Why would one need to take out small business loans?
Starting a business is no easy feat. First, you need a product or service which can help turn a profit. Then, you need marketing to make people aware of that product or service. Next, you need office or warehouse space to operate out of and employees to keep your business running efficiently. The expenses may seem endless, so getting financial assistance can relieve some of the stress. Small business loans can help with this.
How Small Business Loans Are Useful
There is no shame in seeking financial help. Some of the biggest companies in the world do so, too. It is best to work out your budget to make the best use of the loan money. Below are some examples of where the funds from small business loans may be useful.
Working capital is the money you use to manage your day-to-day business operations. Many start-up companies will not have the cash they need upfront to begin work. If this is the case, then a working capital loan can provide much-needed financial assistance. The money from the loan can be used to keep your business operations on track until you start bringing in a profit. As you improve your cash flow, you can start paying back your loan. However, loans for working capital do come with higher interest rates due to the increased risk involved for the issuer.
Specific businesses require specific equipment, and if that piece of equipment is specialized, it won’t come cheap. For example, a construction company needs a lot of heavy-duty, expensive machinery to work. If they have the upfront cash, then good for them, but it is more likely that they will have to source funding via an equipment loan. As a business owner, you can either rent equipment or purchase it outright. Buying is usually the better option, but what if you don’t have the funds? A small business loan can help with this. Loans for equipment are generally intermediate-term loans which last from 10 to 15 years.
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Purchasing Real Estate
A loan issuer is not likely to issue a loan for real estate to a new company. A successful company with a proven track record is much more likely to receive this type of funding option in the form of a mortgage. A company buying new real estate is usually turning a profit and has positive cash flow. A loan for company real estate is called a commercial real estate loan, and as with a mortgage, the loan term is usually 25 to 30 years. The newly-purchased real estate serves as collateral for the loan.
Types of Small Business Loans
As explained briefly above, small business loans do not come in a one-size-fits-all package. There are term loans and commercial real estate loans as well as SBA loans and microloans. The right loan will depend on your requirements and your financial standing. Each loan comes with different terms, interest rates, and qualifications. The most popular types of business loans available to you are:
A term loan is one of the more common types of financial assistance offered to business owners. You will receive the loan amount upfront and then will pay it back with interest at the agreed term. Typically, a loan issuer will lend up to $1 million. If you borrow from an online lender, you can expect to have the lump sum within a few days, as opposed to a bank, which can take a few weeks to issue the amount. A term loan will usually come with a higher interest rate. You will also be required to put up collateral as protection for the issuer. The security can come in the form of real estate or equipment belonging to the business. Short-term loans can be an excellent option for those who need a quick cash injection. However, lenders do require a solid credit score and signs of a successful business.
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The Small Business Administration guarantees an SBA loan. Banks and other lenders can issue this type of loan. The repayment terms of the loan can vary, depending on your planned use of the money. If you plan to use the funds for working capital, then you can expect terms of up to seven years. Using the loan for real estate will come with up to 25 years for you to pay off the debt. SBA loans hold some of the most competitive rates and a high borrowing amount of up to $5 million.
Unfortunately, SBA loans are not easy to qualify for. The decision-making process for your application can also be very long-winded. SBA loans can be an excellent option for someone with a good credit score who isn’t in a rush to receive financing. This type of loan option is what helped get Apple to where it is now and is an excellent form of small business lending.
As the name suggests, equipment loans help businesses with financing for equipment. The loan term usually matches the expected life of the machinery. However, the equipment itself serves as collateral for the loan. For this reason, interest rates can vary depending on the item and how stable the company’s financial situation is. On occasion, for this type of loan, a down payment is required.
The equipment can also lose value before the actual term of the loan is completed. Equipment loans are a type of loan for a particular purpose, but they can help a business get off the ground. Equipment financing is similar to an auto loan in the way it operates.
Business Lines of Credit
A business line of credit can allow you to borrow money up to a set amount called a line of credit. The way a line of credit works is similar to a credit card. You borrow money from a line of credit (the credit limit depends on the credit issuer). Then, you only pay interest back on the amount you have borrowed. As a line of credit is not a typical loan, there is no need for collateral, but a higher credit score will secure a better rate. There are also additional fees to consider, such as maintenance and withdrawal fees. A line of credit is a great way to obtain some short-term financing.
