Emergency Business Loan and Alternative Financing Options For Small Business

Updated on:
July 31, 2023

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Emergency business loans and other types of financing exist so that a business can obtain cash quickly to address unexpected and urgent financial needs. Emergency business funding is typically used to cover short-term cash flow gaps or to deal with an unexpected expense, such as an equipment breakdown, natural disaster, or unexpected opportunity.

Whether it’s a natural disaster, a sudden downturn in the market, or a health crisis, emergencies can leave businesses scrambling to find the emergency business loan options they need to survive. But with so many lenders and loan options available, it can be overwhelming to know where to start. 

Types of Business Emergencies

Emergencies can happen to any business at any time. That’s the unfortunate nature of emergencies. One moment everything is going just fine for your company, and the next you’re in dire need of money to stay above water.

While no one can predict every possible emergency that could present itself for your company, many

  1. Natural disasters: Small businesses may need fast funding to recover from the damage caused by natural disasters such as hurricanes, earthquakes, or floods.

  2. Unexpected expenses: Small businesses may face unexpected expenses such as equipment breakdown, sudden rent increases, or emergency repairs that require fast funding to address.

  3. Loss of key customers: A sudden loss of key customers can put a significant dent in a small business’s cash flow, necessitating fast funding to bridge the gap until new customers are found.

  4. Inventory needs: Small businesses may require fast funding to take advantage of a sudden opportunity to purchase inventory at a discount, or to restock inventory that has been depleted due to high demand.

  5. Health emergencies: A small business owner or key employee experiencing a health emergency may require fast funding to cover medical expenses or keep the business afloat during the individual’s absence.

Types of Emergency Business Loans

Small business loans come in a variety of sizes, structures, and terms. On top of that, there are loan programs created specifically to cater to businesses in certain types of emergencies.

EIDL Loans

EIDL stands for Economic Injury Disaster Loans, which are low-interest loans offered by the U.S. Small Business Administration (SBA) to small businesses, agricultural cooperatives, and most private non-profit organizations affected by a declared disaster.

These loans are intended to provide working capital to help small businesses meet financial obligations and cover operating expenses that they would have been able to meet had the disaster not occurred. EIDL loans have longer terms than other SBA loans, and repayment terms can be up to 30 years.

To be eligible for an EIDL loan, a business must be located in a declared disaster area and have suffered substantial economic injury as a result of the disaster. Non-profit organizations are also eligible for EIDL loans.

The application process for an EIDL loan typically involves the following steps:

  1. Apply online through the SBA’s Disaster Loan Assistance portal, which will require you to provide basic information about your business and your disaster-related losses.

  2. Submit the required documentation, which may include your most recent tax returns, a completed SBA loan application, a personal financial statement, and other supporting documentation.

  3. Wait for a loan officer to review your application and assess your eligibility for the loan. The loan officer may request additional information or documentation as needed.

  4. If approved, sign loan closing documents and return them to the SBA. Funds will then be disbursed to your business’s bank account.

Note that the application process can be time-consuming, and it may take several weeks or even months for your loan to be approved and disbursed. It’s important to be patient and persistent in following up with the SBA to ensure your application is processed as quickly as possible.

Business Lines of Credit

A business line of credit is a flexible form of financing that allows a business to access funds on an as-needed basis, up to a certain credit limit. It works a lot like a business credit card, with the business only paying interest on the amount borrowed.

Business lines of credit are good for emergencies for several reasons:

  1. Flexibility: A business line of credit can provide a readily available source of funding that can be drawn upon as needed. This allows businesses to quickly access funds to address unexpected expenses or cash flow gaps.

  2. Costeffectiveness: Unlike term loans, businesses only pay interest on the amount of funds they actually use from the line of credit. This can make a business line of credit more cost-effective than other types of financing.

  3. Speed: Once a business line of credit is established, funds can be accessed quickly and easily. This can be crucial in an emergency situation where time is of the essence. No need to apply for a new loan.

  4. Control: With a business line of credit, businesses have control over how much they borrow and when. This can allow them to manage cash flow more effectively and avoid taking on unnecessary debt.

Alternative Financing: Invoice Factoring and Merchant Cash Advances

Invoice factoring and merchant cash advances are two popular forms of business financing that are not loans.

Invoice Factoring

Invoice factoring is a form of short-term financing in which a factoring company buys your unpaid invoices. Because a company is buying your company’s unpaid invoices, invoice financing is not a loan, and thus not subject to the regulations and laws that loans are.

The factoring company typically advances a percentage of the invoice value, with the remaining amount (minus fees) paid to the business once the customer pays the invoice. The company receiving financing loses out on a small percentage (typically about 5%) of the total value of the invoices in exchange for quick financing, which is a huge benefit when you need funds the same day.

Invoice financing can be helpful in an emergency for several reasons. First, it provides businesses with a quick and reliable way to access capital without having to wait for customers to pay their invoices. This can be essential for covering immediate expenses or taking advantage of opportunities that require upfront funding.

Second, invoice financing can be a good option for businesses with less-than-perfect credit, as the loan is secured by the value of the invoices rather than the business’s credit history or assets.

Finally, invoice financing can be a more affordable option than other forms of short-term business financing. It’s a one-time transaction, not a month-by-month repayment situation, so the fees you pay when the factoring company makes its purchase are the total fees paid.

