The evolution of the business financing industry has turned several types of small business loans that previously weren’t as popular into household names. These programs tend to be the specialties of the newest and most innovative business financing companies in the industry. Examples include the merchant cash advance, which is a specialty of United Capital Source as well as Square Capital, though each company has its own variation. The increasingly popular Kabbage offers just one program; a business line of credit. Another new player on the roster is the revenue based business loan, or business cash advance.
Many small businesses, however, still prefer the classic business term loan. Despite the undeniable benefits of the newer options, business term loans can most certainly be the most effective choice for growing your business. In the construction industry, for instance, contractors continue to rely on business term loans for important projects.
Why this industry favors the most traditional option
Like myriad other industries, construction contractors favor business term loans primarily for their fixed interest rates and durations. You know exactly how much money you’ll be paying per month, which makes it easier to calculate how much debt you can afford to take on beforehand. Before the emergence of companies like United Capital Source, the biggest disadvantage of business terms loans was the amount of time you had to wait to receive funding. That waiting period has since gone from approximately three to four months to three to four business days. This is vital for contractors, who don’t always know how much an upcoming project is going to cost in the months before they get started.
Once that total cost is figured out, it’s usually much higher than the typical amounts that are accessed through other programs. This is perhaps the second biggest reason term loans are preferred by contractors who often work with mass quantities of brick, wood, or steel. Business term loans carry the highest borrowing limits available. This is the kind of money contractors need to pay for materials, labor, and other business expenses until invoices for their work are processed. Other companies that require similarly large upfront payments include limousine and rental car operators, which must purchase entire fleets of vehicles as soon as their more popular models become outdated.
Business credit is crucial for construction contractors
Some of the alternatives to business term loans were created primarily to increase accessibility to funding. These programs are easier to qualify for and pay back, especially for businesses with unstable cash flow. While business term loans from United Capital Source are significantly more accessible than bank loans, the program remains among the least accessible on the market. Borrowers must possess stellar credit, strong cash flow, and consistent revenue. Having more than enough money in the bank and the ability to provide collateral would be extremely helpful as well.
This partially explains why business term loans are prevalent for construction contractors. In this industry, it’s very difficult to stay competitive and take on increasingly lucrative projects without stellar credit and capitalization. Just a few months’ worth of repayments for a business term loan can boost your business credit score, whereas payments for other programs, like a merchant cash advance, will do nothing for your personal or business credit score. Business term loans are therefore an extremely attractive option for anyone looking to acquire new business partners, from retail stores to wholesalers.
What exactly is a long-term investment?
Numerous business funding programs are designed for long-term investments. There is a distinct difference, however, in the type of long-term investment that is suited for a business term loan compared to another option. Business term loans are ideal for particularly expensive and lengthy efforts that do not contribute to revenue for an extended period of time. Why do these stipulations work for certain businesses? Because their businesses are probably doing just fine without the additional revenue. This suggests that a business term is often more of a “want” than a “need.”
Other programs are geared more towards the latter category. In such cases, the borrower might need the funds to help cover regular business expenses until the investment begins to increase revenue. Rather than making fixed monthly payments, the borrower might choose a program that allows him or her to pay off the brunt of the debt when cash flow has stabilized. Had the borrower been given a business term loan instead, the repayment structure might only do more damage to cash flow or force the borrower to dig into operational or personal funding.
If you have the means, why not?
As you can see, the general consensus in regards to business term loans is “if you can qualify, go for it.” In fact, a number of UCS clients took out more accessible business loans solely to boost their credit scores so they could eventually qualify for business term loans. These are the kind of options younger construction companies should consider because at some point, a business term loan will be needed to finance a potentially game-changing project.