Microloans are small loans made up of $50,000 or less. These loans come from non-profit organizations as opposed to banks and financial institutions. For that reason, these loans are more available to start-ups or businesses located in disadvantaged communities. The low lending amount can be off-putting, but such a loan can also come with business consulting and training. The requirements for this type of loan are strict, although they do come with one of the lowest interest rates.
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Not all loans are available to everyone. For most of the above methods of business financing, you need a successful business. For a start-up company that has yet to turn a profit, this is no good. What can you do if you cannot meet the eligibility requirements of the other types of loans? Personal loans are your best option if that is the case. Again, these loans come with a maximum borrow amount of $50,000 or less. The interest rates on a personal loan can be high, but it does provide fast access to financial aid. For a personal loan, you need a good credit score. Even if you are eligible for the loan, you still need to ensure you can make payments on time. Failure to do so can seriously harm your once-strong credit score.
Invoice Factoring and Financing
If unpaid invoices are hampering the growth of your business, then factoring or financing of your outstanding invoices may be an option for you. Factoring your invoices means to sell them to a factoring company. That company then assumes responsibility for the invoices, including collecting the outstanding amount. In exchange for taking control of your invoices, the company pays you an agreed amount. Factoring can speed up your cash flow and has low acceptance restrictions. However, depending on the agreed amount, you can lose a lot of money on missed payments.
As an alternative, invoice financing is the process of using the invoices mentioned above as collateral against a loan. This method also gives you access to fast cash but leaves you in control of collecting the full amount from the invoices.
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How to Apply for a Small Business Loan
How easy it is to apply for business financing will depend on the type of loan you are seeking. As stated above, a microloan is much easier to secure than an SBA loan. No matter the type of loan you choose, there are steps to follow to ensure the best result from your application meeting. Those steps are:
Step 1 – Why do you need the money? And how much do you need?
Step one consists of two steps but answering one question will help provide the answer to the other. It may seem obvious, but taking out a loan without a clear understanding of how you will use the money can be a costly mistake. Such a statement is especially true when you are a young start-up company trying to make the most of already-limited funds. The list above includes some of the reasons for you to consider taking out a loan, although this is not exclusive and will differ per company.
To assess why you need the money and how much you need, you should sit down and evaluate your business statements. Doing so can help you decide where to inject cash and the necessary amount. Reviewing these statements can also help you deduce how much you can afford to pay back each month. Knowing these three items will help you reach the final desired figure.
Step 2 – Review your credit score.
If your company is three years old or younger, then your personal credit score will also be taken into consideration during the application process. To get your personal credit score, you should request it from each one of the major credit reporting agencies: Equifax, Experian, and TransUnion. Once received, you should review your credit report and report any errors immediately to get them rectified. A credit score of 700 or more is generally considered healthy and will help you secure a better rate.
On the other hand, a poor credit score (typically considered to be 670 or lower) will make getting a loan much more difficult. You may receive higher-than-average interest rates. You can also have your application dismissed and be declined for a loan altogether.
Step 3 – Consider your borrowing options.
You have decided how much money you need and why you need it, and you have your credit score in hand. Now is the time to consider where you will source the loan. Banks and credit unions are the best places to seek out loans. Smaller banks or online-only lenders will get you the best interest rates due to their lack of overhead. You should consider the term of the loan (how long you will have to pay back the amount) and the interest rate of the borrowed amount. The list below details some of the best options for your business financing.
Step 4 – Seek advice.
The SBA loan was put together with small businesses in mind. One part of the SBA is the Small Business Development Center (SBDC). If you have a local SBDC office, then you should pop in and seek advice. They can help prepare you for the loan application process and help with the actual application itself. Both existing and new businesses are welcome at the SBDC.
Step 5 – Prepare your business plan.
In addition to the small business loan application, the bank will also need to see your business plan. If you have followed these steps so far, then step one was to work out what you need the money for. Your planned use of the funds must fbe clear in your plan. A good business plan should consist of financial statements that show past profits and expenses going back several years and forecasts for the future. Your plan should also detail any potential collateral. Collateral can consist of equipment, real estate, or even savings.
