loan. Alternatives to SBA Financing There are several options available should you not qualify for an SBA loan. Some of these options will have easier qualifying standards but come with higher interest rates. Some of the most common options include: Business credit cards: Getting a business credit card makes sense if you need a small amount of working capital or have recurring costs that you can pay consistently. Business line of credit: If you need a larger amount of working capital or need financing to help with cash flow, a business line of credit is a smart choice. Equipment financing: Many lenders offer various types of equipment financing to help restaurants get new equipment. Short-term loans: A restaurant that needs financing in a hurry can take advantage of several fast business loan options where funding may be obtained within a matter of days. Rollover for business startups (ROBS): Even if your restaurant is established, a ROBS plan is worth considering if you have sufficient retirement assets that you can utilize to provide needed capital. Bottom Line Getting a restaurant loan can be difficult if you either don’t know where to look or you’re not sure how to navigate the application process. An SBA loan is an excellent option for your restaurant if you have good credit, sufficient collateral, and are willing to wait while your loan application is reviewed. SBA loans will provide a better interest rate and more favorable terms than other forms of financing.

Commercial bridge loans are flexible loans that provide short-term financing for the purchase of commercial real estate and additional funds for the rehabilitation of property—they aren’t permanent financing. In addition to funding renovations and upgrades, a commercial bridge loan can be used by borrowers who cannot initially qualify for permanent financing. Unlike permanent financing, where loans are funded based on the loan-to-value (LTV) ratio, commercial bridge loans are often based on the loan-to-cost (LTC) ratio or after-repair value (ARV). Lenders will consider a property’s current condition, renovation plans, and market conditions before approving or rejecting a project. Because these loans are based on a property’s future value, they carry more risk to the lender than permanent financing. Pricing will be determined based on the level of risk involved, with higher-risk projects carrying a higher interest rate. Because conditions can vary widely with commercial bridge loans, terms will also vary considerably based on the factors listed above. AVANA Capital is an excellent choice for entrepreneurs looking for interim financing for commercial properties. AVANA offers interest-only payments for up to three years, allowing borrowers to keep more cash on hand for other expenses. For more information about bridge loan program, check out the company’s website. When to Use a Commercial Bridge Loan Commercial bridge loans are most often used for the purchase and improvement of commercial property. Four common reasons to consider a commercial bridge loan versus other financing options include: The property has unsatisfactory occupancy rates The borrower’s credit profile needs improvement The borrower can’t wait for permanent financing Ownership interests are incomplete or there’s no project team in place Below are two examples of when to use commercial bridge loans and how they work. Using Commercial Bridge Loans to Buy & Renovate Investment Property A commercial bridge loan can allow a borrower to purchase a commercial property at a steep discount due to the property’s poor condition or the market conditions surrounding the property. Lenders will assign a TC for the renovated property, including the purchase price and the cost of the needed improvements. This will likely be the limit to which the customer can borrow. In most cases, the borrower will be limited to 80% of the LTC value for the commercial bridge loan. The renovated property can then be sold for a higher value, allowing the borrower to pay off the bridge loan and make a profit on the project. Other Ways to Use Commercial Mortgage Bridge Loans There are three other ways to use a commercial bridge loan: When a borrower cannot qualify for permanent financing. The temporary financing can be used to resolve credit issues that allow the borrower to eventually qualify for permanent financing at the end of the project. When a borrower has a limited time window for purchasing a property the ability to secure financing quickly. Permanent financing often requires the project to be finished before the loan is closed. When a borrower wishes to purchase and develop raw land, demolish existing structures and rebuild, or to purchase, renovate and sell existing properties. Commercial Bridge Loans: Terms, Rates & Fees The amount of the loan for which you are eligible will be determined by a combination of property value, cash flow generated, and your net worth. The lender will typically loan between 65% and 80% of the LTC and 80% of the LTV of the finished value of the property. Qualifying for a Commercial Mortgage Bridge Loan Qualifications for