Small Business Lending: Ways to Fund Your Business

In order to grow, a business has to be funded. You need to invest in your people, marketing, and assets to foster growth. If you have a good personal credit score, you won’t have problems having options when it comes to small business lending. Your choice of financing will depend on what your business needs, the requirements needed and your eligibility.

From startup to relatively established small and medium enterprises, we compiled a list of business loans and other financing options.

Small Business Lending
Small Business Lending

Identifying Your Business Needs

There is a wide range of a business loans that you may choose from. Before you decide which one to get, the very first thing that you have to take into consideration is your business requirements. There are certain types of loans that will take before you can get approval. If you are eyeing into long-term funding and you have good credit standing, traditional loans may work best for you. On the other hand, it gets more challenging if you need additional funding to fill in cash flow. The good news is that there are several business loans coming from lending companies and online lenders that enable you to have your funds released in a just a matter of hours or days.

Difference Between Secured and Unsecured Business Loan

Business loans are categorized into two different types: secured and unsecured business loan. Secured business loan is a type of loan that comes with a collateral. Banks and lending companies offer loan packages that require collateral. As part of the lending process and requirements, you will have to any of your asset as a collateral.
In case of a default, the lender will seize rights of the property. Unsecured business loan works differently. Since there is no collateral involved, lending company will assess the performance of the business, the owner’s credit standing, and the capacity of the business to pay among many others in assessing the loan application

Traditional Business Loan

The traditional business loan is one of the most popular financing options for businesses. This type of loan is offered by banks. The rates are usually lower. But in terms of application process, it is quite strict. Even though banks grant loans to small business owners, they have strict requirements which pose challenges to small and medium enterprises.

Eligibility Requirements
Banks vary when it comes to the requirements that they ask from businesses. To qualify for a traditional business loan, they usually require the following:

  • The business owner needs to have good credit standing.
  • Some banks require businesses to be operation within a certain number of years
  • Current cash flow and financial statements
  • Other requirements like: duly accomplished application form, business license, tax returns, etc.

How to Apply
To apply for a business loan, you can either go to the office of the bank or submit online if they have online application feature. Most banks are strict when it comes to the documentation. Even if let’s say you have already submitted the requirements asked from you, it is not a guarantee that your loan application will be granted. The bank will evaluate your financial standing as well as that of your business.

Pros
Getting a traditional loan from a bank has its shares of pros which include:

  • You get to have lower interest rates.
  • Payment terms are considerably longer compared to others.
  • You can be sure that you are dealing with a reliable lender.

Cons

  • The documentation can be time-consuming and the application process is quite a long wait.
  • The approval rate is low since they are really strict.

Invoice Factoring

Another widely known financing option is invoice factoring. Unlike others, this is basically not considered a business loan. You don’t owe any debt? How does this work? You sell your invoices to a factoring company. The factor will then give you the cash advance you need to get instant funding.

Once you sell your invoices, the factor has the financial rights over these invoices. The factor will give you around 80% of the value of the invoices. The remaining amount will be paid once your client pays the whole invoice. Prior to giving you the remaining amount, the factoring company will deduct the factor fees.

Eligibility Requirements
Compared to traditional loans, invoice factoring is easy to qualify for. Factoring companies are not so strict with your credit standing as they look thoroughly more on the quality of your invoices. Keep in mind that these invoices should be issued to reputable customers that have established businesses.

How to Apply
There are companies that specialize in this kind of financing option. Choose an established and reliable factor company that you know you can work with. You will have to gather the invoices that you want to factor. Factoring companies differ when it comes to the fees they charge. Make sure that you read the terms and conditions completely so you know what to expect.

Pros

  • The application process is fast and easy. There is no need for a lot of paperwork and documentation.
  • If you are in need of instant cash for your business, this is one of the best options for you.
  • The line of credit for invoice factoring is flexible. When you have more quality receivables, then you can expect better line of credit.
  • The payment terms can also be flexible in the sense that you can extend payment terms.

Cons

  • The fees can be quite expensive.
  • Some factoring companies don’t have good customer service which may affect your relationship with your clients.

Merchant Cash Advance

If your revenues come mostly from sales of debit or credit card like restaurants or retail shops, merchant cash advance may be the most suitable financing option for you. In exchange of the future sales, you get to have instant cash. MCA companies evaluate the credit card processing statements.

How to Apply
To get a merchant cash advance, you will have to provide documents which include bank statements, credit score, business tax returns, and credit card. With merchant cash advance, you don’t necessarily have to submit many paperworks. In addition to that, you can also have your application approved the very same day.

Pros

  • The application process is not complicated. It is fast so you will know whether your application is approved.
  • Even if you have bad credit score, you can still apply for a merchant cash advance. In terms of approval rates, the rate is also high for MCA.
  • You do not need any collateral to have your application approved.
  • You will not have a hard time making a payment since you will only pay depending on your sales.

Cons

  • You may be able to have your application approved. But the rate is much higher making this type of financing option much more expensive.
  • This is more of a short-term solution.

Business Credit Card

There are certain instances where you just need instant cash to boost your cash flow and you don’t really need a huge amount of money. Using a business credit card is a good option. The application process is not that hard since you can just do it online. Nowadays, banks enable businesses to submit their applications online. In just a matter of 3 to 10 days, you can have your application approved.

How to Apply
To get a business credit card, you need to submit the following:

  • Business revenue details
  • Complete information about your business
  • Business tax id number

Pros

  • You can have your application approved in a short period of time.
  • This type of financing option allows you to get the financing you need without having to stress yourself in the application process.
  • The process is really fast and easy.
  • There is no need for any collateral.

Cons

  • When a business credit card is used without control, it may pose more problems which can harm your business.
  • If you need a bigger amount to buy assets, this may not be the best option for you.

Using Secured Business Loans

For business owners with bad credit, secured business loans is one option. Most lenders are hesitant to provide credit if your credit score is not that good simply because they want to make sure that you can repay the loan. However, there are lending companies that offer secured business loans. With this type of loan, you can use a valuable asset. An asset backed business loan has a much higher approval rate. The only downside is that in case of a default, the lender will seize your property.

Choosing the Best Business Loan

Every business loan or financing option has its pros and cons. You just have to choose which kind of loan best suits your business needs. There are various factors that you have to consider including the rates, application process, documentation, and payment terms among many others. You also have to take find a reputable and highly established lender.

Finding a Lender

Your choice of lending company is the very first step for you to have a good over-all experience. What are the things that you have to consider? Here are the essential things to keep in mind:

  • The lender should be certified and licensed to operate in your state.
  • The company should also be able to provide all of the necessary information that the borrowers need. A company that is transparent will disclose all of the details that borrowers want to know.
  • Ask if you have questions and you are not so sure about the loan package you want to get.
  • Do your own research. Gather information pertaining to the lender.

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