As you begin to build your business, you will likely find yourself in need of some additional funding at some point. Business owners commonly find that their cash flow needs a bit of assistance through a loan. With a loan, you will get the financing you need to invest in your business and pay the funds back on a predetermined schedule, likely monthly payments.
Whether you pursue online applications and even online lenders or want to go a different route, there is a lot to know. As you begin to investigate the different ways of securing these upfront funds, you will find that you have a variety of methods for securing your funding.
We will explore some of the different sources of funding you can consider and some factors you will want to keep in mind as you look for ways to invest in your business.
How Are Small Business Loans Helpful?
With a small business loan, small business owners can secure the funds they need to build their business in a variety of ways. Depending upon your business needs, you might use your loan to help you in areas like:
- Securing a facility to produce or sell your products
- Expanding your offerings and opening a new location
- Help managing your business and staying afloat during a crisis, such as the coronavirus pandemic
- Funding to expand into a new area of the market
- Startup funds to help you get your business idea off the ground
Depending upon your needs, you will find that you have a variety of different areas to look to find funds that can help you thrive.
What Are the Best Small Business Loans Available?
There are several different loan types that small business owners can pursue depending upon their intentions for financing. The loan products will differ depending upon a variety of factors, such as the lump sum that they offer, the terms and interest rate associated with the loan, and how long the borrower will have to pay it back. Small business lenders will also require borrowers to pay interest on the loan, which will also impact how expensive the loan is and how much you will owe each month.
We will explore some of the main categories of loans that small business owners can pursue. This will help you determine the terms and conditions that will work best for you.
The Small Business Administration, or SBA, provides small businesses with a number of different forms of help and protection. For example, as the coronavirus pandemic forced many small businesses to shutter their doors across the country, the SBA began a loan program known as the Paycheck Protection Program. These PPP loans provided small business owners with the additional finances they needed to keep paying their employees. SBA lenders care tremendously and can help businesses continue to grow. Those who used their funds in specific ways are even able to secure loan forgiveness on these loans.
SBA.gov also offers a variety of different loan programs for those interested in small business loans. While the agency does not itself provide the loans, it does connect small businesses with approved SBA vendors to make it easier for them to find the lending terms that will help them.
There are three main types of loans promoted by the SBA:
- 504 loans, which are long-term loans designed to promote job growth and business growth.
- 7(a) loans, which can be used for a variety of purposes, such as working capital and business purchases, but require applicants to meet certain criteria.
- Microloans, which are loans with a cap of about $50,000. These loans are specifically used to help new startup businesses or to give an existing business the resources needed to grow and expand.
These types of funds, done in conjunction with the SBA, provide business owners with a reliable means of securing funding. They are far, however, from being the only financing options.
Crowdfunding has become increasingly popular in recent years. There are a number of different platforms and online application options to help small business owners find and connect with the funding circle they need.
With crowdfunding, you can ask people to donate a small amount to support your business. With a long list of people donating just a few dollars, that number will quickly add up. You can clearly see how you can secure the financing you need to reach your goals.
Sometimes with crowdfunding, businesses will offer supporters special offers as a thanks for continuing to support the business. For example, you might offer financial supporters the chance to get the first look at a new product or service release.
Lines of Credit and Credit Cards
For many borrowers, a business credit card or business lines of credit can provide immense benefits as a means of accessing additional financing as needed. With a line of credit, businesses can access a set loan amount from a financial institution. They can then access this money as needed, such as for help if their revenue falls short one month and they need to pay rent for their business.
Business funding can also come through a credit card and work in a similar way to a short-term loan. The business uses the credit card as a form of small business lending to purchase what is needed to start up or build their business. They can then pay them off slowly over the course of each month from the business bank account, careful to ensure that they always pay at least the minimum amount due.
These types of loans tend to be relatively straightforward, particularly when the funding comes through an existing credit card line. Depending on the limit on the card or the line of credit, business owners can use this type of funding for everything from buying office supplies to expanding their marketing budget.
Another popular form of securing funding comes in the form of a term loan. The loan application, along with a variety of different factors and criteria — such as the business plan your business offers, your revenue, and your business credit history — will determine your ability to use this form of small business financing. You can approach traditional banks about securing a term loan or you can approach other financial institutions to see what they offer.
The loans can be either short-term, intermediate-term, or long-term. The loans can also come with fixed interest rates so you do not have to worry about seeing an increase in the amount due each month as the years go by. There are a few loans that offer a variable interest rate, but you will have to evaluate if the changing payment will benefit you or leave you struggling to pay the amount due.
Term loans can help businesses in a variety of different situations. Existing businesses, for example, can use the funds to expand their available working capital as they prepare to expand. Using a term loan for equipment financing has also become increasingly popular.
Many businesses will need a physical location to support their business development. You might use this space to help you sell the products you produce, meet with clients, or produce items to sell. Regardless of what you need the space for, commercial real estate provides you with another major category of loans to consider.
With a commercial mortgage, you will need to make a down payment on the location you want and then pay the remainder of the loan through monthly payments. Lenders will look at your annual revenue to make sure that the loan for the property will not comprise too much of your income.
If you want to find the right location for your business, many people find working with a real estate agent to be helpful. The professional can help make sure you understand the differences between a commercial real estate loan and a residential one.
How to Choose a Type of Business Loan
Now that you understand the main types of loans, you can consider the loan and lender that works best for you.
As you begin to look at the different types of loans available, it is a good idea to carefully evaluate your precise needs and how they line up with the loan options so you can make the best choice possible.
- Consider the amount of funding you need. Depending on the amount, you might lean more toward finding microlending or even crowdfunding options. If you need to buy serious equipment for your business and need larger amounts, then one of the other SBA loans or a term loan might work better.
- Check your personal credit score. Many lenders will use your own credit history and how you repaid personal loans in the past during the credit application process. Bad credit, therefore, can make it hard for you to secure a business loan at competitive rates. Instead, you can find yourself facing a loan with high interest rates and repayment terms that will be challenging for your business. In these situations, you want to focus on raising your own credit score, looking for financial institutions that offer business loans while weighing private credit scores less, and looking at alternative lenders of financing (like crowdfunding) until you are in a position to secure better terms.
- Look at the interest rates available. You want to secure the best possible interest rates. Monitor what your loans will look like based on your eligibility for a few different resources.
- Review your repayment terms. You also want to look at the repayment terms you are offered. Make sure that they are favorable to you. For example, if your business has an excellent year, can you pay some of the loan off early and save money in the long term?
Making a funding decision can be a challenge with all of the different options available. However, carefully evaluating your precise needs, looking at your loan terms, and positioning yourself to receive the best possible offer can all help you make the best decision for your organization.
Tracking Your Finances With Skynova
As you begin to build your business, you will tend to keep a close eye on your finances. Fortunately, Skynova was designed as a small business accounting system to help businesses just like yours. With a straightforward interface, a library of resources, and free templates, in addition to accounting software, Skynova makes it easy for businesses to track their finances, including money from loans. Follow how the money is spent, track your ROI, and feel confident with your accounting.
Notice to the Reader
The content within this article is meant to be used as general guidelines regarding financing and may not apply to your specific situation. Always consult with a professional accountant to ensure that you're meeting accounting standards.