commercial bridge loans will vary between lenders. The general qualifications required by most lenders are: Debt Service Coverage Ratio The debt service coverage ratio (DSCR) measures the borrower’s ability to handle the new debt obligation. It takes the business’ annual net operating income and divides it by the current year’s debt obligations, including the debt obligation on the new loan. Lenders will typically require a DSCR of 1.25 or greater. Experience The longer the borrower’s business has been operating, the better chance the loan will be approved. In addition, the lender will consider the borrower’s history of renovation projects when considering their qualifications. Net Worth Commercial bridge loans will generally not exceed the total net worth of the individuals applying for the loan. A financial statement for each individual and the business will be required at the time of application. Borrowers can use our free net worth worksheet to calculate and document net worth. Cash Reserve In addition to overall net worth, borrowers will need to show sufficient cash reserves for potential contingencies. Borrowers may hold back a certain amount of loan proceeds as an interest rate reserve. This allows the lender to draw payments from the fund while the property is in renovation status and not generating full cash flow. Credit Score As with all loans, the higher the credit score, the better terms the borrower can receive. Most commercial bridge loan providers will require a credit score of at least 650. However, the credit score is not the only factor considered. Often, the borrower’s DSCR will weigh more heavily in the credit decision than the credit score. Documentation While documentation varies for each lender, the following list of documents may be required by the borrower at the time of application: Personal and business tax reports Personal resume Income and expense statements from previous property owner Rent rolls (a free template is available here) Schedule of leases Executive summary or action plan Breakdown of renovation costs and project schedule Exit strategy (sale or refinance) Broker’s letter of value Where to Find a Commercial Mortgage Bridge Loan Commercial bridge loans can be obtained from local or regional banks or online lenders. See our buyer’s guide for the best commercial mortgage bridge loan providers. Bottom Line For businesses looking to purchase a property that needs extensive renovations, commercial bridge loans can provide the needed funds. Commercial bridge loans can be used for many types of properties, including multifamily residential, retail, office, and industrial properties. When the project is completed, the borrower can sell the property for profit, or the loan can be refinanced into permanent financing, allowing the borrower to continue to own the property.

The borrowing base is the maximum amount of money that can be borrowed based on the value of a company’s collateral for an asset-based loan. Generally, lenders won’t provide financing equal to 100% of the collateral value, instead offering financing based on a discount factor. The value of the collateral multiplied by this discount factor or advance rate equals the borrowing base. For example, if a lender has a discount rate of 20% on accounts receivable, it is willing to lend at 80% loan-to-value (LTV). The 80% in this example is also termed the advance rate. A lender may disclose either the advance rate, the discount rate, or the LTV threshold. The discount rate a lender applies to asset valuation may vary based on the type of asset being considered. While a lender may require an 80% LTV as a borrowing base for equipment, the lender may only allow a 50% LTV borrowing base for inventory. Before estimating your available borrowing base, ask your lender what discount rate they require. How to Calculate Borrowing Base 1. Determine the Value of Your Inventory When determining the value of your inventory for the borrowing base, use the present market value of the inventory. This is the value of the inventory if it were all to be sold today and not the amount you paid to acquire the inventory. Inventory valuations conducted by the lender may require an on-site inspection. 2. Determine the Value of Your Equipment The valuation used for equipment should be listed as the current value of the equipment and not the initial retail value. You need to account for depreciation when determining the current value of any equipment being considered in the borrowing base. A lender will use the depreciated value on any ongoing borrowing base certification. 3. Determine the Value of Your Accounts Receivable Typically, the only accounts receivable (A/R) that lenders will accept as part of the borrowing base are those that are due within 90 days. The value to be included for A/R is the sum of all eligible invoices. Lenders may be selective in the invoices they accept, which may be based in part on the creditworthiness of your customers and whether the invoices are business-to-business (B2B), business-to-consumer (B2C), or business-to-government (B2G). Some lenders are only willing to lend on invoices to business or government accounts. 