When you run a business, sometimes taking on a loan can help you profit in the long term. You may need to expand your buildings to offer more indoor space, replace outdated equipment, or cover staff wages. A business loan could even pay rent that has accumulated due to COVID-19.
Whatever the reason, acquiring a business loan can seem overwhelming, especially with over a dozen varieties of loans. Fortunately, some are more common financial options than others. Today, we’ll talk about term loans, SBA loans, line of credit loans, and cash advance loans.
Which Loan Is Right For Your Business?
Here are some questions to keep in mind:
- How much funding do you need?
- What are some manageable loan terms?
- How quick do you need funding?
- What are my assets and credit scores?
These types of considerations will be crucial in helping you decide the best route for your business.
Lenders want to be sure you’re a good risk, so they’ll assess you based on your personal credit score, business credit history, how long you’ve been in business, net income and revenue.
Four Most Common Business Loans
- Term loans: These are ideal for small businesses who need to make a big purchase. The terms of the loan and fixed interest rates are based on the borrower’s qualifications. Term loan lenders prefer borrowers who have strong personal credit and high revenue. They may even require some form of collateral, such as the business itself, which can be sold if you’re unable to make payments.
These loans are available in amounts from $2,000 to $5 million and can have annual percentage rates ranging from 6% to a whopping 99%.
- SBA loans: The Small Business Association backs these types of loans, offered by approved lenders such as banks and available in amounts from $500 to $5.5 million. They also provide free business counseling. In order to be eligible for a SBA loan, businesses must be for-profit, operate in the US, have the owner’s own time or money personally invested, and be denied by other financial lenders.
It’s important to have at least two years of business history and good credit scores. An SBA loan can provide competitive interest rates and really favorable loan terms. The downside of this business loan is the lengthy application process, which is less ideal for those who urgently need financial assistance.
- Line of credit: Similar to a personal line of credit, this business loan allows the borrower to withdraw funds and repay with interest. It’s ideal for businesses that need ready cash to cover gaps in monthly income or when they need to finance projects where they can’t predict their precise needs. In the right circumstances, these can be an ideal loan but they carry their own variable risks as well.
- Cash advance: For a business in need of quick funds but with bad or nonexistent credit, some consider a cash advance. This type of loan is often exchanged for a portion of future profits, but it can also open up business owners to unsavory practices, many of which are illegal in several states. You should avoid these loans if at all possible.
How to Apply
Be prepared. Do as much research as you possibly can. The SBA recommends preparing a written business plan, financial statements, personal credit reports, business credit reports, tax returns, and bank statements. You will also need relevant legal documentation, such as your articles of incorporation, contracts, leases, and any permits or licenses your business requires to operate.
With most small businesses seeking loans of less than $100,000, many banks don’t want to underwrite these loans since it affects their profits. Try applying for larger loans or apply to the SBA, since they offer microloans as low as $500.
What if your business loan application is rejected?
Don’t give up. Remember that simply because one lender denies the application doesn’t mean another will. Community banks, for example, are more likely to approve applications with lower credit scores because of how heavily invested they are in the local community. The Equal Credit Opportunity Act guarantees you the right to know why your application was denied. Don’t be afraid to ask for the reasons why a lender turned you down.
Good advice can make the difference between your business thriving or falling into financial problems. Contact us to be connected to an experienced financial advisor.