Do you need funding for your small business? Whether it’s to get up and running, fill cash flow voids, cover operational expenses, or capitalize on expansion opportunities, several types of business loans are available. Not all are the same, though, so it’s worth doing some research to explore funding opportunities and requirements and gauge which are most ideal for your business.
You should also familiarize yourself with the lending process. That way, you’ll know exactly what to expect before applying and can prepare accordingly to boost your approval odds.
Why You Might Need a Business Loan
Business loans can fuel your company’s growth and soar profits. Here’s why you might consider applying for one:
- Business expansion: Have you outgrown your current location? Or maybe you were presented with an opportunity to level up your business? Either way, a business loan can help finance the opening of new locations or provide the funding needed to capitalize on a time-sensitive opportunity. Expanding your business can also mean diversifying your product offerings or entering new markets, which can require significant capital outlay. A loan can bridge this financial gap, allowing for growth without depleting other funds allocated for operational expenses.
- Improve cash flow: If your company is running low on cash with little or no reserves, a business loan can help improve its cash flow. This situation is common if your business is seasonal in nature and funding provides stability during off-peak periods. Maintaining a healthy cash flow is paramount to avoid interruptions in business operations. A business loan can ensure that you have the necessary funds to meet your obligations, such as paying suppliers and employees, even during slower sales cycles.
- Invest in inventory: Stocking up on inventory often requires a sizable upfront investment. You can use a business loan to boost your inventory levels ahead of the busy season or to get a bulk discount from suppliers.
- Update equipment: Investing in the latest machinery and technology can help your company stay ahead of the competition. Business loans can finance these upgrades without depleting your reserves. Up-to-date equipment can also improve efficiency, productivity and the quality of your products or services, which can potentially lead to increased revenue.
- Refinance existing debt: You can use the proceeds from a business loan to consolidate costly debts into a single loan product. Doing so potentially gets you a lower interest rate, lower monthly payment, and a more manageable debt load. Refinancing can also simplify your finances by limiting the number of creditors you have to deal with.
- Cover operational expenses: It’s not uncommon to need additional funds to cover day-to-day expenses if your business is young or experiencing rapid growth that is outpacing your annual revenue. These expenses may include rent, payroll and utilities. A business loan can also help bridge the gap between receivables and payables. Doing so enables you to operate effectively without cutting corners or sacrificing the quality of your products or services.
Evaluating Your Business Loan Options
Here are some important considerations to keep in mind before choosing the best business loan for your needs.
Interest Rates and Terms
A business loan’s interest rate and repayment terms can significantly affect your total borrowing cost. Online lenders may offer competitive rates, especially for well-qualified borrowers, but terms can vary widely. A bank loan may provide lower interest rates for long-term financing, whereas credit unions could offer more flexible terms tailored to your situation.
Maximum Loan Amount
Understand the maximum loan amount each lender offers to ensure it meets your funding needs. Online lenders might have quicker, more streamlined application processes and provide varying loan amounts – from small to large. Traditional bank loans often cater to larger amounts and long-term financing, while credit unions can be more accommodating for smaller, community-based businesses.
Lender Reputation and Customer Service
Research lenders thoroughly, prioritizing those with solid reputations and track records of providing high-quality customer service. Check reviews from past and current customers to gain additional insight. This is particularly important with online lenders, where customer service experiences can vary significantly.
Speed of Funding
If you require quick access to funds, consider lenders known for fast processing times. Many online lenders specialize in rapid funding, sometimes within a few business days, which is attractive if you need access to cash sooner rather than later to meet a pressing business need.
Collateral Requirements
Some loans require collateral, potentially putting your assets at risk if you’re unable to make the loan payments. Secure bank loans and offerings from credit unions typically have collateral requirements. At the same time, some online lenders provide unsecured loans, often at higher interest rates, to compensate for the elevated level of risk posed to the lender.
How to Get a Business Loan
When you’re ready to apply for a business loan, here’s how to move forward.
Assess Your Financial Health
Examine your business’s financial health critically. Lenders want to see a strong cash flow, stable sales and a good debt-to-income (DTI) ratio. Reviewing your financials also helps you determine how much you can afford to borrow without becoming overextended.
Evaluate Your Credit Score
Your credit health also plays a vital role in loan approval. Most lenders require a solid credit history both on the personal and business fronts. Obtain your credit reports, review your scores and take the necessary actions to improve your credit profile(s) if needed.
Create a Solid Business Plan
A comprehensive business plan is essential. It should detail how you plan to use the funds, how the loan will contribute to your business and how you will repay it. Lenders need to understand your strategy and how you’ll leverage the funds to foster business growth and expansion.
Prepare Financial Statements
Organize your financial statements, including balance sheets, cash flow statements, and profit and loss statements. These documents provide a clear picture of your company’s performance and stability and are also examined by the lender during the application review process.
Gather Other Necessary Paperwork
You’ll need to collect additional paperwork that can include business licenses, articles of incorporation, tax returns, and lease agreements. This paperwork substantiates the information provided on your business loan application.
Choose the Right Loan and Lender
Research various loan types and lenders to find the best fit for your needs. Whether it’s a traditional bank, an online lender or a credit union, choosing the right option is pivotal to ensure you have a pleasant lending experience.
Fill Out the Application Form
When you’re ready, fill out the application form thoroughly. Provide accurate and detailed information to prevent processing delays or an inadvertent denial. Be sure to double-check for errors before submitting your application to the lender.
What Are the Various Types of Business Loans Available?
Below is a closer look at the business loans that could work for you.
Term Loans
Term loans are more of a traditional form of business financing where you borrow a lump sum and pay it back in equal monthly installments – with interest – over a fixed period. These loans are suitable for established businesses looking to fund major one-time expenses.
SBA Loans
These loan products are partially guaranteed by the U.S. Small Business Administration, offering favorable terms, like lower down payments and extended repayment terms. There are several types, including the popular 7(a) and 504 loan programs, which cater to a broad range of business financing needs.
Business Lines of Credit
A business line of credit offers small business owners a lot of flexibility. It allows you to draw funds up to a certain limit as needed and pay interest only on the amount used. Like a credit card, it also replenishes as they make payments toward the principal balance. It’s ideal for businesses that experience fluctuating capital needs.
Equipment Financing
Equipment financing is specifically designed to fund the purchase of machinery and equipment. Your business can get the necessary tools without paying the full cost upfront, with the equipment you acquire typically serving as collateral for the loan.
Merchant Cash Advances
Merchant cash advances provide quick cash in exchange for a portion of future sales. Although convenient, they can have high fees, making them better suited for businesses that need capital quickly and have the revenue to support repayment.
Invoice Factoring
You sell your company’s unpaid invoices to a third party at a discount in exchange for cash. This is beneficial if your business commonly faces long invoice payment cycles and needs to quickly improve cash flow.
Microloans
Microloans offer smaller loan amounts and are often provided by non-profit organizations and the SBA. This financing option is excellent for startups and small businesses that may not qualify for larger loans.
Conclusion: Where to Get a Business Loan
When you decide to secure funding for your business, it’s important you know where to turn for a business loan. As a small business owner, you have a range of options, each with its own benefits and considerations.
You can apply with a bank, credit union, or online lender. Regardless of which option you choose, assess its funding options, lending guidelines, processing times, and terms to find the right fit.
