By Laura Sabo
There are several factors that you should consider before getting serious about applying for a business loan. Lending institutions are not always quick to hand out blank checks to expand your business and you, as a business owner, should be cautious in accepting any financial assistance. Applying for a business loan without having a firm understanding of what you are getting into can lead to many wasted hours and, possibly, years of financial turmoil for your business or your family. On the bright side, choosing the right loan for your business can catapult you to the next level of success. Here’s how to do it right.
Does your business actually need a loan?
Here’s a simple checklist that you should consider to determine whether or not your business actually needs a loan. If you answer “no” to all of these, then perhaps a loan is not your best route.
- Is your business expanding? Investing in your business’ overall expansion through advertising, new property, increasing your staff, renovating your building, etc. can come with high costs and even higher rewards. Expansion is a great way to keep your business booming without suffering from a plateau in profits. The right loan can help you get there.
- Are you short on inventory? A business loan can help you fill the gaps so that you maintain happy customers and continue to sell when immediate cash is an issue.
- Is your cash flow dwindling? Let’s say you have customers who haven’t paid or inventory that must be moved soon in order to keep the doors to your business open. Instead of relying on unknowns, such as outstanding invoices, for your cash, a business loan can help you have peace of mind when cash flow is tight.
- Do you need to purchase equipment? From office printers to heavy machinery, having the right equipment can make or break a business. Loans are a great way to ensure you have what you need to do business.
- Are your current loan terms less than ideal? Sometimes startups or fledgling businesses must accept loan terms that may come with high costs. As businesses grow, negotiating ideal loan terms becomes easier. Your business may be able to minimize interest paid by negotiating a better loan.
- Are you willing to accept the risk? It is always best to avoid debt, especially for your business. Don’t take out any type of loan unless it is absolutely vital.
Choosing the Right Loan
There are several types of business loans. Choosing the right one for your business is not always cut-and-dry and will require targeted research on the loan type you choose, loan terms, the lending institution’s track record, your industry norms, proper procedures, and more. But navigating the lending process starts with having a general idea of what type of loan you think you’ll need. Below are the most common types of business loans.
This is the most commonly referred to type of business loan. A term loan can be obtained through bank and nonbank lenders. Term loans usually require a solid credit rating, collateral, and personal guarantees. Terms vary tremendously depending on the purpose of the loan, the lender, business credit rating, personal credit rating, and more. You are likely to not be granted a term loan if your business practices lending, speculating, passive investments, pyramid sales or schemes, gambling, etc.
SBA Guaranteed Loans
The Small Business Administration is a U.S. government agency designated to helping businesses grow. It does not directly administer business loans, but it does guarantee that at least a portion of business loans will be paid. This makes it more enticing for lenders to grant loans to businesses. The SBA maintains a set of guidelines designed to give lenders peace of mind when lending to small businesses. SBA loans, as they are often referred, can be as small as $5,000 and as large as $250,000. There are varying requirements for different types of SBA loans.
Poor cash-flow can cripple a business. Short term loans are designed to help businesses in between pay cycles or in otherwise unusual cash circumstances get through challenging times. Short-term loans are beneficial in helping small businesses make payroll and cover other day-to-day expenses in outstanding circumstances.
Similar to a personal auto loan, equipment loans can provide the resources that your business needs to move forward while using the equipment purchased as collateral. Examples of purchases include, but are not limited to, computers, heavy machinery, or any other tangible items that can be purchased and repossessed by the lender if a loan is defaulted upon. Because there is tangible collateral at stake, equipment loans are generally relatively easy to obtain.
Lines of Credit
Lines of credit generally provide easy-to-access, “revolving” credit that can be tapped into again and again as long as regular payments are made. Lines of credit are similar to home equity lines of credits and can be used for a wide array of business needs. Interest is only paid on funds that are actually utilized. Generally, equipment or inventory can be used to secure lines of credit.
Accounts Receivable Financing
Often referred to as “invoice financing,” this loan option can be a tremendous help when a business-to-business service provider, for example, has many outstanding invoices to other reputable businesses. It can provide the flexibility needed to cover any gaps in payments received. Generally, a lender will cover whatever amount of an invoice that is not paid to date and will charge a fee without requiring any collateral or credit checks. The downside is that fees are generally relatively high when compared to other loan options.
Merchant Cash Advance
A merchant cash advance is a quick loan option that is usually paid out within 24 hours. It’s designed to help businesses maintain positive cash flow while they are waiting on credit card payouts from customers who have already made purchases via credit card. Merchant cash advances are one of the most expensive loan options, with APRs as high as 80 percent.
Making the Decision
After you’ve evaluated whether or not you need a loan and chosen the loan that best suits your business’ needs, you should consult a local lending institution, your local SBA district or branch office, your local Small Business Development Center, and your local chamber of commerce for more resources. Getting the best loan terms depends on your business goals, your business eligibility (such as credit and sales forecasts), and which type of loan you choose.
For more business coaching tips and ways to enhance your overall business growth through peer-to-peer relationships, contact Laura Sabo via email at firstname.lastname@example.org or visit ExecutiveForums.com.
Laura Sabo is a professional facilitator with Renaissance Executive Forums. She brings together Business Owners, Presidents and CEOs from non-competing companies into an advisory board process through which thousands of leaders gain fresh ideas and new insights.