Congrats! You’ve Got a Business Loan, Now What?

You went through the underwriting process and you managed to secure a business loan – what do you do now? 

Arguably harder than getting a business loan is paying it back. The monthly payments can take a large chunk of your business’s revenue, and it’ll take quite a bit of planning to make sure you’re on time and keeping up with payments. Here’s our definitive guide to after you receive your loan. 

Try to Pay More Per Payment

That’s a given – if you have the ability, try to pay more than the recommended monthly payment. If you can’t afford to pay significantly more, try just simply rounding up each payment term. For example, if your payment is $365 a month, go ahead and pay $400 a month. This $35 extra per month can add up, and help you pay off your business loan quicker. 

You can also try to make one extra payment per year. Ideally, this should be about the size of your usual monthly payment or larger, that way you can really put a dent in the total amount. 

Before you do this, however, make sure the business loan you’re paying on doesn’t have penalties for prepayment. Some lenders require fees for prepayment because the loan isn’t acquiring as much interest over time. 

Set Reminders

Many lenders allow your bank account to be auto-drafted for your payment every month, but if that’s not your thing, make sure you’re remembering when your payments are due. Make the correct adjustments to your cash flow to make sure you’re all set – if your loan payment is due the same time as your rent, make sure you’ve planned for that and set aside money.

Setting reminders on your phone are the best way to keep up, that way you’re consistently notified every month. Even if you have auto-draft, make sure you’re aware of when your payments are drafted, so your bank account has enough funds. 

Build Your Credit Score Via Your Business Loan

Remember, business loans aren’t only about paying for things – they’re also vital in building your credit score. Keep that in mind every time you make a payment. If you miss a payment or pay late, your credit score gets penalized. The more consistent you are, the more this “good behavior” will reflect in your score. If you can keep a good score – or increase it – then you’ll be able to attain future funding or refinancing at better rates. 

Make a Business Plan 

Use the money you just borrowed to grow your business. Business loans are meant to be investments in the future, so the best way to ensure that you’re using them to their best potential is to make a detailed plan of how you see your business going in the next few years. Layout how you want to use the money – whether it be for equipment purchases or for investing in new opportunities, you want to make sure you keep track of where you’re spending it and if it’s going to contribute to growth. 

Look Into Refinancing

This something to think about longer down the road. Once you’ve paid a good bit on your loan and your business is making more in revenue,  it could be a good plan to try and refinance your loan to get a lower interest rate. If you’ve been paying on time and your credit is improving, it’s an even better reason to refinance. As your credit improves, lenders will usually give you better interest rates. If your business is more well-established, you might want to look into getting an SBA loan to refinance, they’re usually the lowest-interest business loans on the market. 

How you use your loan is up to you, just make sure you’re really thinking about how you spend. Loans are meant to be opportunities, not hindrances.

Want more direction on how to use your business loan, or are you looking to get a business loan? Check out FaaSfunds proven software to help you find the right loan for your business, or speak with one of our finance experts today.

Forming an LLC: What You Need to Know

Starting a business is stressful, not to mention if you want to register as a limited liability company (LLC). An LLC takes aspects of different business types and combines them into one big (and sometimes complicated) establishment. But no fear, we’re here to clear it up for you. 

How is an LLC Different?

LLCs differ from say, a sole proprietorship, in the sense that the business owners aren’t usually personally responsible for its debts or lawsuits. When it comes to the IRS, though, LLCs have this odd assortment of tax flexibility, which can cause varying degrees of confusion when tax season comes. 

LLCs can technically choose their tax status – they can pick if they want to be treated like a sole proprietorship, partnership or corporation. If there’s only one owner (also known as a “member”) it’ll automatically be treated as a sole proprietorship. If there’s more than one owner, it’ll automatically be treated as a partnership. However, if you want your LLC to be taxed like a corporation, you can fill out a form with the IRS to change this tax status (here are all the hard details from the IRS if you’re looking to file your taxes as an LLC). 

So the real answer is, LLCs don’t differ in the eyes of the IRS because they’re filed the same way as other business types, and they’re usually filed on the owner(s) income taxes. They do, however, require more paperwork and higher fees. But the real reason an LLC is a common choice for business owners is that if for some reason your business must file for bankruptcy or gets sued, being an LLC would mean your personal assets are covered. In the eyes of the law, your business is separate from you. 