4. Apply the Discount Rate or Advance Rate Once you have determined the values of your assets, you will multiply each type of asset by the applicable discount rate. Keep in mind that lenders may have different discount rates for different asset types. To get the most accurate estimate of a borrowing base, you will need to be familiar with the various discount rates. After applying the discount rate to each asset type, you will then add the three figures together to determine the borrowing base. This is the estimated maximum amount that a lender will be able to loan to you based on your current assets. In most cases, the lender will continue to reverify the value of the pledged assets throughout the course of the loan. What Is a Borrowing Base Certificate? A borrowing base certificate is used to list all of your available assets that can be used as collateral for a loan and to determine the borrowing base using the discount rate of the lender. This certificate is the formal calculation the lender uses to determine the maximum amount of financing it can offer. Sample Borrowing Base Certificate Borrowing Base Monitoring When a business takes out a loan based on a borrowing base agreement, the lender usually will require you to file an updated borrowing base certificate at regular intervals. This requirement is to ensure that the business still meets the base requirements for the remaining loan balance. In the event that the collateral value falls below the prescribed borrowing base, the business will need to repay enough of the loan to bring the financing back into compliance. It is your responsibility as the borrower to ensure the updated borrowing base certificates are completed in full, are accurate, and are provided to the lender on time. When Borrowing Base Is Used The borrowing base is most commonly used to determine the potential loan amount you are eligible for when applying for an asset-based loan. While there are additional qualification factors involved in eligibility for an asset-based loan, your loan amount will be tied predominantly to your eligible borrowing base. Types of Asset-based Lending Many types of assets can be used to establish the borrowing base for an asset-based loan. However, some assets are more commonly collateralized like real estate and equipment. Inventory, A/R, and other tangible assets can also be used to back small business loans. The most common types of asset-based loans include: A/R financing: A/R financing uses your current customer invoices to determine the borrowing base for a business line of credit. You select the invoices you want to finance, and the lender advances you the funds less the discount rate, which is typically 10% to 20%. Then, you pay the lender back as customers pay you. Invoice financing: Also known as factoring, invoice financing involves assigning invoices to a factoring company. The factoring company purchases your invoices and advances a portion of the invoice’s value to you. Your customers pay the factoring company instead of you. The factoring company then advances you the remaining amount of the invoice, minus the factor rate and any fees. Inventory financing: Inventory financing uses the value of existing or future inventory as the borrowing base for a small business loan or line of credit. Using inventory as collateral is slightly more complicated than using real estate or equipment due to fluctuating inventory levels. Lenders may require you to update borrowing base certifications more frequently so that the loan remains properly collateralized. Equipment financing: Equipment financing uses the value of equipment you already own or are purchasing to determine the borrowing base for financing. Similar to a personal auto loan, the business equipment protects the lien. If you default on the loan, the lender can take possession of the equipment instead of repayment on the remaining debt. Borrowing base certification updates are necessary due to equipment depreciation. Real estate financing: The equity in owned real estate can be used as the borrowing base to secure a loan. Typically, this is referred to as an equity loan rather than asset-based financing although, by definition, it is a type of asset-based loan. Most major banks offer commercial real estate equity loans. Lines of credit can also be collateralized through commercial real estate. Other tangible assets: Though it is not very common, it is possible to use assets other than those named above as part of the borrowing base for a loan. In general, if you have a tangible asset that has value and a lender is willing to accept it, you can use it as collateral for a loan. Transactions of this type generally require a professional valuation to determine the value of the item intended to be included in the borrowing base. Bottom Line Lenders use the borrowing base to determine the maximum loan amount that can be offered to a borrower on an asset-based loan. Each borrowing base is unique and determined by the borrower’s available assets along with the lender’s discount rate or acceptable LTV ratio.

