1. Bad Credit: Definition, Examples, and How to Improve
2. How To Get A Small Business Loan in California

1. Top 10 Reasons Why SMEs Are Denied Business Loans
2. How To Handle Business Loan Rejection
3. 7 Reasons Your Business Loan Was Denied
4. What To Do If Your Business Loan Is Denied

 

The end of the year is a busy time for business owners. Not only is it time to take stock of financial reports, cash flow statements, and plan for the future, but it’s also a period when the focus must shift to efficient tax management.

Proper year-end tax planning drives long-term growth, ensures compliance, and helps businesses save money. In fact, rather than viewing it as an unnecessary burden, if more organizations were to make corporate tax planning strategies a part of their model, the impact on bottom lines could be tremendous.

So, how do business owners pay less taxes?

In this article, we’ll highlight three tips on how to invest business profits to avoid taxes, identify appropriate credits, and maximize deductions. Crucially, we’ll also look into the role that small business funding plays in implementing these strategies. It’s a lot to cover, so let’s dive right in.

Tax Strategy 1: Maximize Deductions and Credits

All businesses are eligible for deductions or tax write-offs.

For example, most equipment purchases that are found to be essential for operations qualify for a tax break. Under IRS Section 179, the full price of depreciating assets like machinery, computers, or cars can be deducted from the year they were purchased.

Similarly, several other expenses are covered, including operational costs like rent, utilities, and salaries. Depending on your business, you could also be eligible to write off advertising expenses, business meals, insurance, legal fees, and more.

Maximizing these deductions must be a key component of all corporate tax strategies, as they can have a huge impact on bottom lines.

There are also several tax credits business owners must consider when drafting end of year tax strategies. Some, like the Work Opportunity Tax Credit, are available to businesses that employ individuals from targeted groups. Others, like the Opportunity Zones Credit, are available to businesses that support investment in distressed areas.

Moreover, there are multiple industry-specific credits that are often overlooked. The R&D credit, for instance, covers all expenses related to the design, development or innovation of new ideas, products, techniques, or software. The Inflation Reduction Act of 2022 also introduced several additional credits for green energy initiatives.

Once all deductions and credits are assessed, business owners must ensure they qualify for as many tax breaks as possible. And this is where business funding comes in.

To be eligible for a Section 179 deduction in 2024, for example, the equipment must have been purchased or leased the same year. By securing financing for equipment, businesses can make these purchases before December 31, 2024, and benefit from a tax break. Similarly, a line of credit can help businesses fund R&D projects, invest in green initiatives, or fund expansions into opportunity zones.

Clearly, a little small business tax planning goes a long way.

Tax Strategy 2: Defer Income and Accelerate Expenses

Deferring income is another common tax tip for small businesses looking to reduce their burden for the current year. How you do this depends on your organization’s working model. Businesses that work on a cash system can consider deferring outstanding invoices for the following year. Those that work on an accrual system, which recognizes income once a job is complete, can choose to delay shipments.

Similarly, if you’re looking to reduce your burden for 2024, put off investments that will result in capital gains — such as selling real estate — until 2025.

On the flipside, if you’re looking for a year end tax tip to decrease your future burden, or have unused deductions to use this year, you could consider accelerating your expenses until December. To make this business strategy work, send out invoices early, complete projects before time, or consider pre-paying suppliers for products and services that aren’t due until the following year.

These two end of year tax strategies are especially effective if you identify that the tax rates for the following year will be higher or lower — or in case of any potential changes to tax policies. While efficient forecasting can help assess the appropriate path forward, funding can help you implement either of these tax saving options. A business line of credit, for example, can help manage cash flow, either to increase spending in the following year or tide over the period when invoices are unpaid.

Tax Strategy 3: Invest in Retirement Plans

A retirement plan doesn’t just benefit employees, it is an extremely effective tax planning tip for year end for employers as well. Now, under the recent Secure 2.0 law, startups that haven’t yet implemented a retirement savings plan for employees will have more incentive to do so.

From 2023 onwards, business owners with 50 or fewer employees can qualify for up to $5,000 in tax credits to offset 100% of the costs of setting up and administering a retirement plan. Employers can receive credits of up to $1,000 per employee to offset their contributions into the savings plan.

Furthermore, all employer contributions are also tax deductible. Depending on the type of plan, the participants, and the amount you contribute, you may qualify for several other credits — such as the auto-enrollment credit that allows businesses to claim $500 a year for the three years after they introduce the feature.

