Understanding Lending: The Three Paths to Business Financing (Funding Basics Episode 1)

Jul 30, 2023

In the ever-evolving business world, understanding the various facets of lending is crucial. Lending products broadly fall into three categories: credit-based, revenue-based, and asset-based lending. Delving deeper into these paths reveals an array of financing options tailored to meet diverse business needs.

The Three Pillars of Lending

Credit-based lending operates primarily based on the client's personal and business credit. Instruments like personal credit cards, home equity lines of credit, and business credit cards are typically leveraged under this umbrella. The next category, revenue-based products, includes revenue term loans and revenue lines of credit, where income verification is pivotal and lending is anchored to the business's revenue generation. The third pillar, collateral-based lending, encompasses merchant cash advances, high-interest loans akin to payday loans in the business industry.

Exploring the Many Faces of Funding

Peering further into the labyrinth of lending reveals options like merchant cash advance (MCA), purchase order financing, and account receivable financing. MCA provides funding based on future revenue, while purchase order financing grants funds against a customer's purchase order. In contrast, account receivable financing permits businesses to trade their outstanding receivables for immediate cash.

A Closer Look at Financing Options

Diverse financing options like SBA loans, personal loans, and asset-based loans help businesses meet a range of needs. Equipment financing and leasing, stock loans, and 401(k) financing offer more specialized pathways to business funding. Navigating these options, however, necessitates understanding the unique terms and criteria associated with each.

Credit: A Compensating Factor, Not a Disqualifier

When it comes to lending, credit often serves as a compensating factor rather than a disqualifier, especially in segments like asset-based lending, equipment financing, and real estate funding. Understanding how credit influences the lending process aids in effective financial planning and decision-making.

Understanding Lending Criteria and Parameters

As we dissect the paths of lending further, it becomes evident that each has unique criteria. While credit-based funding necessitates good credit, revenue-based and asset-based funding accommodate all credit types. Moreover, income verification, time in business, and credit inquiries differ in their relevance and importance across the lending paths.

Mapping Out Funding Options

The funding potential varies across the three lending paths. Credit-based funding typically ranges from $10,000 to $150,000; revenue-based lending can span from $5,000 to over $1 million; and asset-based lending usually caps at around $50,000. Understanding these parameters and the timeframes for funding is crucial in charting the course for business financing.

Mastering the intricacies of lending is no small feat, but it is an essential one. Whether it's credit-based, revenue-based, or asset-based lending, understanding the path that best suits your business needs can make all the difference in your journey towards financial success. So equip yourself with knowledge and venture confidently into the world of lending.

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