Commercial bridge loans provide short-term financing for the purchase of commercial real estate and additional funds for the rehabilitation of a property. While there’s flexibility in commercial bridge loans, they aren’t permanent financing. In addition to funding renovations and upgrades, a commercial bridge loan can be used by borrowers who cannot initially qualify for permanent financing. Commercial bridge loans can be obtained from local or regional banks or online lenders. Listed below are the four best options from which to choose. AVANA Capital is a direct lender that provides commercial bridge loans, construction loans, and SBA 504 loans. Loans through AVANA range between $3 million and $25 million. Preapproval is promised on its website in as few as three days. While the turnaround time usually falls between 45 and 60 days, it can be as little as 10 to 30 days. AVANA has provided commercial bridge loans to industries, such as hospitality, owner-occupied real estate, and renewable energy, among others. We like AVANA due to the high maximum loan amount, competitive rates, and quick preapproval and turnaround time. Bloomfield Capital Available nationwide in all states besides Nevada and California, provides commercial bridge loans of up to $20 million. The longer repayment period is attractive to potential borrowers, with up to three years to either sell or refinance the loan. Bloomfield offers many uses for funding, including highly structured transactions, discounted note payoffs, property acquisitions, recapitalizations, rehabilitation, lease-up, partner buy-out, and more. Bloomfield positions itself as a strong choice for urgent funding needs. Arbor is another nationwide lender that offers a variety of mortgage loan products, including commercial bridge loans. It’s an attractive option for businesses that aren’t sure that 36 months will be enough time to complete a project, as extension options are available. With rates as low as 6.5%, Arbor offers some of the best rates on the market. Some fees could be waived if permanent financing is also secured through Arbor. One advantage Arbor has over the other lenders listed here is with nonrecourse loans. This means the borrower isn’t personally liable for the loan, so personal taxes likely won’t be required. However, a personal credit score of at least 680 may be required to show the borrower’s ability to secure permanent financing. C-Loans.com Unlike the other options listed here, isn’t an individual lender but rather a broker that uses as many as 750 lenders to secure the best commercial bridge loan option for the borrower. The terms listed here are guidelines for what a borrower will find through C-Loans.com. Still, with so many lenders, the ultimate terms will be determined by how well qualified the business is and the circumstances of the property purchase. Extensive documentation is required when using C-Loans.com so the loan can be shopped around to as many lenders as possible. However, because of this, well-qualified borrowers may find better terms than from the three independent lenders listed. How We Evaluated the Commercial Bridge Loan Providers When evaluating commercial bridge loan providers, we considered the minimum and maximum loan amounts, the potential interest rates, and the turnaround time for both approval and loan closing. Some lenders offer nonrecourse lending, which is advantageous because it removes the repayment liability from the individual borrower. General qualifications only differ slightly between the four options listed, so the borrower should consider what factors are most important before applying. Bottom Line A commercial bridge loan is an excellent lending product for businesses looking to purchase and renovate a property. Depending on the desired repayment term, the amount desired, and the long-term plan for the property, each of the four lending options listed above have terms that might fit one business better than another.

For individuals looking to acquire an existing business, a loan is usually necessary to obtain the required capital. Not only can the loan be used to purchase the business, but it can also give a borrower the cash flow necessary to ensure a successful start to the business. Typically, a down payment of at least 10% will be needed. Interest rates start at 5% and go up from there, with a term of between three and 25 years. Before beginning the process of getting a loan to buy a business, the experts at can assist with the valuation of the company being acquired. Guidant also has funding options, including rollover for business startups (ROBS) financing. Check out Guidant’s website for more information or to begin the funding process. The following are the seven steps needed to get a loan to purchase a business. 