With that said, not all businesses can afford to increase employee contributions before the end of the year. In this case, it may be worth securing business financing to ensure that you have enough capital. Not only will this help reduce your tax liability, it can also:

• Helps attract and retain talent
• Improves productivity of your staff
• Secure employees’ long term financial security

Bonus Tip: Review Depreciation Options

Of all the tax tips for business owners, accelerated depreciation is the most complicated to understand and calculate. But it’s also one of the most critical small business tax strategies.

Rather than deducting the cost of equipment and property over time, accelerated depreciation can help write off significant purchases by the end of the year and reduce your liability for the following years. This has proven to be extremely beneficial for organizations as it helps manage immediate cash flow concerns.

In the U.S., there are a couple of ways to accelerate depreciation.

The first, as we mentioned briefly earlier, is Section 179, which defines property as anything from HVAC equipment to roofing and beyond. In 2023, the deduction limit was $1,116,000, while the phase-out threshold was $2,890,000. In 2024, to claim the full deduction, the total purchase price of eligible property was increased to $3,050,000.

The second approach is known as bonus depreciation. It allows businesses to immediately write off a certain percentage of the price of an asset. In 2022, the TCJA authorized 100% first year bonus depreciation, but will phase it out over a five-year period. So, in 2023, 80% of the price can be claimed, and in 2024, 60%.

Businesses looking to take advantage of bonus depreciation will need to acquire assets before the provision is phased out by 2027. To help make such significant investments, and reduce your future tax burden, consider looking out for various financing options.

To weigh the costs of securing a loan vs the benefits of tax reductions, compare the figures using a small business loan calculator.

How to Save Taxes in the U.S. and Canada

At the end of the day, the best tax saving strategies require a lot of planning. Businesses across North America must familiarize themselves with the specific policies on deductions and credits, assess whether to defer income or accelerate expenses, and invest in their employees to unlock even more tax breaks.

Moreover, it wouldn’t be possible to implement any of these tax tips for small businesses without funding. Organizations can leverage a wide variety of equipment loans, credit lines — or even specific small business funding for women — to maintain cash flow and make investments that improve their future financial standing.

Learn more about business funding options:

• Small business loans
• Merchant cash advances
• Collateral loans
• Business line of Credit
• Business loans for low credit
• Invoice factoring
• Financing for equipment

1. Guide to business expense resources
2. Year-End Tax Planning for Your Business: 8 Strategies to Consider
3. Section 179: Definition, How It Works, and Example
4. 5 Tax Planning Strategies for Small Business
5. Small Business Tax Planning: 8 Ways to Save On Taxes in 2024

 

A business line of credit is a promising financing option for entrepreneurs looking for a quick capital injection. But it isn’t exactly like your average term loan.

So, how does a business line of credit work?

It’s similar to a credit card in that business owners can access funds from a revolving line of credit — as and when they see fit. However, the interest rates are lower than those of credit cards and are charged only on the amount drawn, along with a small fee.

Because of its flexible repayment terms, relaxed eligibility criteria, and competitive interest rates, a business line of credit has helped thousands of organizations replenish inventory, expand offerings, upgrade equipment, and fill cash flow gaps.

Does this sound like something your operation needs?

Follow these five steps the next time you’re applying for a small business loan.

Step 1: Evaluate Your Financing Needs

A business line of credit is not a one-size-fits-all financing option. It can be especially advantageous when used right or expensive if the terms are not properly understood. For this reason, it’s crucial for businesses to analyze their requirements before applying for a line of credit. Are you, for example, looking to secure financing to make up cash flow shortages, buy new property, or cover payroll?

Fortunately, there are few restrictions on how you can spend a line of credit. But with that said, depending on the provider and your financial history, the credit may not be enough to cover major purchases or real estate. Instead, an operating line of credit, when used responsibly, is best used for purchasing inventory, enhancing marketing budgets, and scaling operations over short terms.

The second consideration is how much credit you need. While some online lenders offer up to $500,000 in credit, it’s worth analyzing your exact business line of credit requirements, to keep costs low. Some ways to assess your needs include:

• Analyze cash flow statements to learn how much business you’re losing to pending invoices, seasonal slowdowns, and emergency expenses.
• Consider fixed and variable expenses to forecast future projections accurately.
• Use a business loan calculator to consider the impact of interest rates and repayment terms to identify how much credit you can afford to draw.

Step 2: Analyze Factors That Impact Credit Lines

Qualifying for a line of credit may be easier than a term loan, but lenders still evaluate a host of criteria when deciding terms. Businesses with good credit scores, for example, are usually able to secure more favorable rates, especially from banks and credit unions.

