Accounts Receivable Financing to Bridge The Short Distance

If you have your own business and it is doing well, congratulations is in order. Many of us dream of being our own bosses, but few of us are able to achieve that goal. Also, a small business can be a tricky thing to keep running. There are many unique needs associated with small businesses. Many small businesses have a difficult time generating enough income to remain operational for longer than five years. As a result, you may need to find ways to keep your business solvent during tougher times. It happens to all businesses. You should have a plan in mind, just in case you find yourself in a position where you need cash quickly. There are many options available to you, one of them is accounts receivable financing.

What Is Accounts Receivable Financing?

Accounts receivable financing is a unique type of financing that doesn’t fall under traditional lending. It’s something you should understand when you are considering obtaining money for your business. This is potentially a way to gain access to money quickly. You may have heard of this type of financing referred to as invoice financing. They are the same thing, just called by different names. You may not have heard of accounts receivable or invoice financing, so I am going to explain the basics of it to you.

It is a special type of financing where a lender purchases any invoices that are outstanding. The lender, who is usually called a factor, gives you a percentage of the money that is due to you. They usually pay you anywhere from 80 to 90 percent of the amount of money you are expecting. I will explain it with a real-world example.

Let’s say you manufacture clothes and you sent clothes to a buyer and you are expecting a payment of $10,000 from them. You are expecting that payment in a short period of time. A lender will give you 80 percent of that money, which equals $8,000 today. However, you pay them the full amount of $10,000 that is owed to you. You are supposed to give the money to the lender when you receive it from the buyer. The lender does expect the payment from you within a certain period of time.

You can sell multiple accounts receivable items at one time to a lender. When you enter into one of these types of agreements, you should make sure that you review the fees and percentages to which you are agreeing. Even though you may feel like you need money fast, you should make sure you are comfortable with the agreement.

Different Ways To Approach Accounts Receivable

When it comes to business finance, accounts receivable financing can be one of the more complicated processes. I presented it to you in the most basic way above but you should be aware, it can become complicated. You should also know that just because you have money coming into you at some future date does not mean a lender is going to be willing to lend you money. The lender is still interested in your credit score when they lend money to you.

There are many different iterations of accounts receivable financing of which you should be aware. This is a sale of your assets. Anything that you have in accounts receivable is an asset and goes into your balance sheet as a liquid asset. When you sell these for cash, you are selling an asset. That is the most common type of accounts receivable financing. The good thing is that typically, once you sell the asset, the lender is responsible for collecting the debt. There is an exception to this, which I will discuss a little later in this article.

When you decide to finance this as a loan, your accounts receivable then becomes collateral. Your company maintains ownership of the accounts receivable because you did not actually sell them. You are responsible to collect on the debt.

Pros and Cons To Accounts Receivable Financing

As with anything, accounts receivable financing has positives and negatives. You must weigh all the options available to you when making a decision about how to fund your business. It is in your best interest to have all of the information. The only way that you are able to make the most informed decision is to have all of the information.

Benefits To Accounts Receivable Financing

I am going to start with the benefits when you decide to use accounts receivable financing as a lending source for your business. One of the great features of this type of lending is that you do not need any form of collateral. It is considered an unsecured finance option. But you do not have to provide an asset to guarantee you will pay the money back to the lender. In many cases, a business loan does require collateral, or a long-standing business history, which many small businesses do not have before they need quick access to cash.

Another positive to accounts receivable financing is that you retain ownership of your business. You are selling an asset, but you are not selling any part of your business. You do not lose the ability to make decisions and you are not giving up future sales. The only thing you are giving up is the full amount of the money that is already due to you based on services rendered.

Disbenefits To Accounts Receivable Financing

I always like to look at the positives and negatives to every decision I have to make. I feel like it gives me a full awareness of what I am about to do. The same is true when it comes to making financial decisions for your business. There are also some negatives to accounts receivable financing.  You should consider it before you make your final decision about it.

This type of financing does result in higher costs for you. It gives you access to the cash you need quickly, but it does come at a cost. You must be sure you are prepared to pay the price. When you figure out the percentages, you typically will pay more money when you use accounts receivable financing over some other type of business loan. While you are necessarily paying out money, you are not bringing in as much money as you expected, so you do not have as much cash on hand. The lender is expected repayment within a certain period of time. If the money is not received within that timeframe, it may result in you having to pay more money in the long run.

