It’s not unusual for small business owners to have ongoing needs for capital—in fact, that’s often the sign of a healthy, growing enterprise. But there are many different kinds of financing that can help satisfy those needs: there’s no one-size-fits-all solution.
With that in mind, let’s take a closer look at two different approaches for securing a second small business loan: loan renewals and concurrent funding. While most people are probably more familiar with loan renewals, there are some circumstances where concurrent funding makes more sense.
Here’s a common scenario that many small business owners face: you’re growing quickly and need a round of fresh funding to accommodate your growth. Unfortunately, you can’t find a lender willing to extend you all of the capital you need.
This is a problem that new businesses with short track records or less than ideal credit frequently deal with. If you don’t have blemish-free credit or an established relationship with a lender, it’s often difficult to get fully funded. And that’s understandable—to lenders, a business in this situation is an unknown, a risk.
That’s where loan renewals come in. If a borrower is looking for $50,000 but doesn’t have collateral or perfect credit, a lender might be willing to finance $25,000 upfront with an option to renew the loan if certain criteria are met. This approach lets a borrower build good credit by paying off the first loan in a timely fashion and “prove” their creditworthiness to the lender before agreeing to a renewal.
A loan renewal offers a distinct advantage over a single, fully-funded loan: it lets you improve your credit score before borrowing that second chunk of money, which should lower the overall interest paid. That’s why it’s important to fully investigate your options before agreeing to any loan renewal with your lender.
While agreeing to renew your loan under the original terms could be the easiest route to take, it might not make the most sense from a financial standpoint. Before you sign a renewal, take the time to negotiate—or shop around for—a better offer. If you’ve paid the first loan back on time, you should be able to secure your next round of funding under better terms.
Though loan renewals are often the best option for businesses with capital requirements, there’s another, less familiar path to securing financing after an initial loan: concurrent funding.
Concurrent funding is a lending option that looks a bit similar to a line of credit, except that the borrower gets approved for a larger sum than they need right away. The lender then keeps those additional funds available for, generally speaking, a term of 30 to 90 days.
Let’s look at an example: a borrower needs $50,000 but gets approved for $100,000. If they then realize they need more than the original $50,000, the borrower can tap into that additional $50,000 they’ve been approved for by requesting concurrent funding. Concurrent funding borrowers take out a second contract that has identical terms to the first and runs parallel with it.
While that might sound similar to a line a credit, there are some key differences: concurrent funding isn’t guaranteed and you cannot take a second concurrent loan out during the initial approval period.
One of the primary advantages of concurrent funding when compared to loan renewals is speed. Concurrent funding is typically much faster than a renewal, since many of the same processes that go into securing the original loan must be repeated prior to a renewal. Business owners who need access to more capital quickly might be a better fit for concurrent funding.
Plus, concurrent funding is a smart way to test out how much debt a company can safely assume, since businesses don’t have to take a full load of debt all at once.
Finally, if the concurrent funding is applied for and approved within 30 days of the original loan, lenders typically won’t request another credit check—something that’s required with a loan renewal.
Concurrent funding and loan renewals are two common approaches that make sense for small business owners with ongoing financing needs. In order to find the option that’s best suited for you, it’s important to carefully consider your specific qualifications and borrowing requirements:
Business owners with credit or collateral issues might be better off with a loan renewal, since it provides an opportunity to improve one’s credit score—and potentially secure a better interest rate before renewing the loan.
Business owners who need a faster lending process and more flexibility might be better off with concurrent funding.