(Here’s a disclaimer, though – banking, trust and insurance industry-related businesses can’t be LLCs, and several states won’t let accountants, doctors, architects or healthcare workers be LLCs, either.)

Articles of Organization

If you want to start an LLC, you’ll have to file articles of organization in the state where you want to operate. They often only require basic information, nothing too complicated. Remember, the requirements and stipulations do vary by state, so you’ll definitely want to check specifically for what your state requires. However, most states will require these basic things before you file your articles of organization.

  1. A business name, and it has to end with “LLC.” It also has to be unique, and can’t be the same as another LLC in your state. They’ll also want it to not be confusing – such as including the word “bank” when you’re not a bank (Legal Zoom lets you search to see if your name is available).
  2. Location – where will your business be physically located? 
  3. Names and addresses of the owners (a.k.a. members). 
  4. A registered agent – this is the person or entity that accepts the legal papers of your LLC. It can be you or a co-owner. You can also appoint your business attorney as your registered agent, or you can get registered agent services from online legal services. 

It’s very important to make sure you’ve got all the local licensing requirements down. Counties and cities may have more specific requirements than the state does (FaaSfunds is in Charlotte, N.C., so we have a specific set of rules – the rules and applications for your city/county will be found on a similar local website). Certain industries are regulated more heavily than others as well, like food and beverage. Contact your secretary of state office to figure out these specific rules. 

You could also draft an LLC operating agreement, which isn’t required but is recommended. It simply outlines organization and structure for your LLC – like who will do what within the LLC, how much money has gone into it and who contributed it, along with other operating procedures. It’s a legal document, so once signed, it’s binding. By creating terms and having all active parties agree to them, it creates less confusion about everyday business. 

How To File Articles of Organization

First, you’ll file the articles online or by mail. These details vary by state – in North Carolina, the form is available to fill out online and has a $125 filing fee. Once you fill out the form, submit it and pay the fee, you’ll receive confirmation in the form of a certificate from the state, which can take a few weeks. 

What About After?

If you haven’t made an LLC operating agreement yet, now could be a good time. You should also apply for an employer identification number (EIN) if you have employees. This is essentially a social security number for businesses and is important in separating business finances from personal finances. This way, you can start to establish credit as a business and apply for loans and credit cards without intertwining your personal finances. 

If you want to know more about building business credit or getting a loan for your new LLC, let FaaSfunds help. We’ve got industry experts to provide you with credit advice and proven loan-matching software. Check us out today.

Is Crowdfunding Right for Your Business?

Crowdfunding is a term used for business funding meaning exactly what it sounds like: funding your business through a large number of people. The word has been adopted to mean different things, depending on the industry. To save confusion, however, we’ll stick to its meaning strictly for new businesses and startup funding.

Crowdfunding is mostly done online, makes this specific form of funding a newer development. We’ll start by going through models. 

Pledge-Type Crowdfunding

Kickstarter, perhaps the most well known, is a site that rewards people for “donating” to your business. If you’re selling a product, usually you’ll promise that product to your customers. If your selling something less-tangible – like a dating app or a service – companies will usually promise funders some sort of “swag” or benefits. Whether it be t-shirts or branded koozies, those who give you money often expect something in return, the same way an investor or venture capitalist would, but on a smaller scale. In order to raise funds on Kickstarter, you MUST deliver something to your funders, and you MUST meet your goal, or else you don’t get any of the cash you raise.

Other crowdfunding sites, like Indiegogo, don’t require you to give swag or meet your goal in order to cash out. This can be good for a content creator, but for an actual business, sometimes providing an incentive (like a product) motivates people to give you money. However, these options can be more convenient and cheaper than a Kickstarter campaign, and if you already have a grassroots supporting, they’re likely to get help with funding.

Equity Crowdfunding

The most recent development in crowdfunding is called equity crowdfunding, and it’s similar to an actual investment-model of funding. Through it, accredited and non-accredited individuals/investors can invest small amounts in your company in exchange for equity, or small bits of ownership. This is especially popular for hyper-local efforts, like breweries or coffee shops. It gives community members a way to invest in their community and its well-being. 