You have to negotiate the terms of the contract that work for you. One of the pieces of the sale that you can negotiate is the length of time which you have to repay. It can be a short process or a long one. You have to negotiate a deal that works best for your business.

What Is A Full Recourse Clause?

When you opt for accounts receivable financing, there are two types of factoring that occur. Full recourse factoring tends to be the most common type of account receivable financing. This basically means that the lender may require a clause in the contract that states if the invoices are not paid by the customer within a set period of time, that your business has to buy back the invoices. That means your business has to pay on the invoices. Ultimately, that means you pay out more money in the long term.

Let me explain this in a different way. I will use a real example to highlight how this works:

In the example I used above, the invoice is for $10,000. So, you have created and sold $10,000 worth of product. The lender gave you $8,000, so you have already lost $2,000 in some way. The customer does not pay on the invoice and now you have to buy it back from the lender. However, you have to pay back $10,000 because that is what you have agreed that the lender receives. After that, it is your responsibility to go after the customer to get the payment that is owed to you.

Before you agree to this type of agreement, you should make sure you fully understand the amount of money for which you could be responsible. You should also make sure that if it turns out that you have to buy back the invoices, you will be in a position where you are able to do so.

What Is Non Recourse Factoring?

Another type of accounts receivable financing comes with non-recourse factoring. This means the lender, or factor, assumes all of the risks for your customers not paying on the invoices. Just because your agreement has non-recourse factoring, it does not mean that you are completely protected from a situation where the invoice is not paid. You should make sure that you completely understand any agreement that you enter with a factor. If you are not sure, then you should ask the question so that you know your responsibilities.

Some lenders only offer a non-recourse clause in the case of you filing for bankruptcy. However, you should know that just because your business ends up filing bankruptcy (if it does), you may not be protected from a customer that does not pay on the invoice. The lender may limit that type of protection only to those businesses that have good or better credit. If you have bad credit, you may not be given that protection. The bottom line is you must be aware of the details of your agreement. This can be a confusing undertaking, so if you are not sure, you must ask questions to be sure that you understand.

Does It Make Sense For My Business?

An important question for you to answer when you are trying to determine how to finance a business is does accounts receivable financing makes sense for me and my business? You really have to take a look at the pros and cons to determine that. You also need to understand how much money you may have to pay in the long term and if it makes the most sense for your business. Even if you do not expect that the customer will not pay the invoice, you must consider and account for that. If you have to buy back the invoices, will you be able to absorb those costs? If the answer is no, you may want to question whether or not this is the best option for your business.

When you find yourself in a position where you need money fast, it is easy to focus on the immediate need and lose focus on what this type of financing means for you in the long term. Take a moment and a deep breath while you take a step back and look at the big picture. You may decide that this is the best option for your business. You may determine that the risk involved is worth it for you to get the money right now. Also, you may have more money in a month or two that if everything falls apart with the invoices, you will be able to buy them back.

Do I Have Other Options?

There are other types of business loans available to you as a business owner other than accounts receivable financing. It is smart for you to understand all of the options available to you when you make a choice between your financing options. One of the most available options for you is a loan that is backed by the Small Business Administration (SBA). They are a federal agency and they do not provide the business loan to you. They are backing the loan in the event that you default on it, they will pay as much as 90 percent of it. This makes your loan less risky. The SBA does work with traditional lenders in an effort to regulate the rules around the loans that they are backing. The SBA remains in control.

You should understand this type of loan is intended for long term planning and not meant to be a quick way to get cash. It is a lengthy process that requires a large amount of documentation. You may need to agree to background checks and provide financial reports and tax documents. In some cases, you may need to provide collateral. These types of loans can have fixed or variable interest rates. And the repayment period can be as long as 25 years.

Top Reasons An SBA Loan is a Great Way to Fund a Company

Does It Matter What Type Of Business I Have?

There are different types of businesses that you may be an owner of which might make a difference as to which loans you may be able to obtain. It has recently been determined that almost a third of all small businesses have not had a requirement to borrow money. So, that means that about two-thirds of all small businesses have needed to borrow money. That is a scary proposition for anyone that owns a business.

