Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

If you’re like most small business owners, you’re probably unsatisfied with being marginally profitable. After all, the more revenue you can generate, the more you can support your livelihood and that of your employees and customers.

Plus, the more profitable your operation, the more likely you’ll qualify for a small business line of credit, among other funding from banks, other financial institutions, or investors. And with capital injections, you’d have a larger opportunity to grow profits even further.

So, whether your business remains a true startup or you’re looking to expand an established outfit, carefully examine your options to take the best step forward.

What Profitability Really Means

Profitability is defined as a company’s ability to generate revenue that exceeds its total expenses. Selling products or providing a service to customers are the sources of a business’ revenue. Its operating expenses, meanwhile, are the costs related to generating products or services, such as:

• Employees
• Facilities
• Materials
• Rent
• Property taxes
  
  As mentioned, your objective likely isn’t just to turn a profit, but to produce a substantial profit margin that is substantial.
  
  Profit margin = Sales - Costs
  
  Just as revenue is different from profit, so are your business’s income and cash flow.
• Profit: When a company’s income exceeds the expenses and costs necessary to keep it running
• Income: The money that a company earns by selling its products or services (prior to the deduction of expenses)
• Cash flow: The money that moves in and out of a business on a recurring business (with a highly positive cash flow signaling the company’s strength)

6 Ways to Boost Profits, Including Small Business Lines of Credit

Now that you know more about profitability, consider these small business financing options to grow your company.

1. Lines of credit for new businesses

A business line of credit for new business gives you a pre-approved credit limit, from which you can draw as needed. You pay interest only on the amount you withdraw. That makes credit lines especially advantageous if you’re unsure how much funding your business requires or when you’d need to tap it.

You might also consider a small business line of credit for its relatively fast approval processes and accessible eligibility requirements. It also offers the chance to improve your business credit.

The drawback is related to its potential cost. The interest rates of a business line of credit for new businesses can be high, particularly for unsecured lines (not requiring collateral). On the bright side, their APRs tend to be lower than business credit card rates.

2. SBA Loans

The U.S. Small Business Administration (SBA) offers commercial financing backed by the SBA (sba.gov) through its SBA 7(a) small business loan program. The most common type of SBA loans, an SBA 7(a) loan assists businesses in the purchase or refinance of owner-occupied commercial properties up to $5 million. This loan also gives the business owner a chance to borrow funds for working capital.

You might prioritize a 7(a) loan if you’re unable to secure credit (at more attractive terms) elsewhere. Characteristics of these loans include:

• The maximum allowed interest rates for the program are based on the Wall Street Journal Prime Rate, plus a margin of a few percentage points.
• Interest rates can be fixed, variable or a combination of the two.
• Repayment terms for loans used for commercial real estate may be as long as 25 years.
• Each monthly payment would be the same until the loan is fully repaid.

3. Merchant cash advances

In this instance, you receive an upfront lump sum, then repay it with a portion of your future credit and debit card sales, plus a fee. That makes merchant cash advance (MCA) an expedient way to access cash in an urgent situation. Perhaps you receive a bill you didn’t expect or must act quickly to capitalize on a new opportunity.

Advances are also relatively accessible, as they don’t require collateral or a minimum credit score. Lenders instead make their decisions based on your current operations and sales projections. If your business endured a rough start but still anticipates a rosier financial future, a merchant cash advance might be the best option for a fast business loan.

The fine print: An MCA has potentially costly factor rates (as opposed to traditional interest rates). Factor rates, which are often expressed as a decimal ranging from 1.1 to 1.9, usually equate to a high effective annual percentage rate (APR) that can be burdensome to your budget.

4. Crowdfunding

If you like the idea of fundraising working capital without yielding ownership, consider this strategy. You might leverage online platforms and social media to crowdfund “donations” from friends, customers, family and possibly strangers. You could entice these individual “investors” with your company mission and progress toward its goals.

Crowdfunding can be based on...

• Donations: Provide no financial reward to the donor
• Rewards: “Repay” the contributor, perhaps with a product or a service (provided by the business seeking funding)
• Equity: Invite contributors to become part-owners of the business and potentially receive a financial return on their investment (perhaps in the form of profit-sharing, dividends, or other distributions)
  
  Just keep in mind that...
• Online platforms might take a cut of the money raised as their fee.
• Presenting your business to a large audience at one time online might limit the need for piecemeal marketing, but it can still be time-intensive.

5. Private financing

Like crowdfunding (but without platform fees and social media noise), you might ask family, friends, and colleges for help funding a new venture. It’s a good way to avoid astronomical interest rates. You might be skittish about mixing personal relationships with business, and rightly so. Relationships could be at risk.

6. Equity financing

If you sell a stake of ownership interest to investors, you’re raising funds via equity financing. “Investors” might not be as fancy as venture capital firms. They could be family and friends.

Unlike borrowing a loan or line of credit, equity financing doesn’t necessarily require repayment. However, you might decide to “buy out” the stake of an investor down the road.

FAQs about Small Business Financing

Are there business lines of credit for new businesses specifically?

Yes, some lenders and loan marketplaces specialize in connecting startup founders with variable capital. However, even the most flexible financial institutions will review your credit and cash-flow, among other factors, when determining your eligibility.

What determines business line of credit interest rates?

Lenders look at factors like your personal and business credit, time in business, and monthly or annual revenue when quoting rates for credit lines.

Should you borrow a term loan or a credit line?

A term loan can be the better option if you have fixed, one-time funding needs and prefer installment-style repayment. A credit line is more flexible, however. It allows you to draw funds as needed.

What about short-term business loans?

A short-term loan requires frequent (sometimes weekly) payments and should therefore be considered with caution. The frequent payment schedule may be burdensome if you don’t have strong cash-flow.

What other ways can small business owners boost profits?

Yes, you might also consider reducing overhead costs, raising prices and increasing your marketing budget. Take advantage of available resources such as Small Business Development Centers for training and workshops to grow your business, learn about IRS tax credits for small businesses, and more.

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