19/04/2024

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Emergency Business Loans 2023 -The Essential Guide

Emergency Business Loans 2023 -The Essential Guide

What are Emergency Business Loans?

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Emergency small business loans are fast-funding financing options to provide just-in-time funds when a small business faces an emergency. Most of these loans are short-term, repaid within 18 months or less.

A business emergency can arise at any time and from anywhere. Some emergencies are from external factors such as natural disasters, tax liens, lawsuits, or changes in market conditions. Other emergencies can arise internally, such as employee-caused accidents, unplanned hazards, or critical equipment breaking down.

Chances are, if you’ve been running a business, you’re already familiar with emergencies big and small. Perhaps you have an emergency plan in place, but it’s not always possible to budget for sudden needs.

While business insurance can cover some emergencies, others aren’t covered. Even when you have coverage, you might need additional working capital to get operations up and running again.

What types of Emergency Business Loans are available?

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There are several types of fast funding options for emergency business cash. Here are the best emergency small business loan options.

Business Term Loan

  • Loan amount: $10k – $5 million.
  • Factor rates: Starting at 1%-4% p/mo.
  • Term: 3 months – 5 years.
  • Speed: 1-3 business days.

Term loans are the most common form of business financing. With a term loan, the small business receives a large sum upfront, which it then repays, plus interest and fees, in fixed payments.

Businesses can use term loan proceeds as working capital for various business emergencies. You can use the funds to repair equipment, replace inventory, hire new staff, and more.

Many online lenders only offer short-term loans, which must be repaid within 18 months. However, several alternative lenders provide medium- and long-term loans as well.

Business Line of Credit

  • Loan amount: $10k – $1 million.
  • Factor rates: Starting at 1% p/mo.
  • Term: Up to 36 months.
  • Speed: 1-3 business days.

Business lines of credit (LOCs) are short-term financing that offers excellent flexibility. Instead of a single loan disbursement, your funds are activated as an available credit limit.

The credit limit essentially gives you funding on demand. LOCs are excellent for covering unexpected costs. The trick to a line of credit is to have it active before an emergency. It’s essentially emergency funding available in your back pocket when you need it the most.

You can draw funds from your credit limit as needed. You only pay interest on the money you draw and never have to draw the total amount.

Once you repay what you took out, the credit limit replenishes, and your funds are available for the next time you need them. This is called revolving credit and works like a credit card.

Merchant Cash Advance

  • Loan amount: $10k – $1 million.
  • Factor rates: Starting at 1%-6% p/mo.
  • Term: Up to 24 months.
  • Speed: 1-2 business days.

A merchant cash advance (MCA) is a type of working capital loan that provides funding in the form of a lump sum of cash. The advance is repaid with a percentage of your business’s future sales.

Merchant cash advances are very accessible for small business owners with bad credit. They also provide immediate funding, so you can quickly cover emergency expenses.

MCA funders base your approval amount on your previous sales history and projected future receivables. That’s because your sales are the primary source of repayment.

Most MCAs require daily payments, but some are weekly. In a traditional MCA, the repayment amount comes directly from your debit or credit card sales.

However, many MCA companies are moving to a more reliable process of repayment where the funds are automatically debited from your business bank account via ACH transfer.

Invoice Factoring

  • Loan amount: $10k – $10 million.
  • Factor rates: Starting at 1% p/mo.
  • Term: Up to 24 months.
  • Speed: 1-2 business weeks.

Invoice factoring, also called accounts receivable factoring, converts your unpaid invoice into immediate working capital. Like an MCA, the process is technically a business-to-business transaction, not a loan.

Companies that sell on credit deliver their products or services to a client and issue an invoice at a later date. The process is convenient and helps some companies attract more business.

However, delays between delivering the goods and receiving payment may cause critical cash flow interruptions. This process lets you sell or “factor” those unpaid invoices to a third-party financial services business called a factoring company to smooth out cash flow gaps.

The factoring company issues funds based on the invoice’s value, called an advance rate. Most advance rates are between 75%-95%. The factoring company then owns the invoice and collects payment from your client.

SBA Disaster Loan

The US Small Business Administration’s disaster loan program helps communities affected by natural disasters such as tornadoes or hurricanes. The primary loan for small business owners is the Economic Injury Disaster Loan (EIDL).

In addition to disaster assistance for small businesses, the SBA provides physical damage loans for homeowners, renters, and property damage to the business. Business owners who reside in a disaster area can receive both an EIDL loan and a physical damage loan, provided the combined loans don’t exceed $2 million.

