Running a business is a juggling act between planning for the future and building a secure foundation and reacting to emergencies. It can be dizzying to keep track of all your financial obligations and needs. And adding lines of credit and loans to the mix can make it feel like you are one wrong move away from dropping a ball.
Before you apply for a SBA loan or business line of credit, take the time to figure out whether you’re seeking funding for an emergency or an opportunity. Knowing when and why you’re applying for financing will help guide you to the best financing options and partners. It can help define your financial strategy and give you a strategic tool for running your business like another hand in your balancing act.
When Is It Emergency Financing?
Emergency financing is unexpected, nonnegotiable, and time-sensitive. It’s triggered by unexpected events that catch you off guard and disrupt your business until addressed, like equipment breakdowns, urgent repairs, slow-paying clients, or a seasonal cash shortfall.
Let’s say you run a restaurant and your main refrigeration unit dies in the middle of the summer. You can’t afford to wait to replace or repair the unit. In this emergency, quick financing may be your best option, even if it has a higher interest rate than a term loan. Securing funding in 24 to 48 hours to keep your restaurant open is worth the extra costs.
Some examples of emergency financing include:
- A flood that damages your storage facility. You need immediate repairs and temporary inventory storage to avoid further loss. You apply for a fast working capital loan to cover costs while the insurance company processes your claims.
- One of the semitrucks in your fleet blows half its tires. You secure a business credit card to pay for same-day tire repairs.
- A large client delayed payment unexpectedly. You use an invoice factoring to advance the payment and pay your staff to avoid missing payday.
Loans to Consider for Emergencies
Lenders offer various financing options, so these are only a few common examples to consider in a financial emergency. Work with lenders specializing in emergency or fast funding to learn more about all your options.
Working Capital Loans
These short-term loans, known for quick approval and funding, are useful in covering the day-to-day operating expenses of your business. In an emergency, look for a lender familiar with your industry or area who offers small business working capital loans to learn more details.
SBA Disaster Loan
If you are facing a business emergency due to an official natural disaster, this is a unique, low-cost option. SBA loans have extensive applications, though, so they may take longer than you have.
Business Line of Credit or Credit Card
You can apply for credit before or during an emergency and draw on funds within your approved limit. You only pay interest on the amount you use, making this a great option for lower-cost problems.
Merchant Cash Advance
A merchant cash advance (MCA) offers fast funding in exchange for repayments as a percentage of daily or weekly credit card sales. The cost of this loan is higher to account for this flexibility in matching repayments to your income.
Invoice Financing or Factoring
In this financing option, you leverage your unpaid invoices to receive a portion of the payment amount upfront. When the client pays, you repay the lender plus a small fee or percentage of the payment (depending on the method).
When Is It Opportunity Financing?
Opportunity financing is proactive and non-essential. You’re positioning your business to grow, like opening a second location, buying discounted inventory, investing in marketing, or hiring new staff ahead of a busy season.
Imagine you run a successful landscaping company, and a large commercial contract becomes available. If you choose to take it on, you’d need to hire additional workers and purchase more equipment. This contract is an example of an opportunity, and you can consider many financing options to meet your needs or pass on the contract. Your business will continue to run either way.
You usually have time to research loan options and plan ahead when you’re financing for growth, but not always. Sometimes unplanned and time-sensitive opportunities, like a large landscaping project, are your chance for growth, but only if you jump into action. Financing can feel like an emergency need. The difference is that your business does not depend on securing financing in this scenario.
Some examples of opportunity financing include:
- A local competitor shuts down, opening a prime location for expansion. You secure commercial real estate bridge financing to take over the lease until you can secure a long-term loan. You’ve now doubled your market presence.
- A supplier offers a 25% discount for a bulk inventory purchase, but you need $40,000 upfront. You plan to secure a term loan to capitalize on the savings.
- You hire a part-time dental assistant for your practice using your business line of credit. The increased clients and payments cover the cost and boost your revenue.
Loans to Consider for Opportunities
When you’re borrowing for opportunity, the decision should be deliberate. You can evaluate different loan structures, compare lenders, and calculate your return on investment (ROI) without the pressure of your business closing. The world of financing options is open to you, including options that work for emergencies.
These few loan types require more time to be approved and funded, making them better suited for opportunities.
SBA Loans
SBA loans are backed by the federal government. That means they offer competitive rates and partially protect funds. However, the application is extensive, and the approval rate can be slow. Consider this option when you have time to wait before investing in your growth.
Mortgages
Even in the commercial real estate business, obtaining mortgages takes a long time due to the extensive underwriting process. However, they offer the longest repayment terms, the lowest interest rates, and government-backed funding. So, it’s worth the time if you can wait to purchase your new location with a mortgage.
Term Loans
Lenders offer a variety of term loans, including short-term and quickly funded options. If you can take the time to shop lenders and negotiate terms, this type of financing can be customized to your specific needs. Consider different term loan options when financing your opportunities.
Knowledge is Power
By understanding your financial situation, you have the power to choose the right loan and the right lender for your needs.
Different lenders view risk differently. The strictest financiers won’t approve loans to new businesses or ones in financial distress. On the other hand, some alternative lenders specialize in loans for companies with less-than-perfect or limited credit history. You can maximize your borrowing power when you know who to contact.
Rather than applying for financing like you’re frantically throwing another ball in the air, you can confidently address your emergencies or grab opportunities with a loan that meets your needs.
