i. Explanation: Also known as a “stated income” business line of credit, this loan is typically unsecured. “No Documentation” means that the lender does not require tax returns or financials as a part of the approval process. There are a variety of other types of documentation they will review to assess risk.

ii. Positives: No need to compile mounds of paperwork or prepare for questions related to the mounds of paperwork, and typically a fast underwriting decision is delivered, and usually carries a pretty good interest rate.

iii. Negatives: Only a very low percentage of business owners are actually approved, sometimes it is used as a gateway for the lender to approve you for an alternate product, such as a business credit card, and oftentimes the lender will ask for documentation or “approve” the business owner and then as for some documentation to finish up the paperwork. If you’re not prepared to offer up the paperwork, such as tax returns, then you’re toast.

i. Explanation: Same as a Business Line of Credit where no documentation is required, except that minor financial documentation is requested, typically bank statements. A few months of bank statements will let the lender see the deposit, withdrawal, and average balance information.

ii. Positives: Better than full documentation, usually pretty fast underwriting decisions, and usually carries a pretty low interest rate.

iii. Negatives: Can sometimes raise questions from the underwriter that they would otherwise not think to ask, slows down the underwriting process sometimes, and oftentimes triggers a request for additional documentation such as tax returns

i. Explanation: Possibly one of the most flexible financing vehicles that a business owner can secure. Can be used for just about everything, carries a great interest rate and terms (typically), and is a preferred lending product.

ii. Positives: Limits are much higher than stated line of credit products, interest rate is usually very close to prime (or at prime), typically never expires, and gives the business owner endless options in expanding their business.

iii. Negatives: Requires two years of business and personal tax returns, as well as YTD financials for the current fiscal year, including P & L, Balance Sheet, and sometimes AR Aging reports. Financials must demonstrate an ability for the business owner to cash flow the payments if the line of credit is being used at its full limit amount. Any business owner that can use their tax returns should use them, it is always worth it!!

i. Explanation: Not very different from the other business lines of credit listed previously, but the Small Business Administration backs the loan such that a portion is insured by the Federal Government.

ii. Positives: Usually the bank is approving a loan that is borderline, that they would not otherwise approve, and usually they will approve it for a little higher limit.

iii. Negatives: Typically a slow underwriting process, sometimes the bank would approve it anyway, but uses the SBA to mitigate their risk, and oftentimes it carries a pre-determined term of several years at which point it converts to a term loan amortized over 3-5 years. When the loan converts to term the payments are much higher, and the utility gained from a line of credit is lost.

i. Explanation: Functionally this line of credit operates like an unsecured business line of credit, but specific assets are pledged and encumbered to secure the loan in the event of default. Typically a UCC lien is filed with the Secretary of State, and any titles or other documented ownership is collected and held by the bank. Acceptable assets for a secured line of credit typically include unencumbered real estate, equipment, vehicles, accounts receivable, and inventory.

ii. Positives: Securing the line of credit will typically entice the bank to offer a little better interest rate, and approve the business owner for a little higher limit.

iii. Negatives: The assets that become encumbered can’t be used to secure any other financing, and selling them becomes a problem. If inventory or accounts receivable is used to secure the loan, then lots of times the bank will require very frequent updates (monthly), and will micromanage the decisions made by the business owner relative to using the available limit (also known as a “supervised” line of credit).

i. Explanation: Basically the same as a personal credit card, except that it usually doesn’t report to the business owner’s personal credit report, thus a negative impact won’t be realized on the personal credit if the business owner carries a high revolving balance. It’s our opinion that business credit cards are one of the most under-utilized and under-recognized financing vehicles by business owners.

ii. Positives: Doesn’t usually report to the personal credit, usually carries an introductory interest rate of zero percent for the first months after approval, and cash can be accessed. Sometimes a business credit card is a good gateway product to a more favorable line of credit.

iii. Negatives: Interest rates can be high, limits are lower than on other lines of credit, and if the business owner accesses cash, usually a cash advance fee and high interest rates apply.

i. Explanation: An equipment lease isn’t really a loan because a third party buys the equipment you want to purchase, and leases or “rents” you the piece of equipment (or other item). Lots of different types of items can be leased by a business, not just the stereotypical items like industrial equipment, copy machines, or automobiles. You can also lease office fixtures like cubicles, desks, and chairs, or even software packages, phone systems, and computers or servers.