Eligible businesses apply for EDIL and physical damage loans directly through the SBA. As previously stated, the maximum loan amount is $2 million.

Companies can use Economic Injury Disaster Loans for:

  • Working capital needs.
  • Continuing operational costs like healthcare benefits, rent, and utilities.
  • Fixed debt payments.

Physical damage loans provide funds for repairs not covered by insurance. Small business owners can use the funds to repair or replace the following:

  • Real property.
  • Equipment and machinery.
  • Fixtures.
  • Inventory.
  • Leasehold improvements.

You cannot use the funds to upgrade or expand a business property.

Terms for both EDIL and physical damage loans go up to 30 years and are determined by the organization’s ability to repay the loan. Loan repayments are deferred for the first 12 months, so businesses have up to a year to get business back up and running before repayments begin.

Interest loans cannot exceed 4% for EDIL loans. For physical damage loans, the interest rates are:

  • No greater than 4% for borrowers who couldn’t obtain credit elsewhere.
  • No greater than 8% for borrowers who could obtain credit elsewhere.

There are no prepayment penalties; the only other fee is a $100 processing fee for loans over $25,000.

What are the advantages of Emergency Business Loans?

The primary benefit of an emergency business loan is that it can provide immediate funding when you need it the most. Online lenders can offer quick and easy applications, and most can approve business loans within 24 hours.

Emergency business loan lenders can also fund these loans quickly once you’re approved. You can typically receive funding within 24-72 hours of approval, with some financial services companies offering same-day business funding.

You don’t need excellent credit or a long time in business to qualify for most online emergency business funding options. A variety of loan options are available, so you can pick one that best suits your business’s strengths.

What are the disadvantages of Emergency Business Loans?

The drawback to emergency business financing is that it can be expensive in terms of rates and fees. That’s the cost of the lowered qualifications and the fast approval and funding times.

Another potential pitfall is that the funding doesn’t solve the emergency. You want to ensure the money you receive will help with the crisis and that you’re not taking on more debt unnecessarily.

These business loans also have frequent repayment schedules. Small businesses typically have to repay emergency business funding on daily or weekly schedules. In addition, you might have to sign a personal guarantee.

Pros & Cons

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Pros:

  • Provides fast funding to respond to a business emergency.
  • Quick & easy online applications with fast approval decisions.
  • Doesn’t require excellent credit or several years in business.
  • Multiple emergency business funding programs are available.

Cons:

  • Alternative business loans can be expensive.
  • Potential funding won’t solve the emergent issue.
  • Requires frequent repayments in most cases.
  • Short repayment terms.

How do I qualify for an Emergency Business Loan?

The qualifications vary by loan type. Here are the recommended minimums for each emergency business loan option.

Business Term Loan

  • Minimum credit score: 550+.

  • Time in business: 6 months+.
  • Minimum annual revenue: $75k+.

Business Line of Credit

  • Minimum credit score: 575+.
  • Time in business: 1year+.
  • Minimum annual revenue: $75k+.

Merchant Cash Advance

  • Minimum credit score: 550+.
  • Time in business: 4 months+.
  • Minimum annual revenue: $120k+.

Invoice Factoring

  • Minimum credit score: 550+.
  • Time in business: 1 year+.
  • Minimum annual revenue: $250k+.

SBA Disaster Loan

Eligible businesses include:

  • Small businesses.
  • Small agricultural cooperatives.
  • Most private nonprofit organizations.

To qualify, your business must be in a declared disaster area. The SBA provides a convenient tool to check for disaster declarations in your area.

Your business must also have suffered substantial economic injury, meaning you cannot meet your normal financial obligations or pay required operating expenses. The loan amount you receive is based on the extent of the economic injury and your business’s financial needs.

The SBA only approves EDIL loans when it determines the company couldn’t obtain credit elsewhere.

How to apply for an Emergency Business Loan:

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The application process may be slightly longer or shorter for different types of loans. However, all variations require very little paperwork, and you can get funded in just a few business days (except for SBA loans).

Here’s how to get started:

Step 1: Choose Your Emergency Business Loan

We usually recommend the loan options that feature the most uncomplicated repayment terms for your cash flow. This depends on the length of your cash flow gap and how quickly you can pay off the loan.

Step 2: Gather Your Documents

This step depends on the type of loan options you’re applying for. Here are the documents and information you may need to get started for each option:

  • Voided business check.
  • Recent business bank statements (3 Months).
  • Driver’s license.

