When it comes to financing your small business, you have various financing options available to you – term loans, lines of credit and banks are among them – each offering different interest rates, fees, loan limits and terms that depend on which funding option is selected.
Before applying for a business loan, it’s essential that both your personal and business credit scores are thoroughly examined. If either one falls short, steps should be taken to improve them before making your application.
Term Loans
Term loans may offer advantageous rates and repayment terms depending on the credit history of your business, yet qualifying can be more challenging. Lenders usually require personal guarantees (legal agreements that state you will repay the loan with personal funds if the business cannot do so) as well as collateral to secure these types of financing options.
Traditional business term loans provide you with access to lump sum capital at a set interest rate and repayment term length of one to five years, providing access to funds in one lump sum for making large, single investments like expanding their company or purchasing equipment. Business term loans are available through various lenders such as online lenders, banks and credit unions while alternative debt financing products such as lines of credit, invoice financing or equipment loans provide funds on a more flexible basis with daily or weekly repayment plans using purchased equipment as collateral.
Lines of Credit
Like credit cards, lines of credit provide businesses with financing on an as-needed basis to fund working capital needs. Collateral may include commercial real estate, inventory or equipment as a form of security against these loans; some lenders may require personal guarantees or even file an UCC lien against your business to secure one.
Minimum requirements and maximum credit limits differ depending on the lender. Usually, financial statements that show revenue and profit must be provided. You can find lines of credit through traditional banks, credit unions and online lenders; alternative lenders tend to provide faster turnaround on applications.
Many small businesses rely on revolving lines of credit to bridge temporary cash flow gaps and take advantage of growth opportunities, but it is critical to carefully manage this form of financing to avoid unjustified tappings into it, leading to unnecessary interest charges and raising balances quickly to maintain healthy credit profiles and avoid increasing rates.
Equipment Loans
As its name implies, equipment financing specializes in funding purchases of business equipment. Borrowers typically use collateralized items purchased as security for loans lasting up to 10 years with competitive interest rates and repayment terms offered by traditional lenders.
Small businesses may qualify for government-backed Small Business Administration loans that offer more lenient lending requirements such as lower down payments and longer repayment terms, along with credit unions, private lenders or equipment financing companies as possible lenders.
Dependent upon your needs, it is vital that you shop around for the appropriate lender. Each financial institution offers different rates, terms and eligibility requirements. Furthermore, it would be wise to conduct a credit review on both personal and business credit histories to assess approval odds before applying for any type of financing – this way you may identify ways of improving them if necessary.
Bank Loans
Banks offer small business loans at competitive rates and terms, but the application process is time consuming due to extensive paperwork such as financial statements, payroll reports and tax returns required for approval.
Banks tend to prefer established businesses with proven revenue and creditworthiness over startups or those experiencing negative cash flow.
Online lenders tend to have more flexible qualifications compared to traditional banks and may approve your business for a line of credit or working capital loan even with poor personal or business credit, although they may charge higher interest rates and fees than banks would. Before making your application decision, always compare options in order to secure the best rate and terms that fit your particular business needs. Alternatively, funding your business with family and friends could save time and effort, though improper handling could damage personal relationships irreparably.