Step 6 – Schedule a meeting.
With everything ready to go, you should schedule a meeting with the loan officer of your chosen financial institution. This meeting is not as simple as handing over your application and business plan. You will need to convince the officer that your company can repay the loan. To do this, you will need to put together a presentation that includes spreadsheets and charts.
You also need to prepare an executive summary. An executive summary is a summary of your business plan for the officer to read over. It should ensure that neither of you is wasting the other’s time. Consider bringing a sample of your product along if you can. This meeting may be the make or break moment for your company, so you should be prepared to give 100 percent.
Where should I go to get my loan?
As with any form of a loan, it is always best to shop around for the best deal. You must consider your business’ position. Do you have a proven track record, or are you a fresh start-up? How much can you afford to borrow? Should you get a term loan, or should you try for an SBA loan? Some of the best options for the primary loan types used by businesses are featured below. These include term loans, SBA loans, equipment loans, and microloans.
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The Best Business Term Loans
The right term loan will provide flexible repayment terms and reasonable rates. You can expect payment terms of up to five years with APRs that are typically below 30 percent. Some examples of the best business term loans are:
Funding Circle is an online lender that offers some of the lowest interest rates available. Loan terms range from six months to five years, giving business owners the chance to avoid a long-term financial commitment. In terms of what you can borrow, loan amounts range from $25,000 to $500,000. The APR of your loan will depend on the state of your business and your personal creditworthiness.
Funding Circle does boast an APR starting at 4.99 percent, although this is only available to the very best applicants. However, there is an origination fee to consider, which can range from 3.49 percent to 6.99 percent. The actual application for the loan can take less than 10 minutes, and then you could get approval in less than 24 hours.
One downside to a loan from Funding Circle is the terms you must meet to be eligible. To be a successful applicant, your company must provide proof of stable operations and be running for more than two years. You also need a credit score of at least 620. Funding Circle is best for those who need a small amount of cash to get through a tight period. Their loans are ideal for those who need some additional working capital. The lack of a prepayment penalty means you can pay back the loan before the term with no penalty to yourself.
OnDeck is an online lender that’s less restrictive in its application process. You only need a credit score of 500, and your business must have been running for a year or more. Interest rates for loans from OnDeck start at 9.99 percent with borrowing terms ranging from three to 36 months. Loan amounts range from $5,000 to $500,000. Like Funding Circle, applications submitted using the online loan tool take less than 10 minutes, although you can receive funds in less than 24 hours. If you find yourself needing to borrow money regularly, then OnDeck may be for you as they offer discounted interest rates to repeat customers. The downside to OnDeck is that you do need an annual revenue of $100,000 or more.
The Best SBA Loans
Small business administration loans come with low interest rates and flexible terms. For this reason, SBA loans are highly sought after by small business owners. Not everyone is lucky enough to get their hands on one though. The application is strict, and it can take a month or more to get your money. An SBA loan is ideal for a significant upcoming business expense like real estate or working capital for a slow period. Some examples of the best SBA loans are:
SmartBiz loans are issued surprisingly fast for SBA loans. They can do this because they are an online lender. The application takes less than five minutes. Provided your application meets their requirements, you can have the money in as little as seven days. You can borrow up to $5 million with repayment terms between 10 years and 25 years. Interest rates can range from 6.75 percent to 9 percent.
Both the borrowing amount and the interest rate can vary depending on your need for the money. Real estate financing allows a maximum of $5 million. An amount of $350,000 or less is available to those looking for a loan to cover the working capital of the business. To be eligible for an SBA loan from SmartBiz, you need a credit score of at least 650. You also must have been in business for two years or more and be a legal permanent resident of the U.S. or a U.S. citizen.
Wells Fargo is a traditional bank with no way to apply for an SBA loan online. However, the bank makes this list as a top lender because it has a vast amount of experience issuing SBA loans. A video on Wells Fargo’s website walks potential borrowers through the application process.