Many businesses use a business credit card to help them acquire items that they may not have cash on hand to purchase. About 30 percent of those businesses borrowed money from a bank or credit union. 12 percent of those businesses received some type of credit from vendors. The reality is that no, it does not matter what type of business you have, there will come a point at which you will need to borrow money or have credit extended to you. You must be aware that a situation may happen and be prepared for it.

Conclusion

While at the core, this article is about accounts receivable financing, it is also about being prepared. One of the ways you can protect yourself as a business owner is to be prepared for what situation may occur and come your way. While it is impossible to predict how well your company will do in these difficult times, you can arm yourself with information about how to handle specific situations. I am not suggesting that you borrow money you do not need, or automatically assume you are going to fail. The economy is a difficult thing to predict. And if your business is based on selling a product or service, you may find yourself in lean times where customers are not purchasing your item. You should know what options are available to you if you should find yourself in that position.

You should also know that Loanry is here to help you at any time with all money matters, including finding lenders. We connect you with credible companies withing seconds.

A Handy Guide to the Various Business Financing Options

You have taken the plunge to start your own business and you are finding yourself in a place where you need some funding. You either do not have extra cash on hand, or you do not want to dip into those reserves. Maybe you would rather save them for emergencies. When you find yourself in this place, what do you do? The good news is there are various business financing options available. The best plan of attack for you and your business is to arm yourself with all the information you can before you need it. It will help you to understand different types of business loans. Also, that way you will already have all the information you need before you have to make a decision. Continue reading to find out more about all the various business financing options.

General Business Loan Information

There are many different business loan options available to you. Some of them have specific items for which you can use them. Others can be used for anything related to your business. I will dig deeper into the various business financing options a little further down in this article. Now, I want to give you some general but important information about business finance options.

The criteria for qualifying for a business loan changes based on the lender. Typically, there are some common qualifications no matter which loan and lender you choose. A lender wants to know your personal credit history and credit score, as well as any credit history that your business has. They also want to know the current debt of your business and your business’s debt to income ratio. They prefer for your business to have been in operation for at least two years so that you can prove it is well established. Lenders also want to know the type of business you have so they can have a better understanding of how much profit you make.

No matter which lender you choose, you must sign a loan agreement which states the amount of money you wish to borrow, the interest rate, the term of the loan and how much you must pay each month. By signing this document, you are agreeing to make these payments each month.

Why Consider Business Financing?

There could be several reasons why you might want to consider all the various business financing options available to you. Some of the common reasons you may want to consider a business loan are listed below:

Expansion

When you start a new business, you tend to start small. You want to see if your business can generate revenue and last. Once you establish yourself, hopefully you find yourself in a position where you need to expand. You may need to hire new employees, or obtain a larger space. If you started your business in your home, it may be time to get a space solely for your business. All of the expansion needs require money. You may be growing but you may not have enough cash to pay for the growth upfront, so you can turn to business financing.

Equipment

Perhaps your business needs some new or updated equipment. Most of the time, equipment is expensive and you may not have the money to pay for it outright. There are financing options that are specifically for equipment. In many cases, you can also lease equipment instead of purchasing it. You should consider all of these options before you make a final decision.

Credit Building

Maybe your business is fairly new and does not have a lot of credit. Perhaps, your business has a touch of bad credit because you had some rough years. No matter the reason, you may want to being working on building positive credit for your business. One of the best ways to do that is to take out a business loan and make timely payments.

Inventory

There comes a time when you need more inventory. It could be because you have used up all of your supplies and you need more. It could be because you are a seasonal business and your season is coming so you are about to be hit hard. Whatever the reason that you need more supplies, you always need cash to buy them. A business loan is a great way to get the inventory when you need it.

Small Business Administration Loans

One of the various business financing options you should consider is a loan backed by the Small Business Administration (SBA). This is a federal agency that works with lenders to secure loans for small businesses. They do not provide the loans themselves. They do, however, back the loan up to 90 percent. That means if something were to happen and you do not pay back your loan, they will pay up to 90 percent of it. This gives lender a stronger sense of security in loaning you money.