Step 3: Fill Out the Application

You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

Step 4: Speak to a Representative

Once you apply, a representative will contact you to explain the repayment terms, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees from lenders during repayment.

Step 5: Receive Approval

For most emergency loan products, credit approval only takes a few days. Depending on the type of loan, funds should appear in your bank account in 1-3 business days for most funding options.

Applying for an SBA Disaster Loan

SBA disaster loans are the only package in the program where you apply directly to the Small Business Administration.

The steps to apply are as follows:

  1. See if the SBA declared your area a disaster.
  2. Apply online, which involves creating an online account.
  3. Check your status through your online account.

You may also be required to complete IRS Form 4506-T with your loan application. The form gives the SBA permission to access tax information about your company.

Frequently Asked Questions

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Here are the most common questions about emergency business funding.

When should small businesses consider Emergency Business Loans?

There are many reasons why a business might consider emergency business funding. Here are a few scenarios that could prompt the need for a business loan fast.

  • Natural disasters such as hurricanes, tornados, earthquakes, etc.
  • Sudden loss of workforce due to shifts in the marketplace.
  • Customers who don’t pay their invoices causing cash flow emergencies.
  • Fires, flooding, or other damage to property or inventory.
  • Data or security breaches.
  • The sudden death of a team member, senior leadership, or other stakeholder.
  • Tax liens or other changes in tax law that put your business in the negative.
  • Suppliers going out of business or unable to deliver goods & services as expected.
  • Projects or construction going over budget.
  • Government-mandated shutdown due to a pandemic or threat.
  • New laws or regulations that change how you do business.
  • Equipment or vehicles breaking down and needing repairs.
  • A lawsuit or other legal challenges.

Can I get an Emergency Business Loan with bad credit?

Yes, getting an emergency business loan with less-than-stellar credit is possible. One of the main benefits of alternative loans is the accessibility for credit-challenged small business owners.

However, you should know that the lower your credit score, the higher your interest rate. Many small business owners use bad credit business loans as emergency bridge financing to help power through a crisis or other immediate issues affecting the business.

Once you solve the emergency, you can begin building your credit and time in business to qualify for lower-cost financing in the future. It might be possible to refinance a bad credit business loan with a lower interest rate once your business stabilizes and your credit improves.

Yes, getting immediate funding to help solve a business emergency is possible. Most online lenders can approve applications within 24 hours if you have the appropriate documentation ready.

Once approved, you can receive your funds for most lending products in 1-3 business days. It might be possible to get same-day funding if everything goes smoothly.

Do banks offer Emergency Business Loans?

Many banks can offer emergency funding to cover unanticipated expenses. However, bank loans are slow to close and fund, involve detailed applications, and often have strict eligibility criteria. While bank loans have lower costs, the timeline might not work for you during a time-sensitive emergency.

That’s why most small businesses turn to alternative lending options when faced with an urgent business loan need. The costs are higher, but that extra expense is often worth it when faced with an emergency.

What are my alternatives to Emergency Business Loans?

Some small businesses might not qualify for emergency business financing with alternative lenders. Or you might qualify, but your business can’t afford the interest rate and fees. Some small business owners might not feel comfortable taking on a loan.

In either case, here are some plausible alternatives to emergency small business loans.

Personal loans: It’s not uncommon for startups or companies without established business credit to use a personal loan for business needs. While it’s far from an ideal solution, it could help in a pinch.

Crowdfunding: Businesses with a passionate fan base could potentially raise emergency funds through a crowdfunding campaign. This option is more practical when your business has a compelling story for its emergency.

Business credit cards: Much like personal loans, entrepreneurs often use business credit cards when starting out. Most business credit card companies base approval on your personal credit score and income. Just like individual consumers might use a personal credit card in an emergency situation, business credit cards can provide immediate funding when your business faces an emergency.

Emergency Business Loans – Final Thoughts

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As a small business owner, you’re probably familiar with the adage, “Hope for the best, plan for the worst.” Every business faces its share of ups and downs, and responding to emergencies is part of the job. It’s always good to have a plan of action when the unexpected occurs.

Knowing your options for emergency small business loans should be a part of that plan. While you should be cautious about taking on new debt to solve a temporary problem, sometimes it’s the only way. When faced with that situation, you should know which lending options best suit your situation and business. That way, you can ensure timely funding and mitigate your costs with the loans your company is best situated to repay.

Contact us if you have any questions on emergency business loans or want to apply for a small business loan. Our loan executives can help you find the best funding solution to solve your emergency situation.