1. Gather the Required Documentation No matter which type of financing a business owner goes with, there will be specific documentation required. Not only will the lender require this documentation, but it is also likely that the company being acquired will want to verify this information to make sure the potential buyer has the assets to complete the business purchase. The exact documents required will vary depending on the financing option, with Small Business Administration (SBA) loans typically requiring the most documentation. When applying for a loan to buy a business, the documentation usually required includes: Purchase contract for the business Business and personal tax returns (prior three years) Balance sheet and profit and loss statement (year-to-date) Information on outstanding business debts Complete list of business assets, including year, make, model, mileage, and hours Rent rolls if the business has tenants Business lease Organizational documents for the business like articles of incorporation Business licenses 2. Make the Initial Inquiry Once the documentation has been gathered, the potential buyer must reach out to the business to express interest in purchasing the company. At this point, a nondisclosure agreement (NDA) will likely be required so basic information about the business can be shared between the two parties. Next, the potential buyer should review this information and research any additional information. This process should take around a week. 3. Make a Data Request If the potential buyer wishes to continue after the initial investigation, a data request usually follows. This allows the buyer to request records such as financial statements. This information may also be required by the lender chosen in the next phase of the process. Researching the valuation of the business through valuation calculators will allow the potential buyer to begin planning for the upcoming loan request. In addition, it will allow the buyer to determine the amount of financing needed and what kind of down payment may be required. 4. Choose the Right Type of Loan SBA Loans The top choice among business acquisition loans is an SBA loan. SBA loans have the most competitive interest rates and the longest repayment terms. However, qualification can be difficult, and the process can take between 45 and 90 days. Buying an existing business with an SBA loan is easier than using it for startup financing because the lender can look at the business’s financial records instead of relying on the projections of a new business. Because the SBA guarantees the loan, it is safer for lenders. Even if the borrower doesn’t have enough collateral to secure a traditional loan, they may qualify for an SBA loan. Pros and Cons of an SBA Loan SBA Loan Terms and Qualifications As with traditional business loans, an SBA loan typically requires a credit score of at least 680, along with industry experience and a strong business plan. In addition, collateral may be necessary. The loan amounts and down payment requirements for SBA business acquisition loans are: Loan amount: Up to $5 million Down payment: At least 10% to 20% of the purchase price Guarantee fee: 2% Packaging fee: $2,000 and up The interest rates on SBA loans vary and are based on the U.S. prime rate. Those rates are updated on our SBA loan rates page. Repayment Schedule The maximum terms for SBA 7(a) loans to buy an existing business are: Inventory or working capital: Up to 10 years Equipment, fixtures, or furniture: Greater of 10 years or the useful life of the collateral, not to exceed 25 years Commercial real estate: Up to 25 years How to Qualify for an SBA Business Purchase Loan It can be challenging to qualify for an SBA loan. Generally, there are five factors the SBA will consider: Personal credit score: A credit score of 680 or higher will be required. Down payment: A down payment of 10% to 20% is likely, but some will need at least 30%. Collateral: Real estate is the best collateral, but other collateral, such as vehicles, accounts receivable, or other business assets, may be acceptable. Industry experience: The SBA prefers borrowers with industry experience. Financially strong business: Existing businesses with a track record of success are attractive to the SBA for loan approval. SmartBiz is an excellent broker for SBA loans to buy a business. For more information on SBA loans or to apply, check out . ROBS A ROBS allows a business owner to invest funds from a personal retirement account into a new business without paying early withdrawal penalties or income taxes. It is not a business loan or a 401(k) loan, which means there is no interest or debt to repay. The funds can be available from a ROBS provider in two to three weeks, which is faster than an SBA loan. Because buying a business can be a time-sensitive process, acquiring funding in a shorter amount of time can increase the probability that the acquisition will be successful. Pros and Cons of ROBS ROBS Cost and Qualifications The cost of using a ROBS for financing the purchase of an existing business are: Setup fees: $5,000 at initiation Management fees: $130 per month To qualify for and use a ROBS, you must: Contribute $50,000 or more from your retirement savings: For a ROBS to be a good choice, the business owner must have at least $50,000 in a deferred