The SBA sets the parameters for the loans, so they control what the lenders can and cannot do. This type of loan is best for long term planning. It is not a quick way to get cash. The application process can be quite lengthy and you need to provide a fair amount of documentation. You may need to agree to background checks and provide financial reports and tax documents. In some cases, you may need to provide collateral. These types of loans can have fixed or variable interest rates and the repayment period can be as long as 25 years.

Term Loans

Another one of the various business financing options you should consider is term loans. They are a traditional type of loan and common for most small businesses. They usually have the most flexible terms for a business and can be obtained from a nontraditional lender, as well as a bank. You can use this for just about any need your business may have. Although, if your business has not been operation for long, it may be harder for you to be approved for this type of loan. Lenders prefer to lend to businesses that have been in existence for at least two years.

Lenders are willing to work with you on the amount you want to borrow and the repayment terms. This type of loan can help your business improve its credit score. There are some downsides to term loans, such as you may need to provide collateral to be able to secure the loan. You also may have to provide quite a bit of documentation, including business statements and cash flow reports. The interest rate is typically a fixed-rate but could vary from 6 to 30 percent.

Equipment Financing

Another one of the various business financing options to you is equipment financing. This may be a great way for financing business equipment need that you have. This is a lease or loan that allows you to purchase or borrow assets, such as vehicles, machines, or computers that you need for business use. This is a secure loan because the equipment you are buying acts as collateral. Similar to how a loan for a car works.

You may be able to get better terms for this type of loan, such as lower interest rates or longer to repay the loan. You may not be able to obtain this type of loan from every lender. This may be a good loan for you to consider if you need to build up positive credit. Since the equipment acts as natural collateral this is a great option for you to get the equipment you need and build up positive credit.

Lines of Credit and Revolving Credit

You should consider revolving credit as one of your various business financing options. Revolving credit and lines of credit are similar to each other and one of the best tools that you can use for your business. A line of credit tends to be one of the most useful lending options available to businesses. It can be used for short or long term use that gives you access to additional money when you need it. The lender gives you a specific amount of money for a set period of time. You can use any amount of it that you want. You only pay interest on the money that you spend. And you make monthly payments to pay off the money you use.

The amount you pay per month depends on how much of the money you have used. At the end of the contract, you and lender can re-evaluate your line of credit to see if it can be renewed for another year. The interest rates tend to be modest and are low risk for the lender.

Revolving credit is similar to a line of credit, but not quite the same. When you think of a line of credit, you can compare it to the way a credit card works. You and your business has access to the funds when you need them to the preset limit. When you pay the funds you use, your available balance goes back up. Interest rates are a little higher for revolving credit than they are with a line of credit loan, but may give you more flexibility over time.

Benefits Of A Business Loan

There are quite a few benefits that you get from the various business financing options available to you. Throughout this article, I have mentioned some of the benefits to obtaining a business loan. A loan can provide you with the ability to hire new employees, expand to a larger space, or purchase more inventory. By obtaining a loan you are able to get these items without tapping into your cash reserves. It allows you to keep those for a true emergency. Taking on a business loan also allows you to build up positive credit fairly easily. If you have a new business that is just starting out, a business loan is a great way to do all of the above items at one time without stretching yourself too thin financially.
business loan factorsAre Personal Loans An Option?
If one of the various business financing options does not appeal to you, you do have the option of obtaining a personal loan for business use. A personal loan can be used for any purpose that you wish. One of the items that you should be aware of when it comes to a personal loan is that it is based solely on your personal credit history and credit score. You, alone, are responsible for the obtaining and repayment of the loan.

When you apply for a loan, it can impact your credit score, so when you take on a personal loan, it can be a hit to your personal credit score. Any payments that are made or not made timely also impact your credit score. If you are planning to pay the loan with income from your business, but your business does not do well and has no income, you are personally responsible for the loan.

Benefits Of A Personal Loan

When you are considering between the various business financing options or a personal loan, it is important to understand all the benefits associated with a personal loan. Some of the reasons why you might consider a personal loan over a business loan is because it is often easier to obtain a personal loan and much less documentation is needed. For a personal loan all you need to provide is your income and credit history. When it comes to a business loan, you must provide a lot of information about your business, such as business tax returns, a business plan, and daily income sheets. Personal loan can only be good for you if you get it from a reputable lender.