ii. Positives: Usually there is never a down payment, you can roll some other expenses into the lease like shipping and training costs, and a few banks even let you roll an extra amount in for working capital, sometimes up to 25% of the equipment price amount. There are some tax advantages to leasing as well, and oftentimes at the end of the lease you can purchase the item that was leased. For lease amounts less than $150,000, limited documentation can be provided.

iii. Negatives: Because the business owner doesn’t actually own the equipment during the lease term, it is not listed on the balance sheet as an asset, plus sometimes leases are more expensive than just getting an asset backed loan.

i. Explanation: Unlike an SBA-backed line of credit, this is a term loan not a line of credit. The payments and interest rate are fixed. The SBA does not fund any loans, rather it only insures loans.

ii. Positives: Usually the bank will approval a business owner that they would not otherwise approve, and the interest rate is fixed.

iii. Negatives: If a business owner is approved for a term loan, they probably would have been approved for an SBA-backed line of credit instead. The term loan does not have the same utility that a line of credit offers. Once the loan is paid off it is gone, whereas with a line of credit it can be used over and over.

i. Explanation: The category of an asset-backed loan is very broad. It can be a loan for any type of asset, whether equipment, vehicles, or tools. The amount financed will be based on the value of the equipment, and is always a term loan, not a line of credit.

ii. Positives: Because a specific asset backs the loan, this type of loan typically is easier to be approved for than an unsecured loan, because there is something of value to repossess if necessary.

iii. Negatives: A down payment is almost always required, once the asset is paid off the utility of the loan goes away, and if the loan amount desired is too high, the bank will sometimes ask for documentation like tax returns.

i. Explanation: This is a loan designed to allow someone to buy an existing business or a franchise of an existing franchisor.

ii. Positives: Can put someone in business overnight, and sometimes it may qualify for backing by the SBA. Some franchises with strong track records may more easily qualify for financing.

iii. Negatives: If the business owner is buying an existing business, the full financials of the business must be used in the process, the borrower is usually pretty heavily scrutinized, and must demonstrate a capacity to run the type of business being purchased.

i. Explanation: This type of loan is also known as “overdraft protection.” Unlike on personal checking accounts, usually a much higher credit amount can be achieved by a business owner. This type of a line of credit is very much like a regular line of credit, except that it is attached to the checking account.

ii. Positives: Usually kicks in automatically if the account is overdrawn, usually no advance fee is charged, and it is usually as easy as a business credit card to get approved for (the bank looks at primarily the credit to make its decision).

iii. Negatives: There is usually a cap of 15 or 25 thousand dollars on this product, sometimes as new deposits are made they first go to automatically payoff or pay down the line of credit, and usually the interest rate is similar to that of a credit card.

i. Explanation: This financing is very specific in purpose, and might also be called “floor financing.” It allows the owner to only purchase inventory to sell, or if the business is a manufacturer, it allows for the purchase of raw goods to turn into a product to sell.

ii. Positives: Because the bank knows exactly what the money is being used for, and usually there is something that could be repossessed, sometimes it is easy to be approved for.

iii. Negatives: The bank will micromanage the inventory purchase decisions, and frequent updates on inventory levels are required by the bank. The line of credit can only be used to purchase inventory, but oftentimes the business owner needs the credit for other items like managing AR turn time.

i. Explanation: Sometimes a business will secure the contract on a specific job, but cannot fulfill the job unless they have financing to float the business expenses like payroll or raw goods while they complete the job, and then oftentimes there is a lag time on AR from the project. This type of financing was designed to provide funding only specific to a contract or purchase order invoice “won” by the business.

ii. Positives: Allows a business owner to fulfill a contract or order that they otherwise didn’t have the capacity to, and sometimes allows for quicker business growth.

iii. Negatives: This type of financing is becoming rarer and rarer, and unless the bank has heard of the business offering the PO, and the business is reputable, the bank won’t finance the job. It is also limited in term and usually doesn’t carry any flexibility. If the project takes the business owner longer to fulfill on than expected, the financing might be cancelled and whatever portion is funded might be called due. Also oftentimes this financing is micromanaged and funded in “stages” as the business owner completes portions of the work.

