There are many reasons why a small business might need financing. Perhaps you need to purchase inventory, hire new personnel, or make improvements to your facility. Whatever the reason, it’s important to have a clear understanding of the different loan options available and how they can best be used to meet your specific needs, and how to find a lender who can facilitate your loan.
Keep in mind that business loan criteria may differ from personal loans (although most business lenders will still evaluate your personal credit score, so youâll want to make sure that you do not have a bad credit score when seeking a loan). As entrepreneurs or small business owners, you may have taken out a personal loan to fund your startup or expansion. But once your business is established, you will have additional business funding options for your company.
What Are the Different Types of Financing?
Understanding your financing options is the first step in finding the right lender. There are many types of financing available, each with its own advantages and disadvantages. Here are some of the most common:
Working Capital Loan
A working capital loan is a type of financing that businesses can use to cover their everyday expenses, such as inventory, employee salaries, and utilities. Because working capital loans are typically short-term loans, they often have lower interest rates than other types of business loans (and significantly lower interest rates than business credit cards charge). The short repayment period means that the monthly payments will be higher than on longer loans. You should borrow the minimum loan amount that will get you the working capital you need.
Additionally, working capital loans can be easier to obtain than other loan types, making them a popular choice for small businesses. While working capital loans can be helpful for businesses in a variety of industries, they are particularly well-suited for businesses that experience seasonal fluctuations in revenue.
By taking out a working capital loan prior to their busy season, businesses can ensure that they have enough funds on hand to cover their increased expenses.
A term loan is a type of small business loan that is typically used for equipment financing, expansion projects, or working capital. The loan is repaid over a fixed period of time, up to twenty-five years, and has a fixed interest rate. This makes term loans an attractive option for businesses that need to borrow money but want the stability of predictable monthly payments.
Some of the most popular term loans include SBA loans that are backed by the U.S. Small Business Administration, resulting in a lower interest rate.
Commercial Real Estate
A commercial real estate loan is a type of financing that small businesses can use to purchase or improve upon property that will be used for commercial purposes. Commercial real estate loans typically have lower interest rates than other types of small business loans, making them a good option for businesses that are looking to expand their operations.
Commercial real estate loans can be used to finance the construction of new buildings or the improvement of existing ones. Whether you’re looking to purchase a new office space or renovate an existing one, a commercial real estate loan can give your small business the boost it needs to grow.
Business Line of Credit
Some financial institutions will offer business lines of credit for small businesses that can be drawn on as needed. Lines of credit typically have variable interest rates, so when you pay interest, the rates can go up or down with the market. The line of credit is established for a certain number of years (usually five or ten years) during which money can be borrowed against the line, similar to a credit card. When the draw period ends, the borrower has a set number of years to pay off any remaining balance.
Once you know what type of financing your business needs, you can start looking for a lender that offers that type of financing and check to see if you meet the eligibility criteria.
Difference Between Guaranteed and Unguaranteed Financing
There are two main types of small business financing options: guaranteed and unguaranteed. Guaranteed financing is backed by collateral, the government (in the case of SBA loans like the SBA 7 loan), or some other formal agreement that protects the lender even if you default on the loan. Unguaranteed financing is not backed by any such protection, which means the lender is at risk if you default on the loan.
Even though guaranteed financing means that the lender is sure to get their money one way or the other, it can be harder to qualify for, especially when it is an SBA loan. The loan application process can include business plans, cash flow analysis, tax returns, and proof that your personal guarantees are substantial enough to cover the loan amount. Of course, the fact that these loans are guaranteed means that you will pay lower interest rates, which may make it worthwhile to go through that effort.
If youâre not sure which type of financing is right for you, itâs a good idea to speak with a small business counselor or lender. They can help you compare your options and find the best solution for your business.
How to Find Small Business Lenders
Small business lenders include banks, credit unions, or specialized lending companies. Online lenders, such as Biz2Credit, specialize in helping small businesses get their small business needs met faster than traditional banks. To find small business lenders, you can search online or ask for referrals from friends or business associates.
Many business owners start with the bank or traditional lender they have their personal accounts at, to see if they have any attractive offers. But many banks have limited options for small businesses. Occasionally you may be offered a slightly better rate if you have a bank account with the institution, but you can usually find better rates by comparing lenders online.
The Small Business Administration (SBA) is also a good resource for finding small business lenders. Although the SBA doesnât loan money directly, it offers a variety of loan programs through other lenders and can help you find lenders in your area.
You can also check online marketplaces that allow you to compare basic terms and conditions while providing you the direct contact information for various lenders.
What Criteria To Look For In A Good Lender
When youâre looking for a small business lender, there are a few things you should keep in mind. First, you need to make sure the lender is reputable and has a good track record. You can check with the Better Business Bureau (BBB) or other consumer protection organizations to see if there have been any complaints filed against the lender.
Each lender will have different criteria for making loans including required cash flow, annual revenue, assets, down payment, and minimum credit scores (so make sure you run your credit and know what your credit report is before you start, so you donât waste time). You will need to verify that you qualify for the lenderâs program before selecting a lender.
Itâs also important to make sure the lender is willing to work with you to tailor a loan that meets your needs. Some lenders specialize in a certain type of financing such as microloans or invoice factoring (where you sell your receivables to the lender in exchange for an upfront lump sum).
When you find potential lenders, be sure to compare their terms and conditions to find the one that is the best small business loan for your company.
Finally, you need to make sure the lender has a good reputation for customer service. Be sure to check online reviews for the lenders to verify that other small business owners have had good experiences with them.
If you follow these tips, you should be able to find a small business lender that meets your needs.
How to Compare Lenders
Before the internet, small businesses had to visit local banks or credit unions and hope they could find a sympathetic ear for their funding needs. With the advent of online lending, small businesses can now contact multiple lenders to get a bank loan without worrying about how far away they are.
To compare lenders, you can use an online tool such as the SBA Loan Finder. This tool allows you to enter information about your business such as business name and location and your financing needs. The tool will then match you with lenders that meet your criteria.
You can also contact lenders directly to get quotes. Be sure to ask about interest rates, fees, and repayment terms. Once you have quotes from multiple lenders, you can compare them to find the best deal.
What to Do if You Canât Find a Lender
If you canât find a small business lender that meets your needs, there are a few things you can do. First, you can try to negotiate. You can also look for alternative sources of financing, such as venture capitalists, private investors, or even a business credit card. Finally, you can try to get assistance from the Small Business Administration (SBA). Though the SBA does not directly loan to small businesses, they can help you connect with lenders in your area.
If you follow these tips, you should be able to find a small business lender that meets your needs.
Make Sure Youâre Getting a Good Deal
Ultimately, the best deal for a small business loan is the one that provides you with the funds you need for your business, when you need it, with a low interest rate, and payment terms that fit your budget. By checking with various lenders, youâll get a range of options, but only you can decide which loan best fits your circumstances. Sometimes it comes down to timing, rather than getting the lowest rate. Other times, you may have enough flexibility to search around and wait for the right terms.
Ready to Start the Loan Process?
The lending professionals at Biz2Credit have been working with small businesses for years and offer a full range of funding options, including working capital, term, and commercial real estate loans. Their brokers have a long history of success and can walk you through the loan process and ensure that your business funding goes off without a hitch, even if other lenders think your creditworthiness is questionable. Gauntlett reached out to Biz2Credit when he needed a loan to expand his laundry business. Biz2Credit was able to quickly get him the funds he needed to grow his company.