After the recession in 2008, the government realized the new businesses were being virtually wiped out by their inability to get credit and funding. So in 2012, they passed the JOBS Act, which allowed non-accredited investors to legally invest in private companies. Non-accredited investors are individuals who have a net worth of less than $ 1 million OR who earn less than $200,000 annually. That’s it. So now, pretty much anyone who wants to invest in a business through equity crowdfunding is able to.

In 2015, the government furthered equity crowdfunding de-regulation by allowing businesses to raise up to $1,070,000 per year and required that all transactions be done through an SEC-registered intermediary, either a broker-dealer or a funding portal (like a website). 

With equity crowdfunding, there are a few things you should be aware of. First, state laws regulate it. Depending on where you are in the country, the amount of money and types of investors could be significantly different. For example, in North Carolina, the 2017 PACES Act extends the amount of money that can be received from crowdfunding to $2 million and specifically allows for a non-accredited investor to give up to $5,000 per year via equity crowdfunding.

These regulations vary widely by state, so it’s important you be aware of the rules for your state before you decide to do an equity crowdfunding campaign. Like pledge crowdfunding, these are also done through online portals.

What Are the Risks of Crowdfunding?

Pledge-model crowdfunding runs a greater risk of failure than say, venture capital. Most sites often don’t require that the business have a solid business plan, and that can run the risk of fraud ruining the reputation of websites (like GoFundMe, for example).

There’s also no real advising available when you sign up for Kickstarter or Indiegogo, which doesn’t really set entrepreneurs up for success.  VCs and angel funds usually provide council. However, equity platforms authorized by the state you reside in often have more realistic models of setting up business owners for success. For a fee, you get counsel when you sign up for the platform. You also often have to provide a solid, fool-proof business plan. This way, there’s less room for error, and your company has a better chance of success.

With crowdfunding, there’s always going to be the chance you don’t get the money you need. Like rallying investors, it’s a hard process and can take ages. If you’re in need of more immediate, tangible funding, you might want to look into business loans or lines of credit. If that’s the case, FaaSfunds is here to help. Reach out to us today to get matched with the lender and loan that’s best for your business, and to receive professional financial advice.

Should You Get A Loan from Friends and Family?

What are the important things to think about when getting funding from friends and family? Number, one: always keep it formal.

Strategies for Loan Refinancing

When you choose to refinance something, you usually decide to do it because it makes your previous financing options or purchases more affordable. What exactly does it mean to refinance? Fundamentally, it’s when you decide to revise the terms of a previous credit agreement. Most often, you’ll refinance when nationally-set interest rates go down and can result in savings on monthly payments with a new agreement.

How Does Refinancing Work?

Refinancing is essentially just getting a new loan to replace an old one. The main motivation for refinancing is dependent on the market and the current interest rate environment, but if your business credit has improved, that’s also a reason to refinance a loan. Typically, during times of slow economic growth, interest rates will be lower to stimulate spending and investment. During times of expansion, however, interest rates will be higher.

Different Types of Refinancing

  1. Rate-and-term refinancing: when a borrower directly replaces the existing loan with one with a lower rate.
  2. Cash-out refinancing: when a borrower takes out a loan for more than they owe on the previous loan, so they can use the extra cash to pay off other debts.
  3. Cash-in refinancing: when a borrower pays cash for some of the remaining loans, in order to lower the loan-to-value ratio or get smaller monthly payments. 
  4. Consolidation refinancing: when a borrower takes out one, lower-interest loan to pay off several, higher-interest debts. 

The Best Strategies

How do you know when the best time to refinance is, or if you should refinance at all? First, calculate it (this one is specifically for mortgages, but the results are easily transferable to other loans), then, consider these factors:

Falling Interest Rates

The best strategy for loan refinancing is to pay attention to national interest rates. Interest rates fluctuate based on policy, global factors and the economy. If national interest rates fall, and you can get a new loan at one to two percent below your current rate, then it’s reasonable to consider refinancing in order to secure that lower rate and save money. This is an example of rate-and-term refinancing, where the existing loan is paid and replaced with one with a lower rate. 

Increase in Value

If the thing you used the loan to purchase – property, equipment, etc. – increases in its value (this will usually only happen with property because most equipment depreciates in value), that could be a reason to refinance. This idea works well with cash-out refinancing. With this, you take out more than your current loan amount left to pay and use the extra cash to pay off other debts. If your property has increased in value, you’re more likely to be able to take out more money than what you owe.

