What is a Business Loan
Business loans allow business owners to access additional funding for their company. As with other types of loans, the business owner receives money from a lender and agrees to pay it back, with interest, over a predetermined time.
Different types of business loans are relatives difficult or easy to qualify for. The factors that determine the type of loan your business has access to include your business' financial health, credit score, available collateral and more.
Types of Business Loan
There are six different types of loan available to businesses.
1. SBA Loans
The Small Business Administration will partially back a loan that ranges from $5,000 to $5,000,000. The actual loan will be provided by a commercial bank or an online lender. Since these are government-backed, they have lower APR rates than other types of loans. The money can be spent on almost anything to do with the business and the repayment period is long. However, the applying business must have a strong credit score to qualify and applications can take several months to process.
2. Business Term Loan
A business term loan allows you to borrow between $1,000 and $500,000 and repay it over several years. Typical repayment terms range from 1 to 5 years though some lenders offer longer or shorter durations. Interest rates range from 7% to 30%, can be used for any purpose and do not require collateral. Business Term Loans are determined by credit score, average revenue, and general financial health. However, many come with early repayment charges.
3. Business Line of Credit
Business Lines of Credit are like credit cards. A maximum amount of credit is approved and this can be used as needed. Interest is paid on money used and once repaid, it can be used again. Approval can be issued within a few hours of an application and the APR ranges from 7% to 25%. However, there are severe penalties when payments are missed.
4. Invoice Factoring
Invoice factoring allows you to sell unpaid invoices for an advance of 60% to 90% of their value. The lender collects the full invoice from your client and gives you the remainder minus their fees. These have low eligibility requirements since the invoice acts as collateral and they help mitigate problems caused by clients who are slow in paying. However, early repayment charges are high.
5. Merchant Cash Advance
A Merchant Cash Advance agrees to provide your business with a lump sum in exchange for a fraction of your daily incoming credit card transactions. Instead of APR, the loan will be multiplied by a value from 1.14 to 1.48. The equivalent apr starts at 15% but the maximum is in excess of 100%. There is also no fixed repayment term; payments are maid until the debt is paid off. The repayment time depends on how much money comes in each day and what percentage of it is paying back the loan. These loans are approved quickly and are suitable for businesses with poor credit history. However, interest rates are very high.
6. Equipment Financing
While other types of loans can be used to buy equipment, an Equipment Financing loan takes the purchased items as collateral against the agreement. This means the APR starts as low as 8% and only rises to about 30% and the loan is available to businesses with poor credit. The equipment is still usable while the loan is paid off. The amount depends on the value of the equipment and the repayment terms are around 5 years. However, by the time the loan is paid off the equipment could have significantly degraded or become obsolete.
Things to Know Before Applying for a Business Loan
Firt of all, you must explain what your business does clearly and succinctly. This means what you do, who your clients are, how you get paid, what your profit margins are and what you need the loan for.
Expect lenders to have high requirements. Requests for additional paperwork or some form of collateral are not unusual. In the event you cannot provide collateral, you must prove yourself to be a worthy customer through other means.
Before you approach a bank or lender, have a frank discussion with your accountant. Find out how much you really need and how much you can realistically ask for. They will help you develop financial plans and funding scenarios to strengthen your application.
Lenders always care about your credit score. Always make sure to honor your financial obligations and make repayments on time. There is no fast way to cheat good credit so take the time and get it right.
How to Apply for a Business Loan
Firstly, gather the following information: Your business plan, time in business, industry type, outstanding AR and what the loan will be used for. Next, any lender will ask for most or all of the following documents: a valid ID, personal and business credit score, bank statements, average bank balance, balance sheet, profit & loss statements, business and personal tax returns, cash a flow forecast, and a business debt schedule. Next, find the right lender.
How to Choose a Lender
Always shop around. No-one finds the perfect lender on their first try and you must take the time and get this right or it will cost you a lot of money. Investigate who offers the type of loan you need and read up about each company. Examine their website and seek out third party review sources.
Once you have found a few you like, apply to all of them. Wait and see who gets back to you and take the time to try and get to know the contacts for each business. Any healthy relationship depends on communication so make sure any lender you are considering is willing to talk to you.
Once you have your offers, convert them all to APR. Compare them side by side to find out who is offering the best deal. Once you know who that is, if they have been clear, straightforward and willing to talk, then they are likely a good bet. If you ever have doubts then ask more questions. Always be safe and confident in your decisions because your business will depend on it.