You have the perfect idea for a business and you’re ready to get started. All that’s left to do is secure funding to open the doors. Easier said than done, especially if you don’t know where to start, haven’t been in business for very long, have past credit issues, or minimal revenues.
Or maybe you’re already up and running and need additional capital to stay afloat or take your business to the next level. If you don’t find funding soon, you fear that you’ll have to cease operations, possibly for good.
Fortunately, there are scores of business loan products to choose from to help you get your dream business off the ground or expand your current operations.
Types of Business Loans
Accounts Receivable Financing
When you go above and beyond to serve your customers, you expect to be paid in a timely manner. But business doesn’t always work that way. And unfortunately, too many unpaid invoices can mean trouble for the financial health of your business, particularly those that have been outstanding for some time.
That’s where accounts receivable financing comes in. The lender will give you a cash advance equivalent to the amount of the unpaid invoices, and you’re expected to make timely payments in a set window of time to pay them back. And you must continue to collect on the invoice to prevent taking a loss.
While it’s a costly way to get the cash you need, it can also save your business from going under. Plus, you can always tack on penalties or late payment fees to the customer’s invoices to recoup your losses.
Business Acquisition Loans
Maybe you’d prefer to purchase an existing business or buy a franchise instead of starting your own company? If you’ve found the perfect opportunity but just need the funding to make it official, a business acquisition loan may be a good fit.
If you have good to excellent credit, you may qualify for a low-interest rate. Even better, loan amounts are relatively generous and you’ll have several years to repay what you owe.
Business Credit Cards
Do you prefer a revolving line of credit that you can use when you see fit, instead of a lump sum of cash that you have to start paying back right away? A business credit card may be a better fit, and you may not need to be established for an extended period of time or have stellar credit to qualify. In fact, some lenders will start you off with a small limit and increase it as time progresses, your business grows, and your revenues increase. But you must manage the card responsibly in order to have the best possible chance of getting a credit line increase.
Business Line of Credit
A business line of credit is another ideal way to fund your startup, expand operations, acquire another business, or open a franchise. Unlike an installment loan, a business line of credit has no set monthly payment amount as you only pay for what you draw. And there’s no obligation to draw funds up to the limit.
In most instances, the lender will give you a set amount of time to use the business line of credit. But once this period lapses, it will be necessary to reapply to reopen a new one. So, you definitely want to take some time to draft up projections for expenditures and plan accordingly.
They can also serve as a cushion if your business runs into a rough patch and needs a little help to stay afloat until the downturn ends. And even if your business is doing well, having a business line of credit to fall back on if operations slow down can you give peace of mind.
Business Term Loans
In a nutshell, business term loans are installment loans that are either secured or unsecured, with a fixed interest rate. To repay the loan, you’ll pay the lender the same amount over a set amount of time. Some lenders also offer short-term loans that are payable in a shorter time frame.
When evaluating your loan application, the lender will analyze your business financials to gauge the health of your company and determine how much you can afford to repay each month. They will also consider the amount of time you’ve been in business and factor your credit score into the equation to determine the likelihood of you defaulting on the loan. The latter is also used to determine what interest rate you qualify for.
Business term loans have many benefits, including the ability to use the funds in any way you see fit. Another major perk is the fast funding time and the lengthy repayment periods, which make the loans easier to manage.
Commercial mortgage loans are used to purchase commercial property. But they may also be used as a traditional mortgage to make improvements to your company’s existing facility or refinance the current loan you have on the property.
Commercial mortgage providers offer competitive interest rates, but a down payment is usually required. Furthermore, the property will be used as collateral to secure the loan.
Equipment financing caters to business owners that use loads of major equipment in operations. The loans are usually secured by the equipment purchased, and a down payment may be required.
A credit check will be required as a part of the application process. And if your credit rating and financial health of your business are both up to par, you may qualify for a low-interest rate.
Merchant Cash Advances
Similar to payday loans, merchant cash advances are a way to get your hands on fast cash. The interest rates are exorbitant, but they’re easy to qualify for which makes them a top choice for cash-strapped business owners that have very few options.
The only form of security is your bank account as automatic withdrawals are mandatory. It won’t be necessary to put any other business assets at risk to secure the loan. However, they can perpetuate a cycle of debt if you’re unable to make the lump-sum payment for the amount of the loan plus any applicable interest and fees.
Microloans are disbursed in smaller amounts that generally do not exceed $50,000. They are originated by non-profit organizations and are easier than other traditional forms of lending to qualify for. Even better, many of the microlenders offer educational resources and training to borrowers.
These loans are designed exclusively for individuals looking to fund their startup idea. Loans range from a few hundred to several thousand dollars and can be used to meet a variety of your startup needs.
Startup loans are commonly used for equipment purchase, inventory, other material and supplies, office space, and expenses incurred for employee wages, just to name a few.
Because you’re just starting out with a new business venture, lenders will be interested in your creditworthiness to gauge how you’ve handled other debts in the past. You may also be asked to put up a form of collateral, like your vehicle, home, or another valuable asset to secure the loan. Doing so protects the lender from sustaining major losses just in case things don’t pan out and you’re unable to repay what you borrow.
Where to Find Business Loans
- Credit unions: ideal if you want a more intimate experience and sometimes have better rates than what you’d find with traditional brick and mortar bank. Credit unions may also have less stringent qualification criteria (particularly for established customers with existing relationships).
- Online lenders: convenient as the entire process is done directly from your smartphone, office, or the comforts of your home, and online lenders offer fast funding options
- SBA.gov (The U.S. Small Business Administration): guarantees loans to small businesses, but the loan must be obtained through a lender they work with. Expect loads of paperwork and an extensive evaluation process prior to approval and the receipt of funds. However, it may be a good fit if you fall short of the brick-and-mortar banks or credit union’s qualification criteria.
- Traditional banks: a good option for businesses that have been around for some time and are in solid financial shape.
How to Qualify for a Business Loan
With so many types of business loans to choose from, qualification criteria vary across the board. There are also federal and state regulations in place, so it’s best to consult with the financial institution you’re considering doing business with to determine the specific criteria you have to meet to qualify for a business loan product. Some questions to think about:
- What is the minimum age for applicants?
- Do you conduct hard or soft credit checks?
- Is there a minimum credit score requirement?
- What types of businesses are welcome to apply?
- How long do I need to be in business to qualify?
- How much in annual revenues do I have to generate to qualify?
- What types of documentation will I need to provide when applying for a loan?
Should You Apply for a Business Loan?
It depends. If you’re new to the world of entrepreneurship and have a healthy stash of reserves, applying for a business loan may be worth your while. You won’t have to put all your hard earned money at risk right away to fund your startup and you’ll have time and resources to grow your business while you repay the loan. And in those rough months where things may seem a bit uncertain, you’ll have your reserves to get by on.
On the other hand, if you have what you think is a brilliant idea but it hasn’t been tested in the marketplace, applying for a business loan may be a bit risky. Furthermore, being low on reserves means you could get yourself into financial trouble and damage your personal and business credit.
More established business owners that understand the ebbs and flows of their industry may also want to consider applying for a business loan to expand operations. But if you’re in this category, you should ensure you only apply for what you can afford.
The Bottom Line
Business loans are ideal when you need capital for that startup, franchise, acquisition, or to expand your current operations. But be sure to do the legwork to determine which loan products may be most ideal for your situation. And you may also want to consider crowdfunding or small business grants to obtain the capital you need without having to pay it back.