Which one is Best for You, and Tips for Finding More Options
There are so many more options for funding a business than most business owners realize. Everyone knows about loans and investors. The thing is, not only are there dozens more options, but just within those two categories there are a ton of options. Figuring out which one will work best for you and your business can be a daunting task. Do you go with traditional or online business loans? Crowdfunding or invoice factoring?
Before you can truly know the best answer, you must have a deep, in-depth understanding of each option. You cannot understand which option is best for your without knowing everything about each one and how they compare to each other.
In addition, the choice is dependent upon a number of variables that will be unique to your situation. Why do you need the money? How soon do you need it? What does your credit look like? How long have you been in business? All of this culminates to an arrow pointing you in the right direction.
To keep things from being too overwhelming, it is sometimes best to consider and compare just a couple of options at a time. For example, which is the best for you between online business loans and factoring invoices?
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What Are Online Business Loans?
Of course, this sounds like a dumb question. They are business loans that you get online, right? It’s self-explanatory. Maybe the better question is, what is the difference between online business loans and other business loans.
There are many differences actually. Online business loans:
- Have an application process that takes place exclusively online
- Have a much faster application and approval process
- Offer less strict qualifications guidelines
- Sometimes utilize alternative methods of determining qualification
- Get money into your account much faster, sometimes within as little as a day or two
- Often have higher interest rates than traditional loans
What does all of this mean? It means that if you have trouble qualifying for a traditional loan, an online loan can be a good alternative. This is also true if you need funds quickly, or do not want to have to wade through the lengthy application process that traditional lenders are known for.
However, all this good does have a negative thrown in the mix. Online business loans generally have higher interest rates and less favorable terms. If eligibility and time are not an issue, traditional loans are the most cost effective.
So Then, what is Factoring?
This is more specifically referring to invoice factoring. That of course, means that you must have open invoices to qualify. Consequently, you must be extending credit to customers in some form. Usually this involves invoices with net terms, such as net 30, 60, or 90.
Then, you turn those invoices over to a factoring company. They give you an agreed upon percentage of the total of the invoices, such as 80%. You get this amount of money immediately. When your customer pays, the factoring company keeps their agreed upon fee, and they send you the rest.
This is different from selling invoices, in which you sell your invoices at a premium and do not collect anything else. The buyer then tries to collect the full price from the customer and keeps it, profiting from the premium they were sold at. This is more typical with severely delinquent invoices.
You can factor invoices on an ongoing basis to help with cash flow, or you can do it to aid in a one-time cash crunch. It is quick, but it can be costly. If you are an established business that has little problem collecting on invoices however, this is a funding option that is easy to qualify for. Since the funds are secured with the invoices, there is little worry about credit rating.
Online Business Loans vs. Factoring: Which One Should You Choose?
Even knowing everything you can about each option, it can still be difficult to differentiate between which one would work best for you and your situation. The truth is, one could be best this time, and in the future, the other one will work better.
Take the following factors into consideration:
- Why do you need funds?
- How often do you need funds?
- What does your credit score look like?
- How long have you been in business?
- Do you have open invoices?
- Do you have trouble collecting on open invoices?
If your credit is not terrible, and you only need funds this one time for something specific, it might be best to go with online business loans. You do not have to have a credit score that is up to standards with what traditional lenders require, fund will come fairly quickly, and your interest rate will likely be lower than the factoring fee you would pay.
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Of course, if you do not qualify for invoice factoring, that is another reason to choose online business loans.
If you need fast cash or an ongoing cash flow to cover a collections gap, you may want to look into factoring. You can set it up to where your invoices are automatically factored and you get a portion of the funds right away. Be sure you are not covering up a bigger issue however. Factoring only works if your customers pay.
Building Business Credit Can Open Up Online Business Loans and Other Options
Of course, you shouldn’t feel that these two are your only options, even if your credit history disqualifies you for other types of financing. If you work on building business credit, you can increase your options for funding, and even open up new options for online business loans.
What is Business Credit?
Glad you asked! Business credit is a credit report and score that is based solely on the financial history of your business. In some cases, it does not take your personal credit score into account at all. Even if your personal score is considered, in most cases a strong business credit score will prevail when it comes to business financing.
Why Do You Need Business Credit?