Merchant Cash Advances

A merchant cash advance, or MCA, is a type of financing in which a business receives a lump sum of cash in exchange for a percentage of future sales. The amount of the advance and the repayment terms are based on the business’s credit card sales. Much like invoice financing, MCAs are not loans, as they’re based on the buying of future sales.

Merchant cash advances can be a good option for emergencies for several reasons:

  1. Fast funding: Merchant cash advances can be approved and funded quickly, often within a matter of days. This can be crucial in emergency situations where time is of the essence.

  2. Easy qualification: Merchant cash advances are often easier to qualify for than traditional loans, as they are based on the business’s credit card sales rather than its credit score or financial history. If your company has annual revenue but bad credit, you might struggle to secure a bank loan. MCAs will be a simple solution.

  3. No collateral required: Merchant cash advances are unsecured, which means that businesses do not need to provide collateral to secure the financing.

  4. Flexible repayment terms: Repayment terms for merchant cash advances are typically based on a percentage of the business’s future credit card sales. This means that repayment amounts will vary depending on how much the business is selling. During slow periods, the repayment amount will be lower, which can make it easier for businesses to manage their cash flow.

Emergency Business Loan Options from Alternative Lenders

Alternative lenders are non-bank financial institutions that provide financing to businesses and individuals outside of traditional banking channels. These lenders offer a wide range of financing options, including term loans, lines of credit, and merchant cash advances.

Alternative lenders can be a good option for businesses that have been turned down for financing by traditional banks or are looking for financing options with more flexible terms. They often have less stringent qualification requirements and can provide faster funding than traditional lenders, which is exactly what a business needs in times of crisis.

Examples of alternative lenders include online lenders, peer-to-peer lending platforms, and crowdfunding platforms. Some alternative lenders specialize in certain types of financing, such as equipment financing or invoice factoring.

Types of alternative lenders

Online lenders

Online lenders are financial institutions that provide loans through online platforms. They are helpful in emergencies because they offer quick and convenient business funding without the need for extensive paperwork or in-person visits to a bank or credit union. Borrowers can apply for loans from anywhere, at any time, and usually receive funds within a short period of time, making them an ideal option for those who need cash urgently.

Additionally, online lenders may offer more flexible borrowing terms, such as lower credit score requirements, than traditional lenders. However, it is important to carefully research and compare online lenders to ensure that they are reputable and offer fair loan terms.

Peer-to-peer lenders

Peer-to-peer (P2P) lenders for businesses are online platforms that connect small and medium-sized enterprises (SMEs) with individual and institutional investors who are willing to lend money. P2P lending can be helpful for businesses in an emergency for several reasons.

First, P2P lenders can offer quick access to capital, often with shorter approval times and less paperwork than traditional lenders. This can be especially important in an emergency when businesses need funds quickly to cover unexpected expenses or to take advantage of opportunities.

Second, P2P lenders may be more accessible and flexible than traditional lenders, particularly for small businesses that may not have an extensive credit history or significant assets to use as collateral. Some P2P lenders may also be willing to consider non-traditional forms of creditworthiness, such as social media and sales data, to evaluate a business’s creditworthiness.

Finally, P2P lenders may offer lower interest rates and fees than traditional lenders, making them a more affordable option for businesses in an emergency. However, as with any type of lending, it is important for businesses to carefully consider the terms and fees associated with P2P loans and to research the platform and lender thoroughly to ensure that they are reputable and offer fair loan terms.

How to Apply for Emergency Financing

1. Determine how much money you need

Businesses can determine how much funding they need in an emergency loan by evaluating their current and projected financial needs. Here are a few steps that businesses can take to determine their funding needs in an emergency:

  1. Assess the emergency situation: Determine the nature and extent of the emergency, the impact it has had or will have on the business, and the amount of money needed to address the situation.

  2. Evaluate current financial resources: Determine the amount of cash on hand, any lines of credit available, and any other financial resources that can be used to address the emergency.

  3. Forecast future financial needs: Estimate the amount of money needed to cover ongoing expenses, such as rent, payroll, and other operating costs, and any additional funding needed to address the emergency situation.

  4. Consider the cost of financing: Determine the interest rate and fees associated with potential emergency loan options, and calculate the total cost of the loan over the repayment period.

  5. Determine the optimal loan amount: Balance the amount of money needed to address the emergency with the cost of financing, and choose the loan amount that provides the necessary funds at the lowest possible cost.

By taking these steps, businesses can make an informed decision about how much funding they need in an emergency loan and choose the best financing option to meet their needs.

2. Gather the required financial documents

The specific documentation required for a business loan can vary depending on the lender and the type of loan being applied for. However, here is a list of common documents that businesses may need to provide when applying for a loan:

  • Business plan: A written description of the business, including its goals, products or services, target market, marketing and sales strategies, and financial projections.

  • Financial statements: A balance sheet, income statement, and cash flow statement for the business, typically covering the past two to three years.

  • Tax returns: Personal and business tax returns for the past two to three years.

  • Bank statements: Bank statements for the business and any personal accounts held by the business owners or principals.

  • Legal documents: Business registration or incorporation documents, contracts or lease agreements, and any licenses or permits required to operate the business.

  • Collateral documentation: Documentation of any collateral that will be used to secure the loan, such as real estate or equipment.

  • Personal financial statements: Personal financial statements for the business owners or principals.

  • Business credit report: A report showing the business’s credit history and credit score.

  • Personal credit report: A report showing the personal credit history and credit score of the business owners or principals.

Businesses should consult with their lender to determine exactly which documents are required for their loan application.

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