However, many lenders relax their requirements for businesses with poor credit. To secure a line of credit for a new business, the following factors may play a role.

• Business revenue: Many lenders will require businesses to show a minimum annual revenue to qualify. Some are more flexible than others.
• Financial statements: Lenders may also look into cash flow projections, balance sheets, income statements, and tax returns to assess creditworthiness.
• Vendor payment history: Businesses that make timely payments are more likely to secure favorable terms.
• Business plan: Businesses with comprehensive revenue forecasts, clear strategies for growth, and effectively communicated expansion plans see more success.

Moreover, lenders also consider the type of industry a business operates within when making the decision. They may tighten the reins in case of certain high-risk businesses.

So, to properly leverage business lines of credit, it’s crucial that you conduct a comprehensive financial health check-up. Consider the impact of factors like:

• Current pricing strategies
• Seasonal slowdowns
• Customer payment patterns
• Vendor payment terms
• Tax rates

And more.

Step 3: Research Potential Lenders

Banks were once the only major source of funding. However, the rise of FinTech services has significantly enhanced credit availability and eased requirements. Today, there are multiple types of lenders that offer lines of credit.

• Banks and credit unions: Traditional lenders could offer a line of credit for businesses with competitive interest rates. However, they are usually a better choice for those with solid credit scores, substantial revenue, and significant experience.
• Online lenders: Usually have much more relaxed eligibility criteria, varying interest rates, and faster application and approval times.

Some businesses may also qualify for the Small Business Administration (SBA) line of credit, which offers up to $5 million through one of its approved partners.

There are pros and cons associated with each option. When researching potential lenders, you should carefully compare them based on factors like the maximum credit limit offered, terms of service, requirements, rates, fees, and lender flexibility.

A bank may have stricter criteria as compared to online line of credit providers but may also have more favorable terms. Online lenders, on the other hand, have much faster turnaround times and higher-than-average interest rates. With that said, when used responsibly, online options can be very cost-effective despite fees and factor rates.

Another aspect to consider is whether the credit line is secured or not. A secured line of credit requires businesses to pledge collateral in return for favorable interest rates. This could sometimes be strong collateral, such as real estate, but in most cases, receivables are sufficient to access credit lines.

An unsecured line of credit, on the other hand, may have higher rates to offset the risk of not having any collateral. But, businesses with strong credit scores, clear projections, and experience can secure better terms, regardless.

Step 4: Prepare a Credit Line Application

Once you reach the application phase, most of the hard work is behind you. However, there are still several documents you’ll need to successfully carve out an application.

These include:

• Legal documents, such as business licenses
• Bank statements
• Financial statements, such as profit and loss reports and tax returns.
• Comprehensive business plans
• Collateral documents (if applicable)
• Existing liabilities (if applicable)
• Insurance documents

Certain lenders may require more documentation, or have an easier application and approvals process. But either way, having a strong business plan can help inspire trust.

To draft a compelling application, it’s not only crucial to have all paperwork in order, but also that you know how to present your case effectively.

While there are no set restrictions on how a credit line can be spent, it’s worth clearly outlining your plans to the lender anyway. Break down how much you plan to spend on various categories — buying inventory, investing in marketing, expansion, etc — and emphasize how the credit will contribute to your overall growth.

There are also some common mistakes to avoid when applying for a corporate line of credit. Many businesses, for instance, neglect to read the fine print, or fail to build accurate credit profiles, or even make errors in listing personal or business information. Mistakes like these can have an impact on processing and turnaround times.

Step 5: Apply and Negotiate Terms

A business line of credit application can be delivered in person or submitted online. During a one-on-one meeting, your lender may ask for additional information, such as your social security number, the purpose of your loan, and your annual revenue.

Similarly, to apply online, you will first have to upload relevant documents. Once that’s done, you may be prompted to consult with a financial advisor to discuss the specific terms before your loan is processed. As you’d imagine, doing it online is a lot faster — with credit lines often approved within 24 hours.

Meanwhile, when negotiating terms, consider some of the following questions:

• Are the interest rates fixed or variable?
• The typical draw period for a line of credit can be anywhere between two to five years. Which aligns best with your cash flow reports and financial projections?
• How equipped are you to make timely payments based on the outlined schedule?
• Have you accounted for associated fees — such as the draw fee, late fees, termination fees, among others?

The Bottom Line

Businesses looking for a quick injection of capital have several options at their disposal — with credit lines for small businesses often approved and processed in as little as a day. But to make the most of the financing option, it’s not only crucial to learn how to get a line of credit, but to take a methodical approach to identifying the best terms.