The Low-interest Rate for a Personal Loan

Interest rates tend to be lower with a personal loan. Typically, interest rates for business loans are higher because they tend to be riskier types of loans. You often get an approval faster with a personal loan than a business loan. The application process for a business loan is much longer and slower than it is for a personal loan. When you are approved for a personal loan, typically the money is in your bank account with one or two business days. It often takes much longer with a business loan.

There are a few items that you should also think about before making a decision about which type of loan is best for you. As always, you should consider the positives and negatives when you make this decision. In addition to the full responsibility for the repayment of the loan being on you as an individual with a personal loan, it impacts not only your credit score, but also your debt to income ratio. You are taking on more debt personally and it increases your debt.

However, if your only income is from your business, your income could decrease which also impacts your debt to income ratio. It could impact you being able to be approved for other types of loans, such as a mortgage. Personal loans have a limit for how much you are able to borrow. You may find that a personal loan does not give you enough money for your business needs. A business loan is usually for larger amounts which are better for the needs of your business.

Conclusion

I have give you quite a bit of information about the various business financing options available to you and your business. I also touched on the idea that you can use a personal loan for business needs, as well. No matter which option you choose, you must review the negatives and the positives so that you have a full understanding of which option is the best choice for you at this time.

Make sure that you know how much you can afford to repay when it comes to a loan. Regardless if you choose a personal or a business loan, you want to make sure that you are able to make those monthly payments. If you are not able to make those payments, you are putting yourself in a terrible position by taking on a loan that you already know you are not able to repay. It can be devastating to your credit score if you make late payments or if you default on your loan. It can be a hit to your business credit and your personal credit. You should always think about your needs before you jump in with any loan. It is not something you want to casually take on unless you are certain that you can afford it.

Construction Business Loans to Help Build Your Company

Many of us envision our business going from our imagination to an actual brick and mortar building. We may be very aware of what we want the finished product to look like. Coming up with the funds to build our dream construction can be daunting, however. We may wonder where we will get the funding to bring the physical manifestation of our business into a reality. This is where construction loans come into play. These loans give us funding to physically realize the construction of our business. So, if you are interested in business finance, read on.

What are Construction Business Loans and Why Do I Need One?

A construction business loan is a loan to fund the construction or renovation of a physical property meant to house your business. You can take out this loan to develop the land as well as other forms of construction on business property. You can compare a business construction loan to a mortgage in some ways. However, it for paying for the construction or renovation of a commercial property instead of a personal or residential property. A residential mortgage is there to pay for a pre-existing home or the construction of a home.

If you’re a business owner who wants to renovate your business space or build a new location for your business from the ground up, you may need a construction business loan. Most business owners can afford to fund the renovation of their business space or the construction of it out of pocket. A business construction loan takes away the need to have money for a renovation or construction upfront. From a practical standpoint, you’ll more than likely seek a business construction loan if you want to build a new space for your business or renovate your existing space.

Requirements For A Construction Loan

Lenders don’t take business construction loans lightly. They understand how risky this type of loan can be. As a result, they require a lot of information upfront. Business owners seeking this type of loan will be required to furnish intricate details regarding your construction plan. These details are called the “blue book”. This includes a timeline for the construction project,  floor plans, materials inventory, and suppliers and contractors. Besides, you’ll also need to supply information about the builder. This information will need to show lenders that you have found a reputable licensed builder.

As proof of a builder’s merit, you will need to supply the past and present projects of your chosen builder. Also, as stated above, you will need to provide a profit and loss report. Some lenders will ask for as much as a twenty-five percent downpayment. This works similar to a good faith payment and acts as insurance that you’ll be able to carry out the cost of construction, worst-case scenario. A property appraisal is also a key factor when it comes to lenders. They will determine the value of the property as a finished project. The property value is both location-based and market-based. Lenders focus on five key areas:

  1. Specific details about the construction
  2. A qualified builder
  3. Twenty to twenty-five percent Down Payment
  4. Your ability to repay a Loan
  5. Property value appraisal

The Mechanics of Construction Business Loans

Construction loans follow a particular format. You can use the first part of the loan to cover the building, renovation, or reconstruction of a property. However, once the construction is complete, you use an end loan or permanent loan to pay off the short term initial loan. These loans are designed to complement the construction process and can run anywhere from six months to a few years. This type of loan is designed to be paid off once the construction has finished or it has been refinanced or sold.

