Cofounder / Partner at Lendzi.
Just as it’s important to diversify a company’s investments, it can also be wise to diversify its debt portfolio. While traditional lending products like fixed-term loans are still the most common option for many companies, as a cofounder of a lending company, I believe it’s financially prudent to take a look at a variety of options, particularly in a high-inflation, rising-rate environment. In addition to direct business loans, personal loans and even credit cards, when used in conjunction, can properly diversify a company’s debt portfolio so that business owners receive the maximum benefit for the lowest cost.
Direct Business Loans
I’ve found direct business loans are generally the backbone of a business financing strategy. Lenders can offer so many types of direct business loans nowadays that for many small companies, this alone can be enough funding.
For example, throughout most of 2020 and 2021, fixed-rate loans were the winning ticket, as interest rates hovered near all-time lows for most of those years. But 2022 has already seen a dramatic change, and now adjustable-rate loans are making more and more sense. Market rates have already spiked in anticipation of pumping up the federal funds rate throughout the year, so locking in an adjustable-rate loan might prove to be a big winner down the road if rates drift back downwards. By choosing an interest-only adjustable-rate loan, monthly payments will be lower right off the bat, which can instantly help a company’s cash flow.
For entrepreneurs looking to grow their company with new buildings or equipment, a secured loan tied to new (or existing) assets might be the right call. For something more short-term in nature, a merchant cash advance or invoice financing can be a way to use cash flow and/or accounts receivable to help manage debt.
When choosing the direct loan option, it’s important to take all risks into account and manage them properly. For example, if you choose an adjustable-rate loan, be prepared for rates rising instead of falling, which can result in an immediate drain on your cash flow. Similarly, using a secured loan may get you a lower rate, but you’ll also be putting your collateral at risk. Some short-term financing options, like a merchant cash advance, may carry high interest rates on an annual basis. As there are a lot of potential land mines, it’s important to be informed as you go into the process.
Personal Loans For Business
Personal loans rely on a business owner’s good credit rather than the balance sheet of the company in order to qualify. For those just starting out or with companies that don’t yet have a proven track record of consistent cash flow and earnings, it might be one of the better options available.
Personal loans typically offer the following additional benefits for young companies online applications available 24/7, rapid responses, higher credit lines than owners might be able to get with traditional financing and potentially lower interest rates based on their credit and the state of the company.
For young or rapidly growing companies, a personal loan taken in the name of an owner can be the fastest and easiest way to both get approved and to get actual money in their bank account. Other forms of traditional bank financing may take days or even weeks for approval.
Personal loans can also make a great option even for more established companies that already have traditional financing in place. For example, personal loans can be used to rapidly plug a financing hole that can be paid back when the next invoices get filled.
However, personal loans are also not without risks. Personal loans may carry higher interest rates than secured or good-credit business loans, and they may expose business owners to personal liability for repayment. For this reason, many business owners choose to keep personal and business funding separate.
Credit Card Strategies For Business Funding
When most business leaders think of financing options, credit cards aren’t usually at the top of the list, nor should they be. But when thinking of a complete debt portfolio, business credit cards can serve an important function on a number of levels.
For starters, I’ve found credit cards are the only lending option that provide actual, tangible benefits that effectively don’t cost anything. Many cards offer big sign-up bonuses of miles or points, for example, and even if you have to pay a fee for these types of cards, the sign-up bonuses alone might outweigh the costs. A 100,000-mile sign-up bonus, for example, might be worth over $1,500 in airfare, which is more than enough to offset even a $550 annual fee. Some cards also offer 0% introductory balance transfer and/or purchase APRs for as long as 18 months. Add in the ancillary benefits rewards cards offer, such as kickers for spending in certain categories, travel and mobile phone insurance and/or annual travel credits or airline lounge memberships, and business credit cards can make sense for many businesses.
That being said, of all types of financing, credit cards carry perhaps the highest risk. Unlike most traditional business or personal loans, credit cards typically carry interest rates in the high double digits, sometimes topping 20%. If you fail to pay off the balance by the time your promotional period ends, all of the benefits can easily get outweighed by interest charges. If you fall behind on payments, interest can compound rapidly, fees can accrue and your credit rating can be damaged. When using credit cards as a financing option, it’s important to take extra care to manage your debt load.
Financial conditions are changing all the time, and it’s always prudent to review all available options for your business credit. But rates have been moving more sharply than at any time in recent memory in 2022, thanks to the spike in inflation and the Fed’s rate hike policy in response. I believe it is more important than ever to find the best mix between direct lending, personal loans, credit cards and other types of business financing.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.