The most important thing to note here is that it can be very difficult for some businesses to avail a traditional business overdraft from major banks or financial establishments. It is seen that while some of the banks are removing their overdraft policies that are currently offered to small businesses, others are reducing the amount involved in business overdrafts. This is especially distressing for businesses that have an irregular income, such as those in the retail, tourism, and hospitality industry, because it can lead to a significant gap in their working capital.

Fortunately, there are many alternatives available to business overdrafts these days, which such businesses can avail to meet with their financial requirements. Below are 3 feasible alternatives to business overdrafts, which can help a business to maintain its operations smoothly.

Revolving Credit Facilities

Revolving credit facilities work quite similar to business overdrafts by offering a consistent source of funding to the company with a pre-set limit. In other words, it can be like a small business loan that is ready to be used as and when needed. Besides, the borrower is only required to repay the amount used, which makes revolving credit facilities a much reliable option to secure business funding as required.

Merchant Cash Advances

Merchant cash advances are a way of financing business operations in exchange for their projected card sales. It involves flexible repayment schedules and the option to top up the funds when a part of the advance loan has been repaid. The most amazing thing about merchant cash advances is the speed of processing the funds; the borrower can draw out cash within a couple of hours after setting up the account.

Business Credit Cards

Business credit cards can also be a good source to acquire some quick working capital. They work the same way as a personal credit card does, but come coupled with many business-specific features, such as expenses tracking and the option to link multiple cards to the same account. The main benefit of business credit cards is the amount of funding, which can be much flexible when compared to business overdrafts. However, note that the credit limit, as well as the interest rate, might vary from lender to lender.

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Short-Term Loans

This is the most common type of business funding these days. Working capital in the form of short-term business loans is easy to acquire, involve comparatively fewer costs, and can be used for a wide range of purposes. These loans give the borrower access to a lump sum that is to be repaid usually within 3 to 18 months.

Lines of Credit

This is one of the most flexible options for business funding. This financing option offers the borrower access to a pre-defined amount, which can be used as and when needed. Working capital in the form of a line of credit can work best for small businesses, as they can have it as a backup in case their revenue goes down.

Merchant Cash Advances

Working capital loans can also be sourced as merchant cash advances. Here, the lender would fund the borrower a fixed amount in advance in return of a definite share of the projected credit card sales of the company. This is the easiest way of securing business funding these days, but it could involve comparatively more interest rates.

Invoice Financing

This is the simplest way of acquiring working capital funding for a business. Invoice financing can be a great way to manage the daily operational costs where customers are usually late to pay their outstanding invoices. This can work to free up the business capital and cash flow that can be used to maintain business operations.

SBA Loans

A short-term loan secured by the Small Business Administration can be a great source of working capital. The SBA 7(a) loan program especially works well for acquiring working capital for small to medium businesses, which gives them access to funding ranging from $5,000 to $5 million that can be used for a variety of purposes.

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A startup business might need to source finances to meet its operational costs, while an already established company might need a loan or line of credit to ease its financial burdens, especially in case there is a delay in the payments receivable. Usually, a lending institution offers asset-based financing as the best alternative when a company is unable to show enough cash assets or cash flow to acquire an unsecured loan. This way, the lender can approve the funds based on the physical assets of the company as collateral.

Note that the terms and conditions of equipment secured lending depend on the value of the asset as well as the type of equipment presented as collateral. Generally, lending institutions prefer liquid-type collateral, such as securities and bonds, which can be readily converted to cash if the company fails to repay the loan in time. Financing on physical assets is usually considered to be riskier, which is why the loan amount may be much lower than the actual value of the equipment. Still, that can be a good option for businesses, which are looking to expand their operations, because they are more likely to be in a solid position to repay the amount as agreed.

The interest rates on equipment secured lending are also much lower than that on an unsecured loan or line of credit. This is because the lending body can recover most of the losses here if the borrowing company fails to meet the repayment terms. Yet again, the interest rates can vary widely depending upon the credit history of the company, the business cash flow, as well as the length of the loan period.

Small and medium scale companies with stable revenue and good value physical assets are the ones who generally go for asset-based lending. However, it can be an excellent option for large corporations as well to cover their short-term financial needs occasionally, such as for managing their employee salaries or for some extra raw material purchase.

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In general, your business credit report can affect the amount of funding you are looking to avail, the terms of repayment, as well as the interest rates on the loan amount. Note that a good business credit report is like an invaluable asset for the company, which means that you should take proper measures to protect and manage it. To start, you should review the information and data that is being reported about your business and its financial state. You can order a copy of your business’ credit reports from a credit agency for that. This way, you can also update the relevant information about the company in case it is being reported inaccurately.