Credit Improvement 

The better your credit, the better your rates and terms on loans usually are. If your credit score and financial health have increased significantly, refinancing could save you money because it can lower your interest rates.

Consolidating Debt

The technique of consolidating debt means that a borrower takes out a lower-interest loan to pay off one or several higher-interest debts. This is a refinancing technique used with things like credit card debts – if you have several different credit card debts, it might be beneficial to take out a single loan to pay them all off, so you can only have one payment at a single, lower interest rate.

Things to Look Out For

Closing costs – Some new loans may have closing costs, which are usually based on a percentage. Make sure you calculate in the closing costs when you’re trying to figure out if the refinancing will save you money, because you could end up paying more even if the interest rate is lower. 

Prepayment penalties – Make sure the loans you’re paying off in full don’t have prepayment penalties for paying them off earlier than the agreed-upon term. If they do have prepayment penalties, make sure you calculate to check that their cost doesn’t outweigh the lower interest rates in the long run. 

Keep in mind – It often makes more sense to refinance early in a mortgage or loan repayment because you don’t own as much equity in the thing your financing (like property). Most loans amortize, and therefore most early payments go more toward the interest than the cost of the actual purchase. Later-on in a loan, you’re making more payments toward the actual purchase, so you own more equity in the purchase. When you refinance, you’re essentially starting over by taking out a new loan, and it will take you even longer to build up equity.

There are also things you shouldn’t do. Just because refinancing can lower the total cost of a loan doesn’t mean it’s always the best idea in the long-run. When you refinance unsecured debts with a secured loan, it can be a risk – which is sometimes the case when consolidating debts. This is because you risk putting assets – like your home or car – at risk for repossession or foreclosure. Another risk could be that you end up paying more because you extend the loan, as opposed to paying more per month but for a shorter period of time. If you start a new 30-year loan when you only have 10 years left on the original loan, it could add up to paying more, even if the interest is less.

Confused by all these options? If you’re looking to refinance debts, reach out to us at FaaSfunds. We have business financial experts that can help you make all the right choices for your business. Click the button below to get started today!

Are You Getting the Best Deal From a Loan Broker?

Let’s break it down: what do you get at FaaSfunds that you don’t get with a traditional loan broker?

FaaSfunds is similar to a loan broker in the sense that we facilitate and consult business loan deals. We connect businesses that need funding to lenders. We have a marketplace of dozens of lenders ready to work with businesses to finance their purchases. Through this service, we open up business loan options to businesses who need funding. This relationship between us, business and lender are mutually beneficial – every party benefits and we pride ourselves in being able to provide the best deal, every single time.

With FaaSfunds, you’re able to get several key things you don’t get with a loan broker:

  • Faster service
  • Greater efficiency with our smart application
  • No “shotgun approach” to running credit
  • Decision-making control
  • Transparency

Faster Service

We get you the best deal without hesitation. Once you enter your credit information, you’ll know your options almost immediately. FaaSfunds, though our unrivaled software, is able to compare your financial information with data points from lenders, giving you your best chance of approval and best rates all at once. With a loan broker, you have to wait quite a while for them to apply your information to lenders, and even longer to hear back.

Efficiency

Our application is smart, and that makes it easy. This streamlined application process means you only have to enter your information once, and you’re immediately connected with the business loan options you need. This saves you time, and it saves you labor. Instead of having to apply to several loans, and instead of having to wait for a broker to do their thing, you’re able to do it for yourself almost immediately. That way, you can stress less and spend more effort on running your business.

We Don’t take a “Shotgun Approach”

Generally, a “shotgun approach” is a strategy used by loan brokers to shop your business loan in a way that applies you to several loans at once, and in turn, this runs your credit multiple times. Multiple inquiries into your credit can sometimes affect your credit score, bringing it down. At FaasFunds, we don’t apply you to several loans at once, we only show you the loans you’re most likely to qualify for and their rates, putting the best rates first. That way, you can choose which funding option you want, and only have one credit inquiry at a time.