Businesses should properly evaluate their goals, analyze the factors and criteria that influence their application, and research various lenders to ensure that they come away with higher credit amounts and lower interest rates.

For any further assistance, don’t hesitate to reach out to a Bluerock Options manager, who will work closely with you to build strong applications and secure favorable loans.

1. Funding Programs: Loans
2. What is a business line of credit and how does it work?
3. Secured Vs Unsecured Line of Credit – A Comprehensive Guide
4. Common Mistakes To Avoid In A Business Credit Application

1. Understand Loan Terms Inside Out
2. Calculate Cost of Loan Carefully
3. Create a Comprehensive Repayment Plan
4. Optimize Cash Flow Management
   • Effective Invoicing and Collection Practices
   • Negotiating with Suppliers
5. Explore Debt Consolidation and Refinancing Options
6. Build Strong Lender Relationships
7. Finding the Right Balance for Your Business

Is it better to maintain cash reserves or make larger loan payments?

It's a question that small and medium business owners have struggled with for years. And to be fair, it's a tricky balance to strike. A longer loan term means more borrowing costs. But, for small businesses, draining their cash reserves to pay off a loan faster can also leave them vulnerable when liquidity is most critical.

To navigate this situation, entrepreneurs are on the constant hunt for strategies to streamline loan repayments and optimize cash flow in order to keep operations running smoothly. Often, this requires an immense understanding of various loan types, their implications, and efficient financial and strategic planning.

If, as a business owner, you find yourself struggling with these concepts, consider these effective strategies for business loan repayments - and make informed choices that support both your short-term needs and long-term success.

Understand Loan Terms Inside Out

No two loan terms are alike. Some small business loans have higher interest rates, while others have longer durations. Beyond that, many are loaded with penalties and fees, which are applied at the discretion of the lender.

Fortunately, this also means that loans can be negotiated. Whether you're looking to apply for a small business loan or streamline payments on an existing loan, it's crucial that you understand how various loan concepts relate to one another.

While some terms - like interest or principal - are well understood, others, such as amortization or ballooning payments, aren't. But that doesn't mean they're not crucial.

• Consider amortization or the process of paying off a loan in a fixed number of payments. An amortized loan requires upfront interest payments, but payments are spread over a long period. This can be a pro or con, depending on your needs.
• Ballooning payments, on the other hand, refer to large payments that are due at the end of a loan duration. They aren't often included in loan terms, but when they are, they come as a surprise to businesses that don't plan ahead.

Similarly, breaking other complicated loan terms down into simpler language can help secure favorable small business funding and craft more efficient repayment schedules.

Calculate Cost of Loan Carefully

Calculating the cost of a loan may seem straightforward, but there are several factors to consider.

What is the impact of interest fluctuations? How does amortization impact monthly payments? Are you paying a disproportionate interest over time?

Answering questions like these is key to better business loan management.

To calculate costs, it's not just necessary to account for interest but also calculate the annual percentage rate (APR). This figure represents the total cost of repaying a loan over a year, including both interest and fees. This is an important distinction to make, as loans could come with any number of fees that businesses fail to consider. Such as:

• Origination fees
• Closing costs
• Late payment fees
• Application fees

Furthermore, some loans may have prepayment penalties, which come into effect when a loan is paid off before the duration. Having such a condition included in the terms is a glaring red flag-as it only benefits the lender and never the borrower. While such penalties can sometimes deter businesses from paying off their loans early, it’s essential to evaluate them in the correct context.

This is because, in some scenarios, prepayment may make financial sense for your business despite the penalties. For instance, if the interest savings from paying off the loan early outweigh the penalty costs, it could be beneficial to repay the loan sooner.

Create a Comprehensive Repayment Plan

Armed with this knowledge, focus on creating a repayment schedule that neatly aligns with your cash flow goals. Some strategies for this include:

• Consider all payment plans: Loan payments can be fixed-rate, interest-only, revenue-based, or more. Consider which plan closest meets your needs
• Be realistic: Leverage various financial planning tools to realistically determine the maximum amount you can afford every month without hurting operations
• Budget for payments: Loan payments must be given equal priority as rent, payroll, and other non-negotiable expenses
• Monitor progress: Once a payment plan is initiated, monitor progress to streamline future payments and take corrective action

Companies can also leverage debt amortization schedules when assessing how to manage business loan repayments.

This schedule offers a comprehensive breakdown of loan payments. It allows you to see how much interest you're paying, how much of the principal you are covering, and the overall balance due at any given point of a loan's lifecycle.