i. Explanation: Factoring is not a loan, rather is the sale of the accounts receivable asset that a business owns, and always at a discount of the face value of the asset. The other type of financing attached to accounts receivables is a secured line of credit, explained previously herein.

ii. Positives: Business owners with a slow AR time can accelerate the rate at which they get paid, and grow their business more quickly. All the cash is given, and it is not a loan. No credit check is made on the business owner.

iii. Negatives: There are lots and lots of negatives, including the fact that the business owner has to discount the AR value, usually they have to sign up for a year commitment at once and factor all year, unless the margins are thick in the business the business owner can lose money factoring, and usually the factoring company quotes a rate with fine print, and it almost always ends up costing the business owner more than they anticipated.

i. Explanation: This is a newer type of financing, and is similar to factoring except that instead of selling your AR, you are “selling” your future sales. A loan approval is given based on your monthly merchant processing statements (how much volume you charge customers in credit cards each month), and you payback the loan over the coming months.

ii. Positives: It is way easier to get approved for financing, newer businesses usually qualify, and credit of the business owner is less relevant (and sometimes irrelevant).

iii. Negatives: If you don’t accept credit cards, or don’t charge a very high volume, the loan amount is a pittance. The actual cost of the financing is usually incredibly high, and lots of times the business owner has to change what merchant processing service they use, but still pay for the terminal associated with their old merchant processing account.

i. Explanation: This type of financing is similar to a charge account in that the credit approval is specific to a merchant. A person can walk into Home Depot and get approved for a charge account at the store, but that charge account can’t be used to buy something at Lowe’s (unless a Visa, Mastercard, Discover, or American Express logo is on the charge card). The same person, if they are a business owner, can walk into Home Depot and get approved for a charge account for their business as well, though the account typically does not report to the personal credit.

ii. Positives: Usually there is no personal credit check for these types of accounts, they are not personally guaranteed, and they do not report to personal credit.

iii. Negatives: This value of this type of financing in our opinion is way oversold by companies that profess to help business owners build business credit. Usually the business owner doesn’t understand that it is vendor-specific, and they cannot access cash on the account or spend the credit amount anywhere except with the specific vendor. There is virtually no flexibility in this type of financing, and lots of places that a business owner needs to buy things don’t offer business credit. Way too many accounts have to be managed, and if the business owner needs cash, then the financing doesn’t work.

When you review the four types of financing listed below you’ll quickly ask yourself why they’re listed with commercial financing loan types.  Clearly they are not commercial loans, and they’re only included because of the overwhelming amount of people who use these financing types to fund the startup of a business.  Click on each one to read about the drawbacks associated with using this type of financing.

A. Negatives: Using personal credit cards for revolving debt has a tremendous impact on your credit scores--all negative. Your scores can drop 100 points or more if you run your credit cards up near, at, or over the limits. So the main reason that using personal credit cards to fund your business is because the debt is listed on your personal credit profile.

A. Negatives: The negative impact on your personal credit scores is not as bad as revolving credit card debt, but only by a small, almost indiscernible fraction. The scores will drop if a limit revolves.

A. Negatives: Any loan that is a term loan is better for your credit than a revolving loan. This still isn’t a positive type of debt to have on your report, but it isn’t nearly as bad as a credit card or personal line of credit with high revolving balances.

A. Negatives: If the HELOC is coded to the bureaus as a mortgage loan then this type of financing isn’t that bad for your personal credit, though some banks will count it categorically in your debt schedule the same way as credit card debt. So even if your scores aren’t negatively impacted, it still hurts you when you apply for commercial financing. The biggest problem with most HELOC loans though is that lenders will code the “account type” as a “c” category, which means “check credit,” which is a personal line of credit. So most HELOC loans have the same impact on your credit scores that a personal line of credit does, even if it says it’s a mortgage on your report, because the FICO scoring model sees the “c” coding and counts it on your risk rating as a personal line of credit.

What types of loans do you qualify for?  Click here to fill out a Smart Application that will diagnose the commercial loan types you might qualify for.

Find out Now!