Business Loan Flexibility

We offer flexible control of the decision-making process. Since you can fill out everything on your own and immediately see your options, this gives you the power to decide what you want. We won’t pressure you to choose something you don’t want, we’re only here to help you make decisions and figure out what’s best for your business. You can change your mind without getting trapped. Since you get to see what you’re options are, and you have the power to decide what you want, we just give you the tools and information to make informed decisions.

Business Loan Transparency

You’re able to see every step of the process. You can see where your application is in the funding process, and this means you’ll be informed every step of the way. There’s no more guesswork, now you can see what’s going on for yourself. We offer this open and transparent application process to make sure you know what’s going on, and you can know all your options.

To get you the best deal, we offer you all these things a loan broker doesn’t. At FaaSfunds, we’re changing the funding game but helping you to make informed financial decisions while still giving you control and transparency in the funding process. A loan broker is no longer the only one who can help you make business loan decisions, and even though FaaSfunds is via online software, we’re still a team of real people who care about your financial health. That’s why you’ll have a funding specialist readily available to answer any and all of your financial questions. We’ll help you monitor your business credit, and even after you receive a loan, we’ll be there to help you take a plan of action to improve your credit in the future.

Contact us today to find out what we can do for your business finances, and how we can help you get funded.

What Does the FaaSmatch Algorithm Do?

We keep mentioning our “FaaSmatch” algorithm – it’s how we match your business to the best lending options out there. But how exactly does it work? Let’s break it down.

The “FaaS” in FaaSmatch stands for “Financing as a Service,” which is what FaaSfunds does. We’re taking the broker out of getting a loan, and making it easier for you and your business to find the lending options you need. We’re a business-to-business service, and our finance-matching is the service we offer.

FaaSmatch is an algorithm because it uses software analytics to automatically sort through your financial information and compare it to our lending marketplace. This way, based on data points, it can match you up with the lender that will give you the lowest rates and best terms, along with the best chance for approval. By using this automated process, you can instantly see how different lending options compare, and you can understand which one will work best for your business.

Let’s Break it Down

What is an algorithm? By definition, it’s a process or set of rules to be followed in calculations and other problem-solving operations. They’re created by constructing a set of directions, much like a map, that can be reduced to three logical operations – “and,” “or,” and “not.” You can use algorithms to solve a Rubix Cube, or you can use algorithms to run search engines.  Algorithms are everywhere. They’ve become a colloquialism. They determine what’s advertised to us and they determine what shows up in our news feeds. FaaSfund’s algorithm is different. We saw the need for an easier way to find lending options, so we spent countless hours dedicated to doing just that.

Our algorithm, called “FaaSmatch,” is a set of programmed commands that looks at financial information and compares it to data from lenders. It looks at credit and other financial factors and analyzes it alongside compiled information from our lenders to determine which loan and lending options make the most sense for each business’s financial situation.

The Goal of the Algorithm

Stefan Friend, head of product development at FaaSfunds, explains that the goal of the FaaSfunds algorithm is to help users make informed decisions.

“It’s a simple way to match a business’s credit profile holistically to the right financial products for them,”  said Friend. “Using a proprietary algorithm, we take a close look at a business credit profile and score and weigh them against the criteria for certain financial products.”

This makes the funding process quick and easy, and without the need for a broker or extensive paperwork. The FaaSfunds algorithm automates the funding process so the business owner is in charge of their own funding, but FaaSfunds lets them see what their best option is.

“Ultimately what this does is help them have a better view of the best product for their business,” said Friend, “and allows them to have a firmer grasp on their business’s financial future.”

Take a look at FaaSfunds today and see just how well the FaaSmatch algorithm works for you.

The Top 4 Reasons Businesses are Denied Funding

If you’re frustrated about your business being denied funding, you’re not the only one. According to the Federal Reserve, only 47% of small businesses received the amount of funding they applied for last year. Of the 53% that are denied funding, 32% received some of what they needed, and 22% received none.

Make no mistake, funds are not unlimited and lenders can only approve so many business loans. There are, however, fundamental reasons that businesses get declined. At FaaSfunds, we’re here to break down those reasons and help your business get approved.  Here are our top four reasons why businesses get denied funding.