retirement account. The business owner must then be willing to use that money to fund the business through a ROBS. Be an employee of the business: The business owner must be a legitimate employee of the business the funds are being rolled into. A ROBS is an ideal choice for an actively managed business but not a great choice for an absentee business, such as some real estate investment companies. Structure your business as a C corporation (C-corp): To set up a ROBS, the company must be structured as a C-corp. Be able to fund the setup costs: The setup fees of $5,000 must come from funds outside of the deferred retirement account. However, the monthly fees can be paid with any funds, including the ones rolled over for the ROBS. Where to Find a ROBS For more information on ROBS financing, check out our article on the best rollover for business startup financing providers. In addition, we recommend Guidant Financial to assist with the proper setup and execution of a ROBS account. Check out the website for more information on ROBS or to speak with a ROBS specialist. Seller Financing Seller financing occurs when the business owner selling their business to a potential buyer agrees to finance part or all of the purchase price. With seller financing, the seller typically finances 15% to 60% of the purchase price. This allows potential buyers with subprime credit to get better interest rates for financing the purchase of the new business. Pros and Cons of Seller Financing Other benefits to using seller financing to buy an existing business include: Confidence in the business is increased: Seller financing can give you more confidence since the current owner is willing to invest in your success. All or some of the purchase costs are covered: Seller financing, or seller carry-back financing, can be used to cover all of a buyer’s purchase or just a portion. If the seller financing only covers a part of the acquisition cost, the buyer will often make up the difference with cash, HELOC, or SBA loan. Seller Standby Note Some business owners will use seller financing to satisfy requirements for an SBA loan or other down payment requirements. This may require the seller to put up collateral during the term of the loan. A financial expert should be consulted throughout the process to make sure all parties are aware of the risks involved and the potential liability in the event of loan default. HELOC or HEL A HELOC is a revolving line of credit with the potential buyer’s home held as collateral against the loan. It is often a second lien on the property behind the primary mortgage. Money can be drawn and repaid as long as the line of credit remains open. At maturity, the line of credit can be renewed, paid off, or extended. A home equity loan is a lump sum loan against the equity of a property, also usually a second lien on the property. This type of loan often has fixed payments, with repayment complete at maturity. Pros and Cons of a HELOC or HEL Terms and qualifications for a HELOC or HEL Both types of funding require equity in the property being held as collateral. The typical requirements for a home equity loan or line of credit are: Equity: At least 20% equity in your home; rule of thumb is between 30% and 40% minimum Maximum loan-to-value (LTV): 80%, based on the appraised value of your home Credit score: At least 620—preferably 680 or higher 5. Sign a Letter of Intent Once the financing has been preapproved, the potential buyer will sign a nonbinding letter of intent (LOI) showing the expected purchase offer. Upon accepting the offer, the seller will want to know how the buyer intends to purchase the business. The preapproval letter will show that the buyer is qualified for financing. At this point, initial negotiations regarding sale price and terms will take place. This process should take one to two weeks. 6. Go Through the Full Company Review Upon signing of the LOI and while the financing process continues, the buyer will review all available information on the company they are purchasing. During this one- to two-month period, the buyer will determine whether or not to proceed with the purchase. 7. Sign the Purchase Agreement Once financing is completed and terms agreed upon, the parties will finalize negotiations on terms and prepare closing documents. The documents will be signed, and the deal will be closed at this stage. The loan should be wrapped up before this stage so closing deadlines can be met and the deal doesn’t fall through at the last minute. It can take anywhere from a few days to a few weeks to wrap up this final stage. Bottom Line Potential business buyers have many options available for funding a purchase. Be sure to consult a financial advisor and a legal expert to find the best options and ensure the business is correctly set up to be purchased. SBA loans are the best way to receive funding, but it is essential to know what is required before applying. ROBS financing is also another good option. Stop by website for expert advice and options for business acquisition funding.

