Nov 6 • 💰 Funding Formula
Three Types of Lenders
Full those seeking business funding, there are basically three major types of lenders. Collateral-based, revenue-based, and credit-based. Let’s review their differences and some lending criteria for each. This is meant to be a cursory review not an in-depth overview. Choosing the right type of funding is critical.
Collateral-Based
Also known as asset-based lending. This refers to valuable assets owned by the borrower that are used as security for the loan. Common examples include real estate (like mortgage notes), equipment, inventory, and accounts receivable. Secured loans offer the best rates as the risk is obviously lower than unsecured loans. The collateral itself has intrinsic value.
Some little-known uncommon examples of asset-based lending are appraised artwork, appraised coins & card collections, and exotic cars. Lenders will provide a portion (they determine risk) of the value of the asset as a secured loan. Meaning if you have an exotic car worth $300,000, you will not be offered a $300,000 loan. You will receive a portion of its value in the form of a loan determined by the lender. For the uncommon examples the collateral is often held in a secured facility until the loan has been repaid fully.
Revenue-Based
Revenue-based lenders provide funding to companies in exchange for a percentage of their future revenue. This means the repayment amount (usually daily or weekly) may fluctuate with the borrower's sales, making it a flexible option for businesses, especially those with fluctuating revenue streams. But today, many revenue lenders offer fixed based amortized loans as well.
Generally speaking, you don’t need good personal credit (500+). Your credit lines are based solely on revenue. Less than $15,000 per month revenue usually generates offers of 25%-75% of your average monthly revenue as a short-term loan (4-months to 12-months). $15,000 per month revenue or more usually generates offers of 100%-200% of your average monthly revenue as a short-term loan (4-months to 12-months). Some lenders require as little as 4-months in business. Revenue-based loans use factor rates (1.18-1.65), not interest rates.
An example is you borrow $10,000 with a factor rate of 1.38 you will pay back $13,800 over the term of the loan. Some revenue-based lenders provide loans for as little as $500.00 making these loans available to gig-workers, Uber/Lyft drivers, and solopreneurs. Borrowers and amounts banks will not consider. These loans are quick as well with some lenders providing same-day funding.
Credit-Based
Credit-based lenders provide unsecured loans or financing based on a borrower's creditworthiness, primarily evaluated through their credit history and financial standing. This contrasts with asset-based lending, where the loan is secured by collateral like accounts receivable or inventory. Credit-based lenders assess factors such as credit scores, credit payment history, income, and overall financial health to determine loan eligibility and interest rates. Personal credit scores of 680+ FICOS on all three bureaus and less than 30% current credit utilization are typical data points just to be eligible. The higher your credit score and lower your current credit utilization secure higher credit lines.
You don’t want any major derogatory marks such as BK’s, Collections, Charge-Offs, Foreclosures, or late payments in last 3-years. There are other data points as well that help with securing higher credit lines.
Credit-based lenders are great for start-ups or businesses with no revenue or little revenue. Some other advantages are the ability to obtain 0% interest rates for up to 18-months on certain credit-based products.
Another benefit of this type of funding is you can use co-signers/credit partners if you personally don’t have the credit file for funding. The credit lines will be issued in your business entity name tied to your business EIN#, not the credit partner’s personal credit. In fact, these credit lines will not show up on anyone’s personal credit reports. When you utilize these credit lines it will not hurt your credit score.
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Three Types of Lenders
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