Low Business Credit

According to the Federal Reserve, businesses considered a “high credit risk” had the most financing shortfalls. In 2018, 91% of companies with lower credit scores (usually, under 620) that applied for less than $250,000 did not get the full amount of financing they sought. Lenders are less-inclined to fund high credit risks because they don’t have the personal guarantee of repayment. Meaning that since your credit signifies your history with paying off debts, a lower score often means – to lenders – that your repayment history hasn’t been stellar.

If you have bad credit and have been denied funding, there are several alternative ways of getting funded – some online lenders cater to businesses with low credit, and options like merchant cash advances and invoice financing sometimes don’t look at business credit. The interest rates are often higher and the terms shorter, but if you can manage to prove with these alternative funding options that you’re capable of paying off debts, it can improve your credit and your chances of being approved in the future.

Not Turning Profit

In 2018, 67% of businesses that broke-even or weren’t profitable were denied funding. Being profitable can be a huge determinant for lenders – they want to see that you’re bringing in enough money to pay them back. Forbe’s calls this “quality of cash flow.” They describe that “having high-quality earnings means a company’s financial statements show stable, persistent and predictable earnings that are related to the core business.”

It’s not always possible to be a profitable business right-away, so it’s important to show that you’re capable of paying off debts. If you’re not making a profit, you might have to provide significant collateral or prove that you make enough revenue to cover the loan cost. It’s also an option to add a personal guarantor to the loan, saying that should you default, they’ll pick up payments.  

Geography

The same Federal Reserve study found that geography can also influence if a business gets funded or not. 56% of businesses located in urban areas did not receive the funding they asked for, as opposed to 45% in more rural areas. This fact might sound a little odd, considering that urban areas have more people, but actually, rural businesses out-perform urban ones.

The reason behind this is because urban businesses are met with more competition, higher operating costs and higher taxes. It costs significantly more for a business in New York City to find and pay labor than a business in Albemarle, N.C. For more perspective, the average rent in NYC is $3519/month, while the average rent in Albemarle is $564/month. These lower expenses for rural businesses easily translate to profits. Rural businesses also tend to be older and have predictable expenses, and well-established businesses are more likely to receive funding. Along with these aspects, the fact of the matter is that it’s a lot easier to get funding from a small, rural bank than it is from a national bank.

On a less statistically significant level, according to the same survey, the Federal Reserve found that companies in New England had the hardest time getting funded while those in the East South Central (Alabama, Kentucky, Mississippi and Tennessee) had the easiest time. This is on par with the rural vs. urban divided in business funding. New England is more developed and has a population density of about 210 people per square mile, while the East South Central has a population density of about 98 people per square mile.

Business Age

Most businesses younger than five years old haven’t really established credit, and that explains why according to Federal Reserve data, around 63% of them don’t get the funding they ask for. These businesses are considered startup firms and don’t often have enough established business credit to qualify for funding.

Fear not, though, because there are a lot of options for startups to get the financing they need. Certain crowdfunding opportunities can help raise money via small investments, while the SBA has a microloan program designed for startups. You can also receive grants from companies and investors.

The Big Picture

Often, one single factor isn’t going to determine if you’ll get denied funding Each lender has different parameters for approval, and if you get denied by one, it doesn’t mean you’ll get denied by all of them. Lenders look at a variety of aspects and take many things into account, so don’t get discouraged if you fit a few of the profiles mentioned above. There are hundreds of funding options out there, and FaaSfunds is here to help you understand why you got declined, and look at your business finances and help you figure out your path to approval. Check us out today.

What Should You Know About a Business Line of Credit?

Most people have a credit card. Chances are you have one for yourself or your business, so you’re familiar with how simple and easy they are to use. Business lines of credit work in a similar way. Using credit for your business can be a great idea to boost your financial health and fund large purchases.

A line of credit isn’t technically a loan. It’s an agreement that establishes a maximum amount a business can borrow. A line of credit can be accessed at any time as needed as long as it doesn’t exceed the maximum limit. Interest is only paid on the money used, and once it’s paid back, you can use it again – much like a credit card.

And like a credit card, the lender sets a maximum amount and the business can draw from it using either checks or a card. Borrowers can request a certain amount, but they don’t have to use it all. This flexibility is the main appeal of a line of credit, which is the most ideal for emergency funds – just in case something happens and you need your cash quick. This can help you avoid taking out working capital loans, or “payday” loans, with incredibly high interest rates.