Optimize Cash Flow Management

In Canada, cash flow problems are a common challenge that plague both small and medium businesses. According to a recent survey, 60% of all businesses said they experienced challenges while managing cash flow. This makes the dilemma of whether to maintain cash reserves or make larger loan payments a critical issue.

Draining your cash reserves to accelerate loan payments can leave your business vulnerable, especially if unexpected expenses arise or if your revenue streams are inconsistent. Without sufficient liquidity, you may also struggle to cover operational costs, leading to potential disruptions in your business activities.

To mitigate these risks, we recommend a balanced approach that protects your operational liquidity while improving cash flow.

If you are seeking to improve cash flow for loan repayment, these two broad strategies that could help:

Effective Invoicing and Collection Practices

Businesses can greatly benefit by eliminating manual invoicing and collection practices in favor of new solutions. The rise of cloud-based software and increased automation, for instance, has had a transformative effect on the process of requesting, scheduling, and following up on invoices. Electronic billing and payment options, meanwhile, can streamline the collection process.

Negotiating with Suppliers

By maintaining strong relationships with suppliers and negotiating effectively, you can optimize cash flow by securing better deals. Many suppliers offer early payment or prepayment discounts as an incentive for timely payments, which helps businesses manage their cash flow more effectively and stay on top of their loan repayment schedules.

Explore Debt Consolidation and Refinancing Options

Refinancing and debt consolidation are two popular loan repayment strategies. Refinancing involves repaying an old loan by taking out a new loan with better terms, while consolidation refers to the practice of paying off multiple debts by taking out a single loan with favorable interest rates.

There are many reasons a business would want to consolidate or refinance business loans. The most obvious is that interest rates have dropped since the last loan was financed or that you were able to secure more favorable terms.

Many businesses in Canada, for example, consider refinancing CEBA loans to relieve themselves of high interest rates.

Debt consolidation, meanwhile, also allows you to improve your credit score as you close multiple loans on time. However, if you are bound by prepayment penalties on any of your existing loans, it's more cost-effective to stick it out.

If you decide to refinance or consolidate business debt, ensure you work with a lender you trust. Negotiate terms carefully and maintain positive credit to secure better loans.

Build Strong Lender Relationships

Building better relationships with lenders relies on transparent communication. When you keep lenders in the loop and proactively address your financial situation with them, you build trust. This lets you secure favorable terms.

A lender who trusts you may be more willing to offer assistance programs or more flexibility in repayment schedules. This helps you avoid defaulting.

The best way to build a relationship with a lender is by maintaining a solid credit history. A positive financial record can help you negotiate better terms, access increased lines of credit, and benefit from lower borrowing costs.

Finding the Right Balance for Your Business

The nature of your business is an important consideration when deciding between maintaining cash reserves and making larger loan payments. While strategies such as improving invoicing practices and negotiating with suppliers are effective, tailoring these approaches to your specific industry or business model can also make a significant difference.

For instance, if your business is a seasonal one and experiences fluctuations in cash flow throughout the year, you may need to adopt different repayment strategies as compared to businesses with steady revenue streams.

Moreover, as a seasonal business, you might also benefit from structuring loan repayments in a way that aligns with your peak cash flow periods. This will ensure you have sufficient liquidity during slower months.

Customizing repayment strategies to fit your business’s financial needs not only enhances cash flow management but also supports long-term financial stability.

The Bottom Line

Managing loan payments can be a headache sometimes - especially when navigating the murky waters of small and medium business loans. But it doesn't have to be.

By following these business loan repayment tips, entrepreneurs can build a command over complicated loan terms, create more comprehensive repayment schedules, and gain access to the latest tools and techniques to optimize cash flow management. If you're looking to manage business loans and reduce debt, there's no better time to start than now. Consider consulting a financial advisor for more personalized advice and create a loan repayment plan before it's too late.

1. Loans Terms: Specific Terms Defined & How to Negotiate Them
2. How to manage a business loan: 6 tips
3. New survey data highlights potential for Canadian SMEs to increase efficiency as 60 per cent face cash flow management challenges
4. How to Build Your Business Loan Payment Schedule

1. What is a Secured Business Loan?
2. What is an Unsecured Business Loan?
3. Unsecured Vs. Secured Loan: A Comparative Analysis
4. Choosing the Right Type of Loan for Your Business
5. Impact of Credit Scores on Loan Choices
6. Future Trends in Business Lending

Business loans are an invaluable tool for any small or midsize operation finding its feet. The extra injection of capital offers more flexibility, allows for strategic investments, and can help finance revenue-generating equipment and inventory. However, the type of collateral a business can offer up as security for the loan plays a critical role in determining the loan’s terms — and the type of loans available to them.