By monitoring your business credit report in periodic intervals, you can ensure that the data is up to date and accurate. In addition, you can also identify any errors or changes in the report that could affect your business’ credibility, and fix the issues in time. Assessing your credit reports also allows you to keep an eye on who is inquiring about your business, and generate potential leads from it as applicable. Besides, that would also help you to prevent identity theft and report any kind of data breach to the law enforcement authorities.

Remember that when you initiate a dispute on inaccurate information being reported about your business’ financial standing, the credit reporting agency would investigate the same and update the data. In the meanwhile, you can learn how your credit reports are doing and take proactive measures to improve the scores. Controlling the spending limits and managing the business credit card expenses by employees are a few ways to protect and manage a good credit report. This would not only be of great help when you apply for business funding in the future but also avoid potential losses to the company.

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A startup business might need to source finances to meet its operational costs, while an already established company might need a loan or line of credit to ease its financial burdens, especially in case there is a delay in the payments receivable. Usually, a lending institution offers asset-based financing as the best alternative when a company is unable to show enough cash assets or cash flow to acquire an unsecured loan. This way, the lender can approve the funds based on the physical assets of the company as collateral.

Note that the terms and conditions of equipment secured lending depend on the value of the asset as well as the type of equipment presented as collateral. Generally, lending institutions prefer liquid-type collateral, such as securities and bonds, which can be readily converted to cash if the company fails to repay the loan in time. Financing on physical assets is usually considered to be riskier, which is why the loan amount may be much lower than the actual value of the equipment. Still, that can be a good option for businesses, which are looking to expand their operations, because they are more likely to be in a solid position to repay the amount as agreed.

The interest rates on equipment secured lending are also much lower than that on an unsecured loan or line of credit. This is because the lending body can recover most of the losses here if the borrowing company fails to meet the repayment terms. Yet again, the interest rates can vary widely depending upon the credit history of the company, the business cash flow, as well as the length of the loan period.

Small and medium scale companies with stable revenue and good value physical assets are the ones who generally go for asset-based lending. However, it can be an excellent option for large corporations as well to cover their short-term financial needs occasionally, such as for managing their employee salaries or for some extra raw material purchase.

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It is very important to plan how you are going to repay the loan amount even before applying for it. This way, you can maintain your credit history and make sure that you never lose access to capital in case your business requires some additional credit-based funding at some point. Below is a quick look at what happens in a loan default scenario, as well as some practical ways to avoid loan defaults that you can work out if your business faces a tough financial situation someday.

Talk to the Lending Party

The first step that you should take in case you are struggling to repay the loan amount is to contact the lender and see if they can offer you any assistance. Sometimes, the lender might arrange a different payment plan, extend the term, or postpone some payments. However, that would depend upon how healthy your relationship with the lender is.

Pay the Sum Possible

After you have communicated your current business situation to the lender and expressed your struggles in repaying the amount, tell them how much you can pay. Most lenders allow making small micropayments to avoid full-blown default. This would also build more trust between you and your lender, who might then offer a more flexible payment plan for you.

Consult a Debt Counselor

If you are in no situation to make any kind of payment, you should consider consulting with a debt counselor to figure out your options. They can help you prepare a debt management plan and offer some suggestions on how to pay down the balance due as practically as possible.

Consult a Bankruptcy Lawyer

If the loan default has already happened, it might indicate that bankruptcy is not far away. As that can lead to even bigger consequences on your credit and your finances, you should consult an experienced lawyer to understand how to proceed with filing for bankruptcy.

Note that once a loan default happens, it would take around a month to show up on your credit score. Even if you can manage to pay off the balance loan amount after that, the negative points on your credit history might not come off. In fact, it can stay on your credit report for as long as up to 7 years.

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Depending on the current financial situation of your business and your future needs, one may be better for your business than the other. A term loan for a business is best used as an investment. If your company needs to purchase fixed assets, additional equipment, or purchasing a business, a term loan will give you a lump sum payment that you can use for whatever your business needs. Then you will have monthly payments to settle it off until it is completely paid off.

Note that you will not be able to take more money out with the same loan though; it is a fixed amount. If your business needs more money after this loan is paid off, you can apply for another term loan. When applying for the loan, be prepared to show the bank what you need the money for. Have a plan that you can show them that explains how the money will be spent, and how this will make your company more money. When they see this, they will be more likely to lend you the money, as they have seen your business plan and have faith that you will not have any issues paying it back.

A business line of credit is beneficial to a business that needs the funds as operating funds. This means the money will be used for business expenses. It may be used for paying bills, purchasing equipment that may be needed down the road, and to cover any surprise costs when you do not have the additional cash flow to cover.

