Small businesses often have big dreams, yet it’s difficult to realize these ambitions if you don’t have the cash to facilitate your goals. According to Small Biz Trends, around 44 % of startups fail after four years. Small Biz further suggests that 29% fail due to running out of money. To help your small business to thrive and succeed, a business loan could give you the boost you need to remain financially healthy.
Before you start the application procedure, you’ll need to ensure that you have all of the documents you need. You’ll need your profit and loss statements; personal and business tax returns; balance sheets, bank statements; your credit score and identification documents.
What are the benefits?
Some businesses prefer to work with investors; however, this involves working together and adhering to their preferences as well as your own. Investors will naturally want some control over what you do with their cash. With business loans, this is not the case. You’ll have full control of how you spend the money, so if your plans change, there’s no issue of negotiating things with your investor. When you seek a business loan, any profit you make will be yours to keep entirely.
On the other hand, when you work with an investor, they’ll expect a return on the cash that you make. The higher that your performance is, the more you’ll pay to your investor. When you pursue a loan from a business lender, you’ll only pay a fixed return.
With a loan, the financial pressure of the startup phase is lifted. You won’t have to worry about keeping your expenses low to stop yourself from going under. Instead, you’ll start off more financially comfortable and in a better position to drive growth. There are many different types of business loan available, it’s essential to consider which option is best for you before you start to apply.
1 . Small Business Administration
Available for small businesses in need, SBA loans range from $5,000 to 5 million dollars.
These loans are supported by the Small Business Administration of the USA, and this means that the APR rates are generally lower compared to loans offered by commercial banks. Another advantage of opting for an SBA loan is that these types of loans usually involve lengthy repayment terms.
The SBA introduced a Microloan scheme back in the 90s, the program was intended to help businesses to access small loans up to $50,000. These types of loans are great for startups who haven’t had the opportunity to borrow from a bank lender. Sometimes the interest rates can be higher than traditional SBA loans, so it’s advisable to compare a few options before making a commitment.
CDC stands for Certified Development Company, a type of nonprofit which works to facilitate economic development by providing loans. The CDC works with banks and the SBA to help small businesses access the finance options they need. With these types of loans the lender covers 50 % of costs and the SBA covers 40 %. You’ll have to cover the remaining 10% of the project yourself. With one of these loans, your business will benefit from fixed interest rates plus savings to increase your cash flow.
Within the category of SBA loans, there are a few different subgroups, including SBA 7(a) and Microloans. The 7(a) guarantee is offered to lenders so that they are more inclined to assist companies who have weaker applications. For this reason, SBA 7(a) loans are an attractive option for startups without a positive cash flow history. To qualify for an SBA 7 (a), you must be operating within the U.S, and you must prove that the loan is intended for a viable company purpose. These particular business loans offer a max of $2 million, and the terms depend on what you intend to use the loan for. If the loan is for equipment or real estate, then the terms are up to twenty-five years. For working capital, the terms are seven years.
- Business Term
Business Term Loans allow you to borrow up to $500,000, with repayment terms averaging 1-5 years. You can expect the interest rates to fall between 7 and 30%. If you are ever unsure about calculating your interest rates, there is an online interest calculator you can use to make it easy on yourself. You don’t need collateral for these loans, and you are permitted to borrow for any purpose. A Business Term Loan is usually based on your average revenue and your current credit score. Business term loans are sometimes available as a long-term loan, running for up to 25 years. However, these longer-term loans do use the company’s assets as collateral. The loans involve monthly payments taken from your cash flow.
3 . Merchant Cash Advance
Merchant cash advances provide businesses with an agreed sum of money. To access the sum, companies offer up a percentage of their credit card transactions. Merchant cash advances do not rely upon APR rates; instead, you are provided with a pre-agreed factor rate ( for example, 1.25). You can multiply the loan by the factor rate to calculate how much you will owe. How quickly you will pay back the loan depends on how much money you make daily. If you have a poor credit history, these types of loans can be ideal. Receiving a merchant cash advance is a fast process, you’ll get your cash right away, and there’s no lengthy paperwork process. Another good thing about merchant cash advances is that you don’t need to offer up any collateral. What’s more, you can adjust your repayments according to how well you are doing as a company. With financing like this, you’ll remove the pressure and ensure that you are only repaying what’s viable for you at this time.
- Business Line Of Credit
This type of loan is pretty similar to a credit card; however, you don’t need a good credit score to be approved. During the application process, you’ll choose a maximum amount that you’d like to apply for; once your credit is approved, you can draw out funds as and when you need them. With a Business Line Of credit, you’ll only pay interest on the amount that you actually borrow. APR rates, on average, are between 7 and 25 %. You’ll usually be expected to repay what you owe within one year. A business line of credit is a fully flexible option that lets you manage your cash flow however you please. You have the option to pay back and reuse your credit whenever you need to.
- Receivable Financing
Receivable financing are company loans which use credit terms to turn sales into cash flow. One of the most popular ways of doing so is to sell unpaid invoices to third parties. By doing so, you can access advanced payments. The third-party offers you the full amount and then follows up the sale with your customer. For small businesses that are struggling to get other financing, this is a particularly useful option. There are a few different types of receivable financing, one of which is asset-based lending. It’s essentially the same as conventional commercial lending; your company agrees to commit certain receivables to a program. You can also get ‘selective receivables,’ which allows you to control which receivables you would like for an advanced payment. This is an attractive option for many companies, as rates are usually lower when compared with alternatives. Another option is traditional factoring, whereby a company sells the accounts receivable to an external funder. Some funder fees can be high, so be sure to shop around a little before you commit.
If you have a good credit history and are not eligible for a conventional business loan, you may be able to get a personal loan for business use. You’ll have the option to pursue a business loan with an online lender or a bank. Personal loans usually go up to about $35,000, and the rates range from around 7 % to 35%. Another option for homeowners is to apply for a home equity loan and use this for your business. Perhaps you’re a startup unable to get yourself a loan, but you do own a property? Under these circumstances, a personal loan is an ideal solution to meet your needs.
Before you apply for a business loan, seek to make a thorough plan of how you intend to use the money. Planning your finances will help you to make wise choices and avoid spending your loan too quickly. To help you plan your expenses and projects, a financial planning app can really come in handy. One of the most popular financial apps right now is Mint Money Manager. Using Mint, you can track all of your accounts, expenses, loans, and budget categories; all in one place. The app also has a useful feature where you can check your credit score. Apps such as Good Budget and Toshl Finance are further options that are well worth checking out. With the right kind of financial planning you can save your business money and drive growth.