Entrepreneurs looking to access capital often must choose between two types of small business loans — secured and unsecured. Secured loans, backed by physical assets such as real estate, usually offer better terms because they rely on tangible, guaranteed collateral.

Now, most small businesses don’t own physical collateral like real estate, necessitating the need to put up other forms of collateral — for example, unpaid invoices. This is referred to as receivables-based financing, and its collateral is often considered weaker from the point of view of the lender. This is because, unlike tangible real estate or equipment, receivables are future-based, intangible, and not guaranteed.

So, in which circumstances is a small business loan secured or unsecured? What are the major differences between the two? And, which factors should a business consider when making the choice?

If you’re looking for answers, consider this in-depth guide.

What is a Secured Business Loan?

How does a secured loan work?

Essentially, a loan is considered secured when a business puts up a specific piece of collateral that can be claimed by the lender in case they default on payments. The collateral pledged could be inventory, machinery, or commercial real estate.

There are several benefits of collateral business loans. Some prominent ones include:

• They usually have more favorable interest rates and terms
• Lenders could potentially offer higher lines of credit
• They are easy to qualify for — as lenders prioritize the value of collateral over other factors like credit scores.

At the same time, there are drawbacks. The most obvious is that the lender is legally allowed to seize your prized asset in case you fail to repay.

Beyond that, to even secure such a loan, businesses must have assets valuable enough to back a large percentage of the loan amount. This collateral will also need to be appraised, which can potentially be a time-consuming process.

Lenders may offer other types of secured loans that are considered riskier— such as a business line of credit and merchant cash advance.

What is an Unsecured Business Loan?

Unsecured loans are also known as no collateral loans, because they don’t require borrowers to pledge assets to access working capital. Instead, their terms depend on factors like business credit scores and relationships with the lender.

Such loans help businesses grow during their early stages when they don’t have assets valuable enough to offer up as collateral. Consider two of its most prominent benefits:

• These loans don’t require any collateral, meaning less risk to the borrower
• They are usually approved and processed very fast, often within 24-48 hours.

At the same time, unsecured loans have their share of drawbacks. Without the assurance of collateral, lenders may charge higher interest rates.

These loans also have strict eligibility criteria — as they are contingent on a business’s credit history and reputation rather than the value of an asset. Furthermore, while businesses don’t risk losing an asset when they fail to repay, they risk tanking their credit scores and making it harder to secure capital in the future.

Lenders may offer several types of unsecured loans, including equipment loans, unsecured lines of credit, and more.

Unsecured Vs. Secured Loan: A Comparative Analysis

Here is a comprehensive overview of the difference between secured loans and unsecured loans based on crucial factors.

Choosing the Right Type of Loan for Your Business

How can understanding secured loan terms or an unsecured loan’s definition actually help when applying for a small business loan? Here are some factors to consider.

• Availability of Collateral: Without physical collateral, you may see more benefits in opting for receivable-based financing.
• Creditworthiness: If you have a poor credit history or not enough experience building up a good credit score, you may have no choice but to opt for unsecured financing or receivable-based options.
• Cash Flow Considerations: Assess your budget carefully to determine whether you’re capable of paying higher interest rates over time or if it makes more sense to risk putting up collateral in favor of a better cash flow
• Intended Use of Funds: A secured loan is generally more favored for long-term investments and expansion plans, while an unsecured loan is generally considered better for quick access to working capital.
• Risk Appetite: If you’re confident in your ability to repay, offering collateral can provide an added layer of security and potentially lower your interest rate.

Consider these examples: A relatively new IT startup that is looking for funds to scale operations and has a promising revenue outlook is more likely to opt for a loan without collateral — as it can’t afford to put up significant assets as a safety net.

On the other hand, a welding company looking to finance equipment for its workshop will benefit from pledging the new equipment as security and relying on the increased revenue and favorable terms to pay back a secured loan without defaulting.

Impact of Credit Scores on Loan Choices

While secured loans are contingent on the value of the collateral offered, it is always easier to get a small business loan with a better credit score.

Businesses with bad credit are unlikely to be approved for unsecured loans. But even in the case of secured loans, a better credit history can help you land favorable terms and puts you in a position to negotiate with lenders.

Here are some tips to maintain a good credit score:

• Update all information regularly and accurately with financial bureaus
• Make all vendor and loan payments on time
• Maintain a low credit utilization ratio
• If you can make payments on time, consider opening new lines of credit, as this can bring down the current credit-utilization ratio.