Since business credit is distinct from individual credit, it can help secure an entrepreneur’s personal assets if there is litigation or business insolvency. Also, with two distinct credit scores, a business owner can get two different cards from the same merchant. This effectively doubles purchasing power.
How Do You Get Business Credit?
Establishing small business credit is a process, and it does not occur automatically. A company will need to proactively work to establish business credit. The goal is to make the business appear fundable to lending institutions and merchants. Here is how to make that happen.
Contact Information
Your business needs a professional-looking website and email address. Remember, the site needs to have site hosting bought from a company such as GoDaddy. A free web hosting service or free email service will not work for these purposes.
The business needs a separate phone number as well. It should be from a free exchange and be listed along with the fax number on 411. You can do that here: http://www.listyourself.net.
Business Bank Account
A dedicated business bank account is also necessary. This will not only aid in making your business appear fundable, but it will also help keep business expenses separate for tax purposes.
Incorporation and EIN
Visit the Internal Revenue Service web site and acquire an EIN for the small business. They’re free. You also need to select a business entity like a corporation, LLC, etc. Formally incorporating helps to separate your business from yourself, and as an added bonus, it offers more protection to your personal assets.
Get a D-U-N-S Number
Go to the Dun & Bradstreet website and get a D-U-N-S number. This is a number that D&B assigns to a business when it goes into their system. It is necessary to have this number before the system will generate a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s websites for the company. You can do this at www.creditsuite.com/reports. If there is a record with them, check it for correctness and completeness. If there are no records with them, that will be handled with the next step.
What’s that Next Step?
The next step is to work your way through the credit tiers, adding more cards in higher tiers as you gain accounts in the one you are currently in. Start with the vendor credit tier.
Vendor Credit Tier
First, build tradelines that report. This is also called the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score.
These types of accounts tend to be for the things bought all the time, like marketing materials, shipping boxes, outdoor workwear, ink and toner, and office furniture.
These trade lines are with vendors who will give you starter credit when there is none already. Terms are typically Net 30, rather than revolving. That means if you get an approval for $1,000 in vendor credit and use all of it, you must pay that money back in within the net terms.
Not all vendors work for starter credit. Find some great options here.
Retail Credit Tier
Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the credit reporting agencies, then move onto the retail credit tier. These are companies such as Lowes and Staples.
In fact, Lowes works really well because they report to D&B, Equifax and Business Experian. They will need to see a D-U-N-S and a PAYDEX score of 78 or more though, so be sure to work that vendor credit tier the right way.
Fleet Credit Tier
Once enough accounts are reporting from retail credit, you can apply for cards in the fleet credit tier. This tier includes businesses such as BP and Conoco. Use this credit to buy fuel, as well as to repair and maintain vehicles.
Shell is an example in this tier. They report to D&B and Business Experian. A PAYDEX Score of 78 or higher and a 411 small business telephone listing are required for approval. They might say they want a specific amount of time in business or revenue. However, that will not be necessary if you already have enough vendor accounts.
Cash Credit Tier
If you are responsible with the credit you earn in these three tiers you will be able to move on to the cash credit tier. It includes service providers such as Visa and MasterCard not attached to a retail store.
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Qualify for Online Business Loans and Monitor Your Business Credit
Keep tabs on what is happening with your credit. Make sure it is being reported and take care of any errors ASAP. Get in the practice of checking credit reports and digging into the particulars, not just the scores. We can help you monitor business credit at Experian and D&B for only $24/month. See: www.creditsuite.com/monitoring.
At D&B you can monitor at: www.dandb.com/credit-builder. At Experian, you can monitor your account at: www.smartbusinessreports.com/Landing/1217/. And at Equifax, you can monitor your account at: www.equifax.com/business/business-credit-monitor-small-business. Experian and Equifax cost about $19.99; D&B ranges from $49.99 to $99.99.
Monitoring your credit not only allows you to keep an eye on mistakes and work to get them corrected, but it also lets you see your progress. You can see how many accounts are reporting and what your score is. This will give you an idea of what you can do with it.
How Does Business Credit Affect the Online Business Loans vs. Factoring Question?
While both online business loans and factoring are legitimate funding options for a business, neither are ideal. There are better options out there, with lower interest rates and better terms. The problem is, those options are not available to many business owners for a number of reasons. Building business credit opens up a number of other possibilities for funding your business, and the more options you have, the better.
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