The National Small Business Association estimates that 69% of small businesses took out loans, venture capital, crowdfunding, and credit cards in 2016 to help finance their business goals. The remaining 31%, however, were unable to get funding due to various reasons.
It’s an undisputed fact that to start and run a successful business venture, you’ll require money.
Small businesses require cash to buy new equipment, pay employees, purchase assets, or even expand to new markets.
There are several outside sources on how to get such small business financing, including using angel investors who will help in running the business and even share risks.
However, if you don’t want to share your business equity, you can go for small business loan to help you achieve your desired goals.
To get the right small business financing for your business venture, read on and get insights on the best small business loan in the market, how they work, the different types of small business loans, what to consider before applying, how to qualify for such business loans and how to apply.
Some loans, however, help in boosting the working capital, purchasing new equipment and venturing into new markets or buying business assets.
As a business owner and an entrepreneur, getting the right funding for your business will help you achieve your goals and propel you to greater success if used wisely.
It’s important to shop around to ensure that you get an affordable loan that won’t cut into your cash flow. And before appending your signature on any loan agreement form, ensure you understand all the loan details and the associated borrowing costs before the loan is closed.
Below are some of the best small business loan worth pursuing
If you are a business whose main source of revenue is credit sales and you are struggling with cash flows, use your accounts receivables as collateral to get business funding at a fee. You don’t have to wait for your debtors to pay to finance that project. It’s quite different from invoice factoring where you sell your invoices at a discount to the factoring company who then give you upfront cash and hold on to 20% until the invoices are paid. This mode of financing is good for small businesses that need quick cash and are struggling with bad credit.
Merchant cash advance
Lenders provide small businesses that need immediate cash with a lump sum upfront advance in exchange for a portion of their credit sales. Depending on your agreement with the lender, deductions can be done daily, weekly or monthly and lenders charge fees on the amount borrowed depending on how risky your business is. The more risk involved, the higher the fees charged on the cash advance. It’s ideal for business ventures that are struggling with cash flows and cannot wait until the invoices are cleared.
Most online lenders have streamlined their application processes and borrowers can apply online and receive the funds in their accounts within the same business day.It’s necessary to take caution when used merchant cash advances because the interest rates charged are double digits and can eat into your profits.
Short-term loans Ideal for short-term business needs, these loans are easily accessible to borrowers with a good and stable cash flow, have a proven annual revenue and has at least a 2-year transaction history. Lenders are more particular with cash flow more than any other aspect of the business. Borrowers can apply online and get their loan requests approved as fast as possible since there is no lengthy background verification.
You can use these loans to pay for unexpected business expenses, boost your operating capital or even pay your staff.
The repayment schedule is usually fixed and borrowers are supposed to make monthly payments for a period of not more than 18 months.
The only downside of short-term loans is that the interest rates are high and the monthly deductions affect your business if your monthly revenue is not consistent.
Business personal loans
These are probably the best loans any small business owner can take to boost his/her business. If you have a good credit score, you can act as a personal guarantor and sign for a loan on behalf of your business. Depending on who your lender is, you can get funding within one day or even after months. Online lenders have a fast application and approval policy while traditional banks can take a long time because of the so many verification that they do before approving your loan request. The beauty of taking a personal loan from a bank is that the interest rate charged is low compared to that charged by online lenders.You can use personal loans to boost your working capital, purchase new equipment or even take advantage of new business opportunities.You’ll have to decide on a comfortable repayment term plus the monthly payments you will make to repay your loan.
The only downside of personal loans is that if the business cannot repay the loan, the negative report affects your personal credit.
Term loan These loans are for a fixed period of time and are ideal for established business with a long transaction history.
Ideal for businesses that are looking to venture into new markets, purchase real estate, or even buy existing businesses. Your annual revenue also has to be stable and attractive to qualify for term loans. Term loans can take years and lenders take into consideration your credit scores before approving you for this mode of small business funding. If your credit scores are good, the longer your term will be and the better your monthly payments will be because you are less risky.
SBA loans In a bid to reduce the lending risk for lenders and support in establishing small businesses, SBA guarantees loans for up to 85% of $150,000 and 75% of loans worth $500,000. The SBA, a government agency does not directly offer loans but only guarantees. This program was created to help provide resources for budding and startup businesses. The program is executed by commercial lenders who have been approved by SBA and normally borrowers pay an upfront fee to be guaranteed for these loans.SBA loans are flexible and the interest rates charged are affordable for most borrowers.We have four types of SBA loans: disaster loans, 7 (a) Loan program, real estate and equipment loans, and microloans program.It’s important to access your current business needs and apply for the one that suits you the most.
Before applying for any small business loan
As an entrepreneur and a small business owner, you could be excited and eager to take your business to the next level. Lenders, however, will need a lot of convincing to give you the credit you need no matter how big or promising your idea is.
