A Guide to Funding Your Business
Business always requires capital to start or grow. If you are starting a new business enterprise or growing your current company, you will need the right financial capital to do it. This is where a business loan can help. In this blog, we will take a look as to what constitutes a business loan, the different types of business loans and how they can help give the wings of success to your business.
Business Loan
A business loan is an amount of money you borrow from a bank, credit union, or online lender to meet operational costs, grow your business, or fund new initiatives. Business loans come in many different shapes and sizes, designed to help businesses meet specific needs. These loans usually consist of a single sum of cash that can be paid off over a period of time, usually with interest.
It is used for a different purpose according to the business types like staff hiring, marketing, expansion of the business, cash flow, purchasing equipment, etc. The rates of interest and repayment terms will differ based on the type of loan and the lender’s criteria.
Types of Business Loans
As you would imagine, there are several different types of business loans to cater to various financial positions. So, let’s go through the most important ones:
Term Loans
Term loans are the most traditional business loans. A term loan gives you a lump sum of cash in advance, and then you repay it over a fixed term — usually between one and ten years. Term loans typically come with fixed interest rates and repayment schedules, making them predictable and straightforward. These loans are best suited for long-term investments such as buying equipment or growing your business.
SBA (Small Business Administration) Loans
SBA loan programs are intended to help small businesses achieve affordable financing. These loans are partially guaranteed by the U.S. Small Business Administration (SBA), meaning they mitigate the lender’s risk and the lender can offer more favorable terms. There are several types of SBA loans: 7(a) loans, microloans and CDC/504 loans. These loans have lower interest rates and more extended repayment periods, making them one of the most favored options for small businesses.
Business Line of Credit
A business line of credit is a flexible loan solution that gives you access to a specified amount of credit. This is different from a traditional loan in that you borrow only what you need, and you are charged interest only on the amount you actually use. A line of credit is an ideal type of loan for businesses with fluctuating cash flow needs, because it gives quick access to funds for covering unexpected expenses or for capitalizing on new opportunities.
Equipment Financing
Equipment financing refers to a specialized loan where you use the loan to purchase or lease equipment. This is a secured loan, which means that the equipment itself serves as collateral, and the lender can repossess and resell the equipment if you do not pay the loan back. Equipment financing is best suited for those businesses needing to make a capital purchase of an expensive equipment without the capital on hand.
Invoice Financing
Invoice financing (sometimes referred to as accounts receivable financing) enables businesses to borrow against their unpaid invoices. This loan can assist cash flow problems in businesses by quickly allowing them access to new funds while waiting for clients to settle their bills. With invoice financing, the lender gives you a percentage of the invoice amount in advance, and then you repay the loan when your client pays.
Merchant Cash Advance
A merchant cash advance is a type of short-term financing where a business receives a lump sum cash amount upfront in exchange for a percentage of future credit card sales. This type of loan is a great option for a business that has strong credit card sales each day, like retailers or restaurants. Merchant cash advances provide fast funding in exchange for straightforward cash flow, but they typically come with high rates of interest and associated fees.
Microloans
Microloans are very small loans — typically conduced through non-profit organizations and community lenders. These loans are specifically for startups, entrepreneurs, or companies in underserved communities that may not qualify for traditional lending. Microloans have smaller amounts and less stringent eligibility criteria.
Eligibility Requirements for a Business Loan
To qualify for a business loan, many lenders have certain requirements that must be met. Although the specific requirements can differ between lenders and loan types, here are common factors that lenders typically consider when reviewing your loan application:
Credit Score
Your credit history is an essential factor when it comes to applying for a business loan, with both your personal and business credit scores playing key roles in eligibility. Your credit score helps lenders determine whether they think you’ll be able to pay them back. However, a higher score increases your odds of getting a loan with better terms.
Business Plan
An effective business plan is key to demonstrating to lenders the potential value of your business to their bottom line. The business plan should detail your business objectives, financial predictions, and how you would use the loan. Lenders are looking for proof that you have a viable plan for growing your business and paying them back.
Time in Business
Usually, lenders want to work with businesses that have operated for a minimum period (normally within 1 or 2 years). A successful income record proves the ability of your business to generate revenue and handle finances.
Revenue
Lenders expect to want to see that your business is bringing in consistent revenue. Your revenue numbers tell a lot about your business’s capacity for repayment. For example, you may need to show financial statements, tax returns, or bank statements to verify your revenue, depending on the lender.
Collateral
For some loans, like equipment financing or secured term loans, lenders will seek collateral to secure the loan. Collateral is an asset that the lender can seize if you do not repay the loan. This can also relate to property, equipment, or inventory.
Benefits of a Business Loan
Access to Capital
With a business loan, you have immediate access to the capital you need to cover expenses, invest in growth, or manage cash flow. It enables you to make plans for your business without having to wait for savings to build up.
Flexible Loan Options
There are so many various types of business loans that you can select a loan that’s tailored to your particular financial requirements. Regardless of your need for short- or long-term financing, a business loan can help you get what you need.
Improved Cash Flow
If you’re running a type of business that has seasonal or inconsistent income, you could also find a business loan can smooth your cash flow. By borrowing money, you can continue making money without any hiccups.
Opportunity for Growth
Business loans open up new growth opportunities for you. And as you expand into new markets, or launch new products, or hire more staff, a loan can give you the funding you need to grow your business.
Build Credit History
If you manage a business loan successfully and make timely repayments, it can help you build your business credit score. Having a positive credit history can provide the opportunity to obtain funding more easily in the long run.
Are Business Loans the Solution for You?
Business loan is an important avenue for growing and managing your business. So, you are asking, Do you need money for a sinking fund, pieces of equipment, or working capital? A loan gives you the fiscal expansiveness to reach what you want. But you must weigh your business’s needs, the type of loan you qualify for, and repayment terms to make sure that taking on debt is a good decision for your business.
Before you take out a business loan, it’s important to assess your business’s finances and compare rates and terms. However, a financial advisor or a loan expert can also help you pick the right loan for your business.
📞 Is it a Must to Get a Business Loan? — Call us today to learn more about how we can help you.
