Business loans are becoming more accessible these days. Compared to traditional lending sources, you can find companies offering business loans through the internet. Banks also provide a convenient way of borrowing money from them. You can open bank accounts online without being physically present.
However, before you start applying for such loans, there are a few things you should know. Knowing how you’ll use the funds will help you create a strategic plan for your company. But it’s important to start understanding the different types of loans and which type you need.
Small Business Loans: Sources, Types, and Requirements
Where Can You Apply for a Small Business Loan?
Loans are a good source of funding for your start-up. You can take a portion of it and buy the equipment and inventory that your business needs to operate. There are different sources of small business loans where you can apply. They include:
The most common source of small business loans is a bank. To qualify for one, you should meet certain criteria, such as having a good credit history. Each bank offers different types of loans including working capital loans, term loans, and property loans.
2. Non-Bank Lenders
As a start-up company, it’s difficult to qualify for a bank loan. Fortunately, you can find non-bank lenders to apply for loans for small businesses. Since they are privately owned, these lenders provide more flexible offers compared to traditional lenders like banks. This means they can give you attractive rates and fees.
What’s more, they are not strict about the requirements for loan applications. That’s why they are ideal for small businesses that are just starting to build their credit score. On the other hand, some non-bank lenders also offer bad credit loans.
3. Government Grants and Loans
Governments have loan programs that can help small businesses build their start-ups. In the US, you can apply for an SBA loan, which is partially backed by the Small Business Administration and partner lenders.
Which Type of Loan Fits Your Needs?
As a business owner, you need to know what types of small business loans are available out there. By doing so, you can tailor your application to the appropriate loan as per your need. With that in mind, take a look at the different types of business loans to see which one is the best for you.
1. Term Loans
Term loans are a lump sum of money that you return over a certain period. The monthly payments will most likely be set and will include interest on top of the principle. You should look for loans of this type if you want to invest in a certain area in your business or need ongoing working capital.
2. Personal Loans
One of the simplest ways for company owners to obtain a business loan is by applying for a personal loan. You can get one from banks and other financial entities.
However, getting a personal bank loan can be challenging. To be qualified for one, you need to have a strong credit history and a good business plan. Start-ups may not be able to get a personal loan, but small businesses with good credit history can.
3. Business Lines of Credit
Business lines of credit are like credit cards. Both give borrowers a revolving credit limit that they can access through their checking accounts. You can spend up to your credit limit, pay it off, and then withdraw more cash.
Banks like CIBC offer business lines of credit with minimal requirements. Some of these include having a good credit score and presenting a comprehensive business plan. Additionally, you can now open checking accounts online instantly without having to wait up in a queue.
4. Receivable Factoring
If you’re having trouble being paid on time, you might want to consider invoice or receivable factoring. This loan is designed to convert sales to credit terms to generate rapid cash flow. This type of loan is used to buy time for your business while you search for long-term, sustainable financing options.
5. Merchant Cash Advances
As the name suggests, lenders let you borrow cash in advance with a merchant cash advance. In return, the lender buys a share of your daily credit and debit card sales. This type of loan lets you pay a small amount of money if your business is slow. And if it is flourishing, you’ll have to pay more.
While that is the case, merchant cash advances are the most expensive type of loan available. So you should only apply for one if your sales are consistent and you did not qualify for other types of loans.
How Can You Get Your Business Funded?
Applying for a small business loan needs time and preparation. Many business owners are not qualified for a bank loan because they did not prepare the application documents.
Before you walk into a bank, make sure that you have complete documentation and other information required for a loan. Here are some of the most common requirements needed for a business loan.
- Purpose of loan
- A good credit score
- A strong business plan
- Your business’ annual revenue for the past two years
- Your business’ primary cash sources
- A personal guarantee like additional collateral
- Your business experience
Ways to Spend Your Small Business Loan
A small business loan gives you a lot of alternatives for expansion and growth. Here are a few examples of how companies use their loans:
1. Equipment and Machinery
With a small company loan, large purchases become more accessible. You can purchase new machinery or vehicles to expand your company’s capabilities. On the other hand, you can also upgrade the ones you currently use to improve their efficiency.
2. Tenant Improvement
If you’re moving into a commercial facility, chances are you’re liable for customizing your space for your needs. This is what is known as tenant improvement and it is a part of a lease agreement.
One example is installing a new kitchen for a restaurant. The landlord can grant you a credit to cover all or part of the tenant improvements. However, you’ll be responsible for anything beyond that amount. In this case, you can use your small business loan to cover any outstanding project expenditures.
A loan can help you get cash flow so you can refill current stock and acquire new stock when it’s most convenient. Updating your inventory can expand the scope and attractiveness of your product line. This can increase customer satisfaction since they have more options to choose from.
Retail establishments are an excellent example of a company that can profit from inventory spending. They’ll have a wider product range, happier consumers, and more repeat business.
4. Business Operations
There are different expenses connected with keeping yourself active every day. After all, keeping the lights on is as important as buying inventory and machinery.
A working capital loan helps business owners manage their costs and volatility. Such financing is a useful tool for businesses that face drastic fluctuations in revenue. In this case, small business loans can assist you in getting through off-peak seasons.
5. Debt Refinance and Consolidation
A small business loan can be used to refinance existing debt. Debt refinancing keeps your existing lines of credit, loans, and other debts in place, but at lower interest rates than you’re paying now.
On the other hand, you can use it to combine the higher-interest debt into a new loan with a lower interest rate and/or monthly payment. This is known as debt consolidation. It may or may not imply a lower interest rate, but it is not refinancing in the traditional sense.
Although there is a distinction between the two, both are beneficial to the growth of your company.
Almost every business wants to attract new consumers and keep existing clients loyal to their brand.
With a small business loan, you can recruit new employees to boost internal marketing capacity. Or, you can invest in marketing tools and processes. Boosting your marketing budget is a good way of expanding your business.
By doing so, you can increase brand recognition, improve marketing analytics, and increase ROI.
7. Website Creation
As of 2021, 59% of global internet usage came from mobile users. So if your company website is still not mobile-friendly, you’re throwing away so much potential. You can create your company website. However, if you want to optimize its design and content, it’s best to outsource the creation to the experts.
As a small business owner, you may not have additional funds to create an updated website. But with a small business loan, you can make this possible. After all, a digital presence, like marketing, can help practically any business.
Some of its benefits include increased traffic, wider reach, and improved brand awareness.
Purchasing and managing a franchise falls between self-employment and traditional employment. A small business loan can help you get your business off the ground and operating.
As a franchisee, you’ll have access to the franchisor’s resources, business model, and stability. A working capital loan can be used for nearly everything you need to get your franchise off the ground.
Applying for a small business loan is a great strategy for keeping your start-up operating. After acquiring a loan, you can use it to finance different business operations or start a franchise. If you still don’t have a company website, then a good source of funding for website creation and optimization is a business loan.
Understanding your needs for a business loan is the first step to creating a good business strategy. The next step is figuring out which type of loan your company needs. Once you’ve understood both, you can now apply for the business loan of your choice.