Loan amounts go up to $5 million with repayment terms varying depending on the use of the loan. For working capital, loan terms of up to seven years are available. Equipment loans provide terms of up to 10 years, and real estate offers up to 25 years to repay the loan. You must go into an actual branch to apply for a loan through Wells Fargo, so the application can take longer. Pending a successful application, you can usually have the money within 30 to 60 days.
Equipment loans are specialized and can take many different forms. Term loans may prove suitable depending on your requirements. The Wells Fargo SBA loan can also be used to cover equipment expenses. Some more specific options include:
Currency Capital can be the best option for those looking to provide financing specifically for equipment. Currency Capital is a marketplace as opposed to a traditional loan lender. You fill out your application, and they send it to over 100 lenders. The platform matches your needs to the loan issuer that can best meet them. The marketplace does have minimum requirements that a business owner must meet.
These requirements include a credit score of 585 or more and at least six months of business operations. If you meet these requirements, loan amounts can range from $5,000 to $2 million. Loan terms vary from one year up to five years with funds being available between the same day and up to two weeks.
National Funding offers both funding and leasing of pre-owned equipment. Financing options range from $5,000 to $150,000, although you must hold a credit score of 620 or higher. The terms for National Funding loans can be between three and five years with monthly payments expected. Your business does need to be running for at least six months for you to be eligible.
National Funding offers rates starting at 8 percent. A low rate is possible because the equipment purchased serves as collateral. National Funding also provides a merchant cash advance for those who need an alternate form of funding.
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Best Business Lines of Credit
Business lines of credit come with a wide range of amounts and interest rates with each option being different for every business owner. Some lenders that will guarantee a good deal include:
OnDeck makes this list as a lender more than once because their business lines of credit can be approved in minutes and then funds deposited to you in less than 24 hours. A line of credit of $100,000 can last up to six months. To be eligible for this line of credit you need a credit score of at least 600 and an annual revenue of $75,000 or more. OnDeck does require weekly payments to which are taken directly from your business bank account.
The amount you pay is flexible, and there are no prepayment fees. A downside to OnDeck is the $20 monthly maintenance fee. However, if you withdraw $5,000 or more in the first five days of opening your account, you can avoid this fee. Interest rates range from 13.99 percent to 40 percent.
Kabbage is one of the only loan issuers that doesn’t consider your credit history. It is also possible for you to receive your money in minutes. However, your business must be at least one year old and be able to show an annual revenue of $50,000 or more. The amount for lines of credit ranges from $2,000 to $150,000 with repayment terms of either six or 12 months. Interest rates come with a considerable amount of variability. The lowest rates start at 14 percent but can go as high as 99 percent. Kabbage doesn’t consider your credit score, but it does look at other factors that show your business is a good investment.
This is why there is such a broad range for the possible interest rate. Kabbage is a good option for smaller companies that are just getting started and need extra cash available. If you are turning a higher profit, have been trading for much longer than a year, and have a high credit score, then look elsewhere for a better deal.
Microloans from Kabbage come with interest rates ranging from 24 percent to 99 percent. A minimum borrow amount of $1,000 can be a great option as that amount can be in your account the same day. Payment terms are the same as their line of credit at six and 12 months, although 18 months is also an option. The annual revenue requirement is also the same as their credit option. However, despite the similar terms, your credit score will be taken into consideration when applying for a microloan, with a minimum score of 500 required.
OnDeck offers a slightly higher minimum loan amount of $5,000 with the maximum going up to $100,000. Like Kabbage, the terms are similar to their line of credit terms. Interest rates start at 13.99 percent with the maximum going up to 36 percent. OnDeck requires a credit score of 600 or more with proof of your business operating for more than one year. Again, funds can be received the same day as the application is submitted, which you can do online.
Summing It Up
Small businesses need a helping hand to be successful, which is precisely the reason for such loans. The amount of help required will dictate the type of loan used. A brief slow period can be covered with a microloan, whereas a brand-new warehouse will require an SBA loan. OnDeck offers competitive options for most circumstances. Wells Fargo has a reputation, but SmartBiz comes with the ease of online access, which makes them the better choice for an SBA loan.
Has your business benefited from a loan? Can you imagine where your business would be without financial aid? Let us know in the comments.