How to Evaluate Capital Options

Capital is essential to the health and growth of any business. Whether you’re just starting out, need a temporary cash infusion, or looking to expand your offerings, access to funding is a gateway to reaching your goals. While there are several ways to secure capital, it can be difficult to determine which one is best for you and your business. Here are five key things to consider when evaluating funding options.

1. The cost of capital

Put simply, securing capital comes at a cost. This generally includes interest as well as any associated fees–for example, origination fees, credit reporting fees, application costs, and more. 

Since interest rates and fees can vary depending on many factors, it’s helpful to look at the total payback amount when evaluating capital options. The total payback amount refers to the total amount of money you'll spend to secure and repay a loan, inclusive of the principal plus any interest or fees. In terms of loan cost measurements, it’s often a much simpler way to compare options than calculating the annual percentage rate (APR).

Depending on the type of loan you receive, the total interest amount may be fixed or variable. The interest rate for fixed rate loans does not change over the lifetime of the loan, while the interest rate for variable rate loans fluctuates as market interest rates move. One key advantage to a fixed rate loan is that there are no surprises: you’ll know the total cost of capital upfront, and you can plan accordingly. On the other hand, the amount you pay in interest for variable rate loans is usually lower than fixed rate loans–though you can’t know for sure until it’s fully repaid.

Changing interest rates and unexpected additional fees (often in the form of penalties for default or late payments) can mean the total cost of capital ends up being significantly higher than you expected. This can be especially difficult to manage if you don’t operate a high cash flow business or need to be more exact with budgeting and operational expenses.

While the option with the lowest interest rate is often the most compelling, it can be useful to consider the total payback amount–especially if you want a clear understanding of the cost of capital from the beginning. If you receive an offer from Mindbody Capital, you’ll see two distinct dollar amounts: the total advance amount plus a simple, flat fee. There’s no interest, no additional fees, and no way you'll end up paying more than the total amount shown in your dashboard, which helps you plan accordingly.

2. Time and energy required to apply

While the cost of capital is an important evaluation criterion, there are times when the speed and convenience of the application process is even more critical. As a business owner, you know first-hand that many growth opportunities are time-sensitive and require quick execution. If you need to access funds in a short timeframe, your options may be more limited than you think.

To qualify for a traditional business loan, you must go through a lengthy application and review process that includes filling out paperwork and gathering the relevant documentation to make your case. If you’re an established business looking for a larger amount of capital, you’ll likely need to get a secured loan. This means that you’re putting up collateral to back the loan, and the valuation process for those assets can be time-consuming.

On the other hand, for some microloan options (which can allow brand new businesses to access smaller amounts of capital without the proven performance that a bank would require), you may need to show a detailed business plan, financial statements, and a description of how the loan will be used. Keeping in mind the adage that “time is money,” it’s crucial to consider the cost of spending your or your employees’ time on the loan application process when evaluating funding options.

If you see a personalized offer via Mindbody Capital, there's no application necessary and you can use the funds for business purposes. Any offers available to you will be easily visible in your Mindbody dashboard, and you can decide to accept them at any time–day or night. On top of that, the money hits your account within a few business days of accepting your offer, which can be invaluable if you need funds fast.

3. Qualification requirements

Traditional lenders take many factors into consideration during the review process, including your personal credit history, personal wealth, and current business performance. It can be hard to secure a traditional business loan without strong cash flow from your business and a good personal credit score–and nearly impossible if your business is relatively new. Most banks look for businesses that have been in operation and showing solid cash flow for at least two years in order to qualify. Microlenders are an alternative option for those with limited operating history or less-than-stellar personal finances. These are more accessible but the amounts are smaller overall than traditional business loans—usually less than $50,000.

Since less than 25% of loan applications were approved by credit unions, institutional lenders, and alternative lenders in June 2021, there’s a risk that your business may not qualify for a loan— regardless of your growth potential. The uncertainty of funding coupled with a lengthy review process can be especially problematic when trying to capitalize on time-sensitive growth opportunities.

If you see a personalized offer via Mindbody Capital, there is zero guesswork: You’re already pre-approved for that amount. In addition, the offer is based solely on your business performance and the daily payment processing sales you generate through Mindbody, so there’s no connection to or impact on your personal credit score whatsoever—whether you accept the offer or not.

4. Repayment terms

Most traditional loans require a monthly paydown of the principal, plus any interest that’s owed on top of that. If your cash flow is relatively stable month over month, this may not be a problem. You can easily project your monthly payments within your business plan and confirm your ability to consistently pay down the loan over time.

However, if your business is seasonal—meaning you earn more during some times of the year than others—a fixed monthly payment could work against you. If you can't meet your minimum payment amount during a slow period, it could result in an additional penalty fee—on top of your normal interest rate. In this case, what initially seemed like a doable repayment structure could end up becoming untenable due to the changing business environment.

If this is a concern, Mindbody Capital could be a good option for you. Any advance you accept will be paid by an automatic deduction of a fixed percentage of your daily sales. This means that on days when you earn more revenue, you pay more; on days when you earn less, you pay less. If your business closes unexpectedly and you earn no revenue, no payment is owed for that period. And since the payment happens automatically, there's no fear of a late payment or other penalty. That said, if you want to pay off the advance earlier, you can make a direct payment at any time. 

5. Collateral and personal guarantee requirements

Banks will often require collateral to mitigate their risk when approving a loan. These secured loans provide protection for lenders in the event of a default. Collateral is an asset that the lender has a lien on until the loan is fully repaid, which can include assets like personal property, land, and equipment. While secured loans place an additional burden on you as the borrower, they’re generally easier to qualify for and offer lower interest rates, as well as larger loan amounts.

Unsecured loans don’t have collateral requirements. Because they’re riskier for lenders, they often come with higher interest rates and lower loan amounts. They also include tougher qualification criteria based solely on your creditworthiness, which can be tricky depending on your personal and financial situation. That said, unsecured loans can be quicker to secure because they require less documentation, making them a better option when you need capital fast.

Whether the loan is secured or unsecured, many lenders require you to offer them a personal guarantee. When you provide a personal guarantee, you’re on the hook for repaying the funds personally if your business can’t. If you don’t have adequate personal funds to make good on the guarantee, there’s a risk that your car, home, or other property may be seized for repayment.

While collateral and guarantees can increase the loan amount or lower the interest rate, they can have negative consequences on your personal situation and financial stability. It’s crucial that you consider the implications of these options prior to using them to protect your assets and your credit. With Mindbody Capital, there’s no collateral or personal guarantee required, so you can rest easy knowing your personal and other assets are protected—while still accessing capital within three business days of accepting an offer.