Whether you own a business or aspire to do so, investment is an important aspect of building financial stability. If you want to have a financially healthy future—even If you only have a few hundred to a few thousand dollars to invest—consider these nine top small investment ideas. 1. Start Your Own Business Starting your own business can be an expensive proposition, depending on what you wish to do. However, there are many entrepreneurial opportunities or microenterprises that require very little initial investment. If you have a skill, such as carpentry, repair work, or cooking, you can start a business on the side and make some money in the process. Investing your own money in your small business is a simple process, but it can cause headaches down the road if you don’t take the right steps from the beginning. Check out our guide to putting personal money into a business to make sure your accounts are in order and things don’t get messy between your business and personal finances. 2. SEP-IRA Plans A simplified employee pension individual retirement account (SEP-IRA) is a retirement plan for businesses with five or fewer employees. If you are a sole proprietor or own a very small business, it’s a way for you to put money away for retirement through tax-deferred investments similar to a traditional IRA. While the annual maximum contribution is above $50,000, there’s no minimum contribution requirement for a SEP-IRA plan. Many investment platforms offer low- or no-minimum balance requirements. 3. Solo 401(k) Plans Solo 401(k) plans are designed as a way to save for retirement. They are designed for single-employee businesses only, unlike SEP-IRA plans, which can be used if you have a few employees. Solo 401(k) plans have administrative costs involved, such as annual fees and administrative charges, depending on the provider, but they are another option for providing tax-deferred retirement savings. 4. Partial Shares of Stocks Conventional investing requires a significant amount of money, given that many stocks have a very high price. But fractional share brokerages, including sites like , allow you to buy partial shares of individual stocks or fractional shares of exchange-traded funds (ETFs) or indexes, giving you access to investing with lower levels of cash. These fractional share services often run on low or zero commission. Since investors can buy partial shares with very small amounts of money, standard commissions would eat up their investments quickly. The rise of zero-commission trading has also led to larger brokerages changing or eliminating their commissions. 5. Savings Accounts and Certificates of Deposit Savings accounts aren’t what people tend to think of first when they think of investing. However, a savings account does give you returns in the form of interest, and it’s an easily accessible and useful small investment opportunity. There are different kinds of savings accounts you can open, depending on your needs. A high-yield savings account and a money market account both give you a higher rate of interest than a standard savings account, but you’ll usually have to keep a minimum balance in either to avoid paying a fee. A certificate of deposit (CD) offers you a longer-term guarantee of interest but requires commitment for months or years to avoid potential penalties. 6. Invest Your Spare Change For investors who want to put small amounts of their personal funds into the market, offers you the ability to invest your spare change. When you make a purchase with your credit or debit card, Acorns rounds up your purchase to the nearest dollar and puts the change into an investment account. You can put money into a standard investment portfolio, a retirement account, or even an investment account for your kids. One of the problems with small investments is that it can take a long time and a lot of work for your investments to grow into something significant. With automated investment, it’s surprising how quickly your accounts grow, and all the while, you may not even notice the money leaving your checking account because it gets taken out in such small amounts. 7. Crowdfund Someone Else’s Business While there’s always a risk of losing money when investing in another’s business venture, both equity and debt crowdfunding can offer an opportunity for small-level investment in a new venture that you think has potential. Your investment can be made in return for either ownership stake or your principal investment being returned over time plus interest. Platforms like Kickstarter and Indiegogo are popular for researching potential business investment options. Peer-to-peer (P2P) lending―where you lend money to another individual through a third-party platform―may also be a viable option to pursue. Just like investing in the stock market, the potential risk of loss means that personal funds, not business funds, should be used if you choose to invest in crowdfunding. 8. Paying Off Debt Whether personal or business, paying off existing debt will help build your overall net wealth. If you have debt, you are paying a higher rate of interest than you would be able to earn on investments or savings. A savings account that gives you a 1% annual percentage yield (APY) is offering a really good interest rate, but your credit cards might be racking up interest at 15% or higher. Putting additional money toward that debt won’t only pay it down but will cost you less in monthly interest payments. Additionally, it may be worth shopping around to get a new credit card to help save a few additional dollars. There are credit cards that offer an introductory period―usually 12 to 18 months―of 0% annual percentage rate (APR). 9. Reinvest in Your Business In addition to paying off debt, look at low-cost ways to improve your business’ efficiency and performance. The increased processing power of computers and mobile devices, combined with increased affordability, makes updating your business’s technology a viable option. Additionally, you can consider collaboration software or other office tools that help improve efficiency within your company. Some of these tools may be particularly useful if your employees work remotely. While investing in your business will cost money on the front end, the increase in productivity will hopefully yield additional revenue and profit. Bottom Line There are several options available to business owners for low-cost investment. Some of these options are designed to help owners save for retirement while others offer ways to improve business productivity and the company’s bottom line.