Every year, tens of thousands of people start new ventures. Whereas the niche might be different, each one of them has one thing in common, they all need to raise money to finance their corporate expenses and get the business off the ground.
With so many ventures kicking off each year, it is no wonder that there is also a growing demand for lending platforms. Securing a business loan does not require one to go far and wide anymore, it has become convenient than ever before. However, with a wide variety of options, it becomes hard to comprehend which source of financing will work the best for your company. The overwhelming options make things a little challenging for small business owners.
There are usually business loan guides created to address the most commonly occurring thoughts regarding business financing. There are just so many things an entrepreneur has to deal with while reaching-out for external means of injecting capital into his venture.
Here is a list of aspects worth considering that will help you decide rationally about which business loan will best suit your needs.
1 – Know Your Business Needs
The best way to find a loan that would match your business perfectly is to assess your company’s financial needs. There are various things for which one might need a loan, for instance, to keep up with the expenses or a safety net for the times when things go wrong. Putting a finger on an exact reason as to why a loan is required would help you in determining the approximate amount you wish to apply for.
2 – Figure Out The Right Amount To Loan
If you consult with finance experts about whether or not you should go for a loan, 90% of them would answer in negative, unless of course, you need it direly. Nonetheless, if you are to apply for a loan, ensuring not to ask for too much or too little is important. You would need to decide on an appropriate figure before applying.
Different lenders use different parameters to assess your business’s health and decide how much amount do you qualify for, but that is a story for another time. For now, remember that you must ask for the figure you exactly need.
3 - Know Your Lenders
The lending business is booming because of its growing need for the past few decades. Besides conventional lenders, there are dozens of granters that lend you money on more lenient terms. Once you weigh all the options carefully, you can easily decide which one to opt, especially, when things become crystal clear for you. The few most reliable and commonly approached moneylenders in the world are;
Banks
Banks are the most conventional lenders known to business owners. They provide typical bank loans at very low-interest rates. The downside? It might take you longer to finance your business.
Small Business Administration (SBA)
SBA loans are another very common option. Apparent from the name itself, SBA offers various loans to small business owners. However, it does not do that by itself but encourages other granters such as banks to lend more money to small businesses. SBA is a great option for those who narrowly miss out on traditional bank loans.
4 – Alternative Options
Besides the aforementioned options, there are multiple alternative ways available that help entrepreneurs with financing their organization. The alternative options are usually best for quick financing however they come with higher interest rates.
5 – Accessing The Lender
This might not seem like a suitable option to be considered on the list, but it is. If you weigh all your possibilities by assessing your situation carefully, you can easily decide on a business loan. Reaching out to lenders has become convenient than ever before. Be it traditional granters such as banks or private lenders, they can be accessed either in person or online. Especially for alternative granters, online platforms hosting private lenders work best as they guarantee the lenders’ authenticity. This ensures transparency and ease in the application process.
6 – Requirements For Qualifications
If you think you can form a decision by just evaluating your financial needs and convenience of the lending process, you are wrong. Even when you’ve reached a decision regarding the most favorable loan for your company, if you do not comply fully with the criteria of the loan, you might not secure it.
One thing that all lenders have in common is the requirement of a good credit score. Aside from that, lenders also consider the time you have been associated with the business, your company’s revenue, balance sheets, your credit score, etc. Here are the few commonly asked requirements by most conventional lenders, such as banks;
● At least two years of operation
● An above 600 credit score
● A minimum of $100,000 of revenue generated a year
Other common requirements include a firm nationality, a comprehensive business plan, no bankruptcy records, and no criminal charges in the past three years, etc.
Private lenders are not as hard on the borrowers as conventional ones. They have much softer prerequisites and provide leniency to a great extent. Alternative lenders are angel investors especially for the young businesses as they offer loans for companies who have been in operation for as low as a few months.
What Are The Types Of Business Loans?
When looking for the best financial solution for your organization, you must be familiar with the various options available for small businesses, such as;
Term Loans
Long term loans, commonly known as term loans are great for owners with good personal credit scores and who need funding in large amounts. But, you might want to re-consider long term loans as they are not best for fresh businesses because the lenders often evaluate your business’s track record.
The process to apply for long-term loans is cumbersome. According to reports from sources, banks approve only 25% of the total small business loan applications. If you get lucky to be amongst that 25 %, you will have to pay huge amounts annually in interests and repayments until it is paid off completely.
Term loans are best for real-estate businesses, starting a new venture, remodeling or renovation, or business expansion.
Short-Term Loans
Short term loans are good to avail fast cash. It is meant for businesses that are aiming to bridge the gaps between their cash flow, which can be due to any reason such as paying off interest, addressing emergencies, investing in new business opportunities, etc.
The benefit of the short term loan is that almost anyone can get it without much hassle. If your company has a bad credit score and you are unable to qualify for any other loan, this one can rescue you. Besides, short-term loans include very little paperwork and offer quick processing, making it extremely feasible to apply.
However there is a catch, short-term loans require quick repayments. Means, your lender is going to give you a schedule with short periods for loan pay-off. Typically, with a total repay period of two years, it might require monthly, weekly or even daily payments.
Secured Loans
Are you running a business that has a poor credit rating or occupies a very tight budget? Secured loans are the thing for you. This type of loan offers the lowest possible interest rates.
With secured loans, you get a way to keep your business running while maintaining your credit rating, without getting into more financial troubles with interests and urgent repayments.
All small business loans are secured against some kind of asset, for instance, a success history, invoices, equipment, purchases, or inventory. However, a loan secured by means of property is the only way to get financing for small businesses.
Equipment Loans
An equipment loan is a good go for newly established businesses that require the latest equipment to improve their facility. Equipment loans can be used to finance any kind of equipment. The reason why this loan is advantageous to startups is that the equipment itself can act as collateral for the lent money. These biz loans are reasonable but the terms might vary depending on a business’s time in operation, financial picture and credit scores.
Invoice Financing
This is a type of short term loan where the invoices serve as collateral. Invoice financing is most beneficial for businesses looking to resolve their cash-flow problems that arise from unpaid invoices. Companies relying on invoicing can easily acquire this loan. It can stabilize your cash flow if you invoice many clients who like paying at different times.
Under invoice financing, the lender will advance you a percentage of your company’s total invoice amount, while holding the remaining percentage as collateral.
Conclusion
There is no fixed recipe to tell you which loan is perfect for a certain kind of business. It does not happen magically and you need to complete your homework to arrive on a decision most suited to your needs. Once you consider all aspects thoroughly and decide on a loan, make sure you consult it with at least your trusted employees or family and friends (if not professionals) about the loan you have been eyeing.