A line of credit is a great option for those who are looking for something short term. If you know you will be able to pay it off in less time than a term loan, or if you think you might not even use most of it, then a line of credit may be the way to go for you. Since you are only charged interest on the amount that you use, and you can view your balance at any time, some choose this option over a term loan because it can be dealt with or paid off simply when you have the money to make the payments.

When deciding what is best for your business, it is better to review your business and see where you are sitting currently. Then look at the goals you have set for your business and what you need to achieve that goal. Once you have this information, you can have a rough idea of how much you are going to be asking for your line of credit or term loan, and how soon can you pay it off. Once you know the answer to this question, you will be ready to decide what is best for your business.

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Differences between Line of Credit and Term Loan

A business line of credit is very much like a personal line of credit or home equity credit line. It is also similar to a credit card. This means that you will have access to finances, if you need them. The line of credit will allow you to have access to the amount your business is approved for, and you will not be making any payments on it, or paying any interest on it, unless you actually used that money.

Lower interest rates are a common benefit of having a business line of credit. The closing costs are also lower than if you choose to take out a term loan. Now, a big difference between a business line of credit and a term loan is that if you start missing payments, or your payments start tricking in late, your bank may start charging you a high interest rate on a line of credit. On a term loan, your rates will stay the same throughout the length of the term.

A business line of credit can be renewed every year or so. This way, you can go over your credit line with your bank during this time, and adjust or plan as needed. For a business term loan, you would need to talk to your bank and they would then give you the money in one lump sum. Before approaching the bank, you should know how you plan to pay it back within the period (term) you have agreed upon.

Term loans can be very attractive to some as you can choose the term and interest rate (fixed or variable) at the time you take the loan. Yet repayments on the term loan will begin immediately after the loan is taken out, even if you have not touched the money yet. The interest rates and the closing costs are known to be higher for a term loan than with a business line of credit.

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When it comes to a revolving account, there is no set monthly payment, but the credit length would be ongoing. A cardholder can make purchases as long as they do not exceed their spending limit, as well as make minimum payments each month. Sure, interest accrues and it is capitalized just like any other credit. However, the revolving payment option is appealingly flexible for customers.

An example of revolving line of credit is HELOC, which expands to Home Equity Line Of Credit. A pre-approved credit amount is given to the borrower according to the value of their home, which makes this a secure credit type. He or she can access the funds in their account in many ways – via check, transfer, or even a credit card connected to their account. The account holder only has to pay interest on the used money, and the HELOC account gives him or her flexibility to draw on their available line of credit when required.

Line of Credit

A line of credit is effectively a one-off arrangement. When a bank customer has spent the set credit amount, their account is closed. The “non-revolving” credit line has similar features to a revolving one. A lending institution sets a credit limit, the account holder can use funds for many different purposes, normally interest is charged, and he or she can make payments at any time.

There is a major limitation to this arrangement though. After no payment does the pool of credit available to you get bigger. After you pay off the credit line in full, your account is closed, and you cannot use it again.

Personal credit lines, another type of bank loan, are at times offered to customers in the form of overdraft protection plans. The customer of a bank can subscribe to a plan which is linked to their checking account. When he or she goes over the available amount in it, the overdraft keeps him or her safe from check- bouncing and payment denial. As with any credit line, the withdrawn amount has to be paid back with interest.

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Two features make both options particularly attractive to borrowers: the flexibility with regards to purchasing and payment. Depending on the line of credit terms, one can use it as and when required, and pay it off when convenient. To stay safe though, it bears understanding how each works, and this can be done by looking at relevant examples. Both work similar to a credit card scheme, but with a notable difference.

Revolving Credit

This type of credit line is also extremely similar to the typical card scheme. The lender informs the borrower of a credit limit – the maximum amount which they can use to purchase something in any single instance. Typically, this option is used by the average guy to buy the goods he needs.

Now, let us understand how revolving balance works with an example.

An Example of Revolving Payment Balance

If a person named Michael has a card with $10,000 as the credit limit, he can spend $10,000 on services or products. If Michael bought something for 1,000 dollars, he would get a bill for that amount at his billing cycle’s end. The bank offers some different repayment options to him. He can write a $1,000 check and pay before his grace period ends, and avoid paying any finance charges to the card issuer. He can also choose to make either the minimum monthly payment required by his bank, or anything above that. If he chose to pay $400 for instance, he would be carrying the remaining $600 over to the subsequent billing cycle. Interest would apply on that, and he would get a bill inclusive of that extra charge.

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