Like using any form of credit or money that isn’t technically yours, they can have limitations and certain dangers, so it’s advised that they’re used responsibly.

Do You Qualify?

Qualifying for a line of credit is a little easier than other loans, but there are many variables associated with getting one. The maximum amount, duration, repayment terms and interest all depend on your business’s already established credit and revenue. Usually, new businesses may be able to qualify for smaller lines of credit while more well-established businesses can receive larger lines of credit.

How to Apply

Like most loans, you can get a line of credit at a bank or an online lender. Banks have long, intensive line of credit applications – they require a lot of paperwork and wait time. Online lenders will offer quicker, easier applications (and chances for approval), but will often have higher interest rates. You’ll need all the basic documentation to apply:

  • Valid driver’s license
  • Voided business check
  • Bank statements
  • Balance sheet
  • Profit & loss statements
  • Credit score
  • Business tax returns
  • Personal tax returns

What About a “Revolving Line of Credit?”

Line of credit financing is sometimes referred to as “revolving” because it usually doesn’t require you to apply again and again for a loan. This definitely comes in handy. Once you pay off what you’ve spent within your credit limit, you can use up to that limit again without applying again. It’s always there, and you don’t have to worry about filling out all the paperwork each time you pay it off. This is part of the allure of a line of credit – you save time, energy and stress by not having to apply for multiple financing options.

How do They Compare to Other Loans?

Business lines of credit traditionally have lower interest rates and closing costs, but can be pretty big on punishment. They have strict repercussions if you exceed your limit or miss a payment. Traditional loans, too, are usually used more for one time, larger purchases – like a company car. Lines of credit are best suited for repeated spending or cash flow. This doesn’t mean you can’t make large purchases with a line of credit, but often, traditional loans are better options for these types of expenditures because their interest doesn’t vary depending on what you spend.

Since business lines of credit are so flexible, they’re really attractive to use for recurring expenses. Things like:

  • Operating expenses
  • Payroll
  • Cash flow gaps
  • Emergency funds
  • Seasonal expenses
  • Investments

Do They Have Term Lengths?

No, lines of credit don’t usually have term lengths, but they do have different maximum amounts depending on where you get them. Online lenders usually will only offer small- and medium-amount lines of credit. These both don’t really have term lengths, but the “small” and “medium” refer to the maximum amount of money you can withdraw. You can withdraw and pay back funds whenever you want. Larger-amount lines of credit are usually only given out by traditional banks.

So how do They Compare to Credit Cards?

It’s true that they’re both forms of revolving credit, but credit cards have several limitations that lines of credit don’t.

  • Credit cards are typically paid monthly. Lines of credit usually are not.
  • Credit cards typically have higher interest rates.
  • Credit cards charge fees for cash advances and balance transfers.
  • Lines of credit give you access to cash. Credit cards do not.

What Will It Cost You?

Interest rates are set by the lenders and the market rates, and they vary widely according to your business specifics. However, these rates are often lower than a business credit card.

To help understand the costs associated with lines of credit, here’s an example:

You run a restaurant in a small college town. During the summer, when all the students head home or to internships, you have a lull in your business. In order to pay your expenses in June, July and August, you need some extra cash. You know that after these three months, your business will pick up significantly. So, you apply for a $25,000 line of credit.

With it, you end up spending $20,000 on your rent, payroll and supplies for those three months. If your interest rate was 10%, you’d pay back that $20,000 plus 10% in interest, for a total of  $22,000. Once you pay that off, you have $25,000 again and you can keep it to use when you have other lulls in business, like winter break.

This can all sound very overwhelming, but that’s why we’re here. When you sign up with FaasFunds, we analyze your business needs and finances and figure out if a business line of credit is the best option for you. We’ll also link you up with an industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.

Why Is Your Business Credit Important?

Building business credit is like building trust. The more of a clean track-record you have with paying debts, the more likely you are to be trusted in the future with them. Think of it as a resume – if a resume exemplifies how well you’ve performed at previous jobs, your credit is a history of your finances, and how well you’ve paid off debts. Your lenders are your references, and they keep a trail of how well you’ve repaid them. They then report that history to compile a credit score. If you perform well at a job, it builds your resume. If you don’t, then not so much. If you have a good resume and you have a good track record with your employers, you’re more likely to get more interviews and job offers – credit works the same way. When used responsibly, it will get you approved for more – and better – loans.