Interest Rates and Fees

As with any kind of credit or loan, your interest will be based on your credit. Typically, business construction loans range from four to twelve percent. Of course, the smaller interest rates go to people with better credit. However, interest rates can be affected by more than just your credit score. The type of lender you choose will also play a role in the interest you pay. Typically banks have lower interest rates whereas hard money lenders typically have higher interest rates. So you should carefully shop business loans.

Business construction loans come with fees. However, the type of fees and the amount you will be required to pay will vary from lender to lender. The fee types and amounts vary by lender. However, some fees are common for most business construction loans:

  • Documentation Fees
  • Processing Fees
  • Project review Fees
  • Fund control Fees
  • Guarantee Fees

How Do Lenders Determine Eligibility?

Lenders understand the risk factors involved with business construction loans. As a result, they pay attention to a few key areas. they will look at your credit score. Lenders tend to favor business owners who have a credit score in the high six hundred and seven hundred. However, each lender will vary in their eligibility requirements as well as what they’re looking for. However, the evaluation doesn’t stop there. Lenders will look at business credit as well. Lenders will also take into consideration your business’s debt to income ratio as well. Most lenders are looking for potential business owners who have a DTI of forty-three percent our less. Logically speaking, the lower your DTI, the better.

How Do Business Construction Loans Work?

Lenders understand that the one size fits all approach can’t apply to business owners. Especially when it comes to business construction loans. Businesses are as unique as a fingerprint. Each has its unique wants, needs, and preferences. As a result, there are business construction loans to meet the wide and varied needs and preferences of different businesses. Business construction loans are unique in that they are funded differently from other loans. Conventional loans give the borrower access to the full loan amount immediately. You pay back the loan in pre-set installments over time.

Construction loans are funded in increments. As you finish each phase of the construction, you can access the funds for the next phase. The borrower works with the lender to create a draw schedule based on the smaller projects that make up the construction of the commercial property. Typically, an inspection is required after each construction phase is completed. This ensures that the work has been done and has been completed correctly. This continues until all the funds have been released and the project is finished.

One key difference between construction loans and conventional loans is how the interest rate is factored into the loan. Borrowers will only pay interest on the loans that have been funded.  For example, if a business/borrower receives a construction loan for $250,000 but has only received $100,000, they will only pay interest on $100,000. As they receive more money from the loan, the interest will be based on how much they have received. Borrowers will never pay interest on funds they haven’t received yet. In a nutshell, a commercial construction loan is set up to have the borrower pay only the interest until the loan has been fully funded.

What’s Next?

After the construction of the commercial property is complete, the loan doesn’t become due in one lump sum. Instead, the borrower can now get a commercial mortgage. As with any form of real estate, the newly constructed or renovated commercial building serves as collateral. You can use the funds from the commercial mortgage to pay off the commercial loan. The payments should be more affordable for the commercial mortgage.

Type of Loans To Research

Since we are talking about business construction loans, naturally, we will take a look at certain types of SBA loans you should know about. Besides that, let’s also look at other types of lenders you can go to.

SBA CDC/504 Loan Program

Businesses who are interested in this type of loan must meet the following requirements. The company must be comprised of fifty-one percent American owners or aliens with a green card. The business must be for-profit and NOT publicly traded. The company must operate within the US or US territories. And the business must operate in at least fifty one percent of the space. Also, the net worth of the company can’t exceed $15 million. Plus, profits for two fiscal years before applying for the loan can’t exceed five million dollars. It should also be noted that businesses that participate in real estate ventures aren’t eligible for this loan. This loan is geared for businesses that are:

  • Sole proprietorships
  • Partnerships
  • Limited liability companies
  • Corporations

SBA 7(a) Loan Program

This type of loan can be used to acquire working capital. These loans can be funded for as much as five million dollars. These loans generally require a few months to be approved, the interest is fixed, and no collateral is required. However, if you work with one of SBA’s preferred lenders your loan could be approved sooner. However, the time for approval