You, therefore, have to do the following to increase your chances of getting funding:
Know how much capital you need and for what reasons
As stated earlier, each type of business loan performs a different function. You need to determine why you need funding. There’s no point in taking a term loan when all you need is a short term loan to cater for some short-term needs. Depending on your current financial status, determine if your sales income can support your business expenses and still service a loan. You can do that by calculating your debt service coverage ratio. This is usually the net operating income/total annual debt. For small businesses, a ratio of 1:0 is okay. The ratio means that your monthly loan repayments are equal to your cash flows. Lenders, however, prefer an ideal Debt Service Coverage Ratio (DSCR) of 1.35. For example, your net annual revenue is $135,000, and your expenses are $100,000, your DSCR is 1.35. It means that you can comfortably repay your loan and still have some cash to run the business.
It’s also important to do a loan impact analysis. What positive impact do you think the loan is going to have on your business? What do you intend to achieve with the additional capital?
By doing a performance analysis, you’ll identify if it’s worth taking a business loan. You don’t have to take out credit that you are not going to properly utilize because the borrowing costs and interest rates will cut into your profits.
Only take loans when your business really needs them.
2. Work on your credit score
A good credit score means better repayment terms, a lower interest rate and more access to huge loan amounts. Lenders will always prefer borrowers with good credit scores. This way, they are sure that the lending risk is minimal.
Small businesses, especially startups, take out loans in the name of their owners. It means that the borrower’s personal credit score has to be good. Before applying for a loan, you can check your credit reports just to ensure that it is correct and free from errors. Usually, errors in your credit report may give a wrong impression on your credit. If you suspect that there are some anomalies, you can make a complaint and have it repaired. You have to do this with facts to make the process easy. If you do have a poor credit score, you’ll have to work on improving it before applying for a loan. This will give you some leverage with lenders and help you get affordable credit for your business.
The only downside of acting as a personal guarantee for your business is that if it fails to pay the loan, the negative report affects your personal credit and minimizes your chances of getting funding in future.
3. Present a solid business plan
A business plan will give lenders an insight of your business’s target market, financial projections, the kind of products and services you intend to offer to your customers and how you intend to do it. Make sure that it is as detailed as possible.A detailed business plan acts as an assurance to your lenders that the business you intend to pursue is viable enough to repay the loan and still have enough cash to run the business.
4. Explore the different borrowing options available to you
When looking for a loan, you’ll have a lot of options to choose from. Some may be good for your business, while others may be disastrous. Choose wisely. Options like bank loans, online lenders, peer to peer, SBA loans, and credit unions are some sources of easy business loans you can look into. For small business owners, SBA guaranteed loans may be good since they offer a long-term and an affordable interest rate. Collateralized loans like a home equity loan may not be ideal since the risk of losing your home is so big.
5. Compare the different loan terms and offers
The idea is to end up with the most affordable funding option for your business. Compare lenders in terms of their APR, interest rates, loan terms, monthly repayments and the penalties they charge either for late payments or prepayments. Determine if your business can afford the total borrowing costs and whether it can make the monthly repayments without affecting your profits.
Traditional lenders like banks or credit unions will require that you fill lots of documents before approving your loan requests.
Online lenders, on the other hand, have an easy application process and do not do a lot of background checks especially for short-term financing options. They are, however, expensive than your conventional lenders.
Some of the common lenders’ requirements are:
Personal/background information – lenders will ask for your contact details, your bank details (if you are not banking with them), criminal records, and even educational background.
Bank statements – your business’s bank statements will show the lender your cash inflows and help inform their decisions on whether you qualify for funding or not. Some lenders will require three months’ statements while some will ask for 6 months or even one year.
Transaction history – lenders are more at ease lending out to established businesses than startups. The business environment is pretty dynamic and most startups don’t survive. This makes the risky borrowers.
Annual revenue and cash flow – you have to show stable cash inflow for a certain trading period.
Income tax returns – lenders will ask for your personal and business tax information for the last three years. This will give them an idea of your income.
Previous loan schedule – if you have any outstanding debt, the lender will want to know how consistent you are in making loan repayments.
When applying for small business loans:
You need to focus on getting a reputable lender who’ll help your business move to the next level.
It’s important to focus on the eligibility requirements, their reputation, their borrowing cost and the loan options that they offer.
Find a lender who’s offering the loan you are looking for. This will save your time and energy. The loan limit should also suit your needs at the moment and the repayment terms should be flexible.
Their borrowing costs should also be affordable so that you don’t end up eating into your profits to repay the loan.
Also check their reviews online and determine if they have a good history with past clients.
Now that you have all the information, what are you waiting for? Fill out our loan application forms online and let us help you grow your business. We’ll connect you with the most reputable lenders that’ll allow you access to better lending terms, quick and affordable business loans.
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