At some point in time, every small business needs a cash injection to keep running its operations. Perhaps the industry has found the perfect expansion opportunity, and the entrepreneur has everything in place to take advantage of it except for the funding. Or maybe an unexpected event has taken place; there may have been a sudden shift in customer demand, requiring the business to adapt to it or an essential piece of equipment that may have broken down suddenly and need repairs. In such situations, the small business owner may decide that applying for a suitable business loan is the only way to get access to the funding they need.
However, finding the right business loan is not always as simple as reaching out to your nearest bank anymore. If you do just a little bit of research, you will come across different loan options and lenders, each with their application and approval process, cost of funding and terms and conditions, making it difficult for businesses to decide which loan option will be the most suitable for their capital needs.
As a small business owner, you need to be aware of all your financing options so that you can tailor your loan application according to the type of loan and increase your chances of getting that much-needed approval.
To help you out, we have listed 7 of the most common loans for small businesses:
The Small Business Administration has come up with a cost-effective, government-backed loan scheme for small businesses that may have difficulty securing funding from traditional sources. The SBA doesn’t directly provide these loans; instead, it encourages its approved lenders to do so by guaranteeing to cover a large proportion of it.
SBA loans come with many benefits. Firstly, a variety of loans are available through the program, from the 7(a) program that provides up to $5 million for different business purposes to microloans of $50,000 for smaller funding requirements. With so many options, it is easy to find an SBA loan that meets your needs. Moreover, they are one of the most affordable funding options in the market. However, you will need a good credit score to be eligible, and the application and approval process can potentially take months to complete.
Short-term loans are a quick way for small businesses to fulfill their immediate funding requirements. Paid over anywhere between a few weeks to over a year, these loans are best used for emergencies or more minor funding needs.
Many small businesses do not have the collateral required for most long-term loans. Thankfully, there are several types of unsecured business loans available in the market to cater to their needs. Most short-term loans do not require collateral or even an excellent credit score to qualify, making them a suitable option for businesses that fail to meet the eligibility criteria for traditional, long-term loans. The only drawback is that they tend to come with high-interest rates and, therefore, must be used with caution to avoid putting a strain on cash flows.
BUSINESS LINE OF CREDIT
Under this option, the business gets access to a specific amount of funds that it can withdraw as and when it is needed. The line of credit acts as a safety net, allowing the business to get quick cash in case of an emergency.
From secured to unsecured and fixed to revolving credit lines, there are different options available for small businesses. A revolving credit line works like a credit card, where you can continue to use your available balance and have the whole limit available once you pay off the full amount.
Business lines of credit are ideal for paying routine, operational expenses, or covering occasional cash shortfalls, as you have the flexibility to use the funds when needed and incur no cost when it is not utilized. However, it is not suitable for any long-term funding needs.
For small businesses looking to acquire new or used assets, equipment financing is a popular funding option. Instead of having to pay the full cost of expensive equipment at once, you can use an equipment loan to fund your purchase.
The benefit of equipment financing is that it is available to all kinds of businesses, even new or small ones. Unlike other loans that require a high credit score or collateral, equipment financing is easy to option as the equipment itself acts as security on investment. Interest rates are also affordable on these loans as the lender’s risk is reduced. Moreover, equipment financing covers a wide range of equipment, including computers, machinery, and vehicles.
Under this arrangement, the business sells its outstanding receivables and gets an immediate advance of anywhere between 70-90% of their total value. The lender is then responsible for collecting the payment from the customer and pays the business the remaining amount, minus their fee, once the payment is made.
The significant benefit of invoice factoring is that it provides access to quick funding for businesses that face cash flow shortages due to slow-paying customers. It is easy to qualify for since the invoices itself are the collateral, and your credit rating or business history do not matter. However, the lender is likely to consider your customer’s payment history to determine the risk involved and may ultimately hold you responsible for any bad debts.
MERCHANT CASH ADVANCE
A merchant cash advance is a funding option that provides the business an advance that is repaid as a proportion of its future credit card sales. Once the advance is provided by the lender, the company has to pay a specified percentage of its credit card sales to the lender on a daily basis.
This arrangement works best for smaller businesses that require quick cash but cannot meet the fixed repayment schedules of other loans due to their volatile cash flows. When sales are slow, you pay less as the payment is a percentage of sales. The funding process is also as quick as a day or two, in most cases. However, a merchant cash advance is one of the most expensive funding options in the market, and you need to make sure the cost outweighs the benefit before you opt for it.
COMMERCIAL REAL ESTATE LOANS
If a small business needs to acquire or upgrade its commercial real estates, such as an office building, manufacturing facility, or retail store, a commercial real estate loan is the right funding option. The funds can be used to either purchase land or a building or upgrade the existing business premises. These loans are long-term loans payable over 15-20 years, allowing the business to invest in commercial property at an affordable monthly cost.
Banks, commercial lenders, and credit unions all provide commercial real estate loans. Just like equipment financing, the property itself acts as collateral on loan.
THE FINAL WORD
Choosing the right small business loan is the key to achieving your overall business objectives. Every business and its capital needs are different, so it is crucial to understand the purpose for which you need the money entirely. A loan that is quick to obtain but too small to fulfill your needs is of no use. Similarly, getting a loan that is too big for your requirements is not a good idea because unless you can find a way to turn the extra funding into revenue, you are just piling up your liabilities and interest payments for no reason.
Make sure to understand the financial needs of your business first; only once you can do so will you be able to find the ideal funding option for your small business. Good luck!