Future Trends in Business Lending

Are small business loans secured or unsecured? Well, in this digital age, the choice is not so clear-cut. The fintech industry’s impact on business financing has been revolutionary — offering small businesses a host of alternative lending options.

Many of these modern loans, including receivable-based financing, combine the best features of both secured and unsecured loans. This modern approach allows businesses with poor credit to access working capital by leveraging unpaid invoices rather than physical assets, reducing the need for collateral.

In the future, disruptive technology can also result in advanced credit assessments.

For example, FinTech firms have already begun implementing AI and big data to determine the creditworthiness of an organization in real-time. This will prove to be a game-changer for small businesses with limited credit history — and blur the lines further between secured and unsecured loans.

Conclusion

There are many factors that go into consideration when considering the right business loans for small businesses. Organizations not only need to decide on the type of loan based on credit scores and cash flows, but they also need to consider the long-term implications of the various options at their disposal.

Because every business’s needs and requirements are so unique, it’s crucial to consult with an expert who understands how business loans are secured when making the choice. A professional can help outline the ins and outs of business loan security, better define borrowing costs, and ensure that you negotiate more favorable terms.

1. Unsecured Loan: What It Is, How It Works And How To Get One
2. What Is a Secured Loan?
3. Is a small business loan secured or unsecured?
4. Is a Small-Business Loan Secured or Unsecured?

No matter what industry you operate in, how long you've been in operation, or the size of your business, small business owners will face a number of challenges if cash flow is tight or inconsistent, such as covering unexpected expenses, paying for suppliers and payroll, and financing expansion and growth.

Third-party financing can help your small business bridge these cash flow gaps so you can continue to operate at your best and grow your business.

From traditional sources of funding like Small Business Administration (SBA) loans and term loans to alternative lending options like merchant cash advances and invoice factoring, small business owners have a number of funding options at their disposal. Determining the right type of funding for your business can be challenging, especially if you're focused on running your business.

Traditional, long-term loans from lenders like the SBA and banks are often the most commonly recommended form of small business financing, but in some cases, these loans may not actually be the best option. For some businesses, flexible funding options like business lines of credit will more effectively support business growth than a long-term loan.

Ideal for businesses that are looking for a cushion to fill in cash flow gaps or manage emergency costs, or business owners who need flexible access to working capital, business lines of credit are one the easiest and fastest ways to secure funds that you can use to boost cash flow, expand, or keep your business running smoothly.

Keep reading to learn more about business lines of credit, including:

• What is a business line of credit?
• How do business lines of credit work?
• Business lines of credit vs. loans
• How can you use a business line of credit?
• Who can benefit from a business line of credit?
• How to get a business line of credit
• Business line of credit requirements
• Business line of credit interest rates and fees

Let's jump in.

A business line of credit provides a maximum credit amount from which funds can be drawn and repaid as needed, rather than a lump sum that is repaid in set monthly installments.

Available from traditional lenders, credit unions, and alternative online lenders, business lines of credit are one of the most flexible forms of small business funding. They can be secured or unsecured, depending on the strength of your application, the credit limit you are seeking, and what kind of lender you're working with:

1. Secured lines of credit are typically available from banks and credit unions and will require collateral as a guarantee for the financing. A Uniform Commercial Code (UCC) filing must also be completed.
2. Unsecured business credit lines do not require collateral, which means the lender assumes more risk in the event that the borrower defaults. As a result, unsecured business line of credit interest rates are higher and approval requirements might be more demanding depending on which type of lender you're working with. Banks and other traditional lenders may approve an unsecured line of credit if you have an exceptionally strong credit history, while alternative lenders will have more flexible approval requirements that typically don't require collateral and which are favorable to more small businesses, including those with lower credit scores.

Business lines of credit operate much like a credit card, but with lower interest rates and higher limits.

Businesses can withdraw from their credit line as needed and will only ever pay interest on the amount borrowed (not the total funded amount like a loan). Once repaid, the entire credit line amount is restored. You may also be able to increase your credit limit after one successful round of funding, and there are no restrictions on how funds can be used.

Business lines of credit differ from traditional loans in a number of ways:

• Credit lines allow small businesses to withdraw funds as desired and pay back the amount used plus interest, just like a credit card. Traditional term loans, on the other hand, will provide a lump sum of cash that is repaid in set monthly installments, plus interest, regardless of whether or not the funds are used.
• Lines of credit usually have variable interest rates, whereas business loans are more likely to have fixed rates.
• Business lines of credit typically have a lower limit than business loans-usually around $500,000 instead of $2 million like some loans.
• There are no restrictions on how business lines of credit can be used, while some business loans are more strict about which expenses the funding can be used to cover.