Why is establishing business credit so important? It can deeply affect your potential to get funding. In an article published by the Small Business Administration, they cite that the Nav American Dream Gap Survey revealed in their 2015 study that 45% of small business owners did not know they have a business credit score, 72% didn’t know where to find information on it, and 82% didn’t know how to interpret it. This narrates exactly why learning about and establishing your business credit is so important.

Many business owners don’t understand their credit health, and it can in-turn affect the financial health of their business. Here’s our take on why business credit is so important.

Growth

Along with providing a service to your customers, growth is usually one of the top long-term goals of a business. Building business credit is important because it helps prepare your business for the future. If you want your business to grow, you have to first establish some sort of credit. Business credit is used to determine if your business is qualified for different financial products. The more credit you have, and the better that credit is, the more purchasing power you have. Your purchasing power is exactly how much you have to invest in new assets, and if you maintain good credit, it runs parallel with your company’s growth.

Business credit also increases your chances of getting financed with favorable terms. If you build your credit, you’ll receive loan amounts, interest rates and term-lengths based on it. The higher your score is, the better these terms are – you’ll get higher loan amounts, lower interest rates, and ideal term lengths. Higher business credit can also get you lower rates on insurance.

Whether it be through a business credit card, a line of credit or getting a loan, building your business credit shows that you can pay lenders back. This builds your track record, proving you’ll be able to take out more loans in the future. Thus, contributing to your business’s growth.

Net 30, Net 60 Approval

It’s not only banks that use credit. If you deal with paying by invoice, having little or no credit can make it harder for your vendors or distributors to approve you for Net 30 or Net 60 terms. Why? Because if you don’t have credit built up, they don’t have anything to go off of. Since an invoice is essentially a form of debt, if you don’t have a record of paying back your debts, they’re less likely to trust you with a new one.

Visibility

Unlike personal credit, business credit makes your business public. Only you and a few other certain parties (lenders, for example) can see your personal credit. This isn’t the case with business credit – as long as an individual or company is willing to pay for it, anyone can see your business credit score.

Since business credit is public information, customers or partners can use that information to determine if they want to do business with you. This might sound intimidating, but most of the time, people won’t want to do business with a company that doesn’t have their credit information public. If you’re not actively building and adding to your business credit score, people will see, and that could mean less business for you.

Personal Credit vs. Business Credit

According to Experian, one of the credit score reporting agencies, keeping your personal and business credit separate is vital. It’s risky to intertwine your business finances with your personal finances, but there are other actual benefits of separating them. Many lenders and creditors are leaning away from relying on personal credit when trying to judge a business’s financial health because it’s not a great predictor for a business’s behavior.

Nerdwallet also says that keeping business and personal credit separate can be highly beneficial when it comes to tax season. It makes it that much easier to track your business expenses for tax purposes, and it’s always better to be on the safe side when it comes to the IRS.

How Can FaaSfunds Help Build Business Credit?

What if you could have on-demand assistance to help you establish your business credit? What if there was a way to manage personal credit and also see how it affects your business’s financial health? FaaSfunds exists to do just that. We’re here to help monitor and make suggestions to help your business credit and navigate the complicated world of making financial decisions. Don’t be part of that 82% that doesn’t know how to interpret their business credit – let FaaSfunds help.

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FaaStrak, LLC and affiliate FaaSfunds are software providers that exist to facilitate funding and help you make financial decisions for your business. The views, reviews, recommendations and suggestions expressed in our articles aren’t in any way affiliated with certain products or companies, and are based on the view of our editorial team alone, not FaaStrak, LLC as a whole. We do not take endorsements from products or companies mentioned above. We give advice based on research and industry knowledge, but the finance world is vast and variable, so we do not claim to be experts at everything within it. We are here to guide and provide direction, but are not here to enforce our knowledge as fact. We cannot be held liable for decisions made by you or your business. Under no circumstances should FaaStrak, LLC or any of its affiliates be liable for any indirect, incidental, consequential, or exemplary damages or loss of profits arising out of or in connection with your access of our site or software.