Compare business lines of credit vs. loans in the table below:

	Business Lines of Credit	Traditional Loans
Loan Type	Revolving credit-use credit as needed and accrue interest only on the amount used (unless paid in full prior to due date)	Term loan-a lump sum will be provided, with immediate interest regardless of whether or not funds are used
Maximum Amount	Up to $500,000	Up to $2,000,000
Rates and Fees	Variable interest	Typically fixed interest
Approval Requirements	Easier approval	Stricter approval
Collateral	No hard collateral required	Collateral required
Uses	Unrestricted use of funds	Some restrictions on ise of funds

Lenders will consider the following business line of credit requirements when evaluating your application:

• Revenue: All lenders will evaluate your business's revenue and cash flow when assessing your application for a business line of credit. Traditional lenders may require up to three years of detailed financial documentation, while alternative lenders like Bluerock Options® are often satisfied with three months of bank statements and at least $25,000 a year in revenue.
• Cash flow: Businesses that are profitable with strong, consistent cash flow will be able to qualify for larger lines of credit with lower rates.
• Vendor payment history: Repaying other business debts on time will result in more favorable interest rates.
• Years in business: Traditional lenders will require your business to be in operation for at least two years, while alternative lenders typically only require your business to be in operation for at least six months to qualify. Startups may have a more challenging time being approved for a business line of credit, but the longer you have been in business, the less investment risk there is for the lender and the lower your rates will be.
• Industry type: While all industries can apply for a line of credit, certain businesses are riskier than others and will have a harder time being approved (though they will still have a higher chance of success than a bank loan).
• Public records: Any red flag in public records, such as previous bankruptcy, may disqualify you from being approved.
• Personal credit: Having good personal credit is an excellent signal for lenders to approve your application. Learn more about personal and business credit.

Business line of credit interest rates depend on your business's risk assessment, as well as the type of lender you're working with.

Traditional lenders will use standard interest rates for business lines of credit, meaning you'll pay a certain percentage every month depending on how much of the line you've used. Interest rates typically range anywhere from 5% up to 20% and may be variable depending on the federal prime rate. Businesses with stronger financial histories or those that secure their line of credit with collateral will receive lower interest rates.

Alternative lenders use a factor rate instead of an interest rate. Factor rates are simple decimal figures that show how much "extra" you owe on top of what you've borrowed. The factor rate is multiplied by the funding amount to determine the total cost of financing; for example, if your desired funding is $100,000 and the factor rate is 1.3, the total cost of funding is $130,000 to be paid over the set terms such as 12 months. Your factor rate will depend on your risk assessment, but these rates typically range between 1.1 and 1.5.

Small business lines of credit are ideal for businesses that are expanding and searching for unrestricted funds to support their growth or day-to-day operations. In this case, "unrestricted" means that the line of credit can be used for any business expense that the owner sees fit.

Use your business line of credit for:

• Expanding to a new location
• Pursuing other growth opportunities, such as purchasing another business
• Acquiring business assets, such as inventory or equipment
• Financing a merger or acquisition
• Investing in a marketing team or strategy
• Paying for renovations
• Covering payroll or other expenses
• Filling cash flow gaps between projects or during a slow season
• Funding other growth strategies

Almost all businesses can benefit from a business line of credit regardless of industry, how long it's been in operation, or the size of your business.

Credit lines are an especially good fit if your small business needs extra cash flow during a slow season, has short-term expenses, or has customers who take more than 30 days to pay.

Industries that may be considered "high risk" may also have an easier time qualifying for a business line of credit than a traditional bank loan.

The approval process for a business line of credit depends on the lender you're working with. Traditional lenders like banks will have stricter approval requirements that are based on your financial and credit history, and will often require collateral, and for your business to be in operation for at least two years.

While alternative lenders will also consider your financial and credit history, these lenders have more flexible approval requirements that are based on the future potential of your business. Collateral is typically not required, and most of these lenders (including Bluerock Options) only require your business to be in operation for six months.

With an alternative lender like Bluerock Options, the application process for a business line of credit is streamlined, fast, and easy. Simply fill out an online form and a Funding Advisor will reach out to you within an hour (during regular business hours) to discuss your funding options and review your three months of bank statements. Once approved, you can receive up to $500,000 of business line credit in under 24 hours. Repayment will be automatically deducted from your daily or weekly sales.

Apply for a business line of credit online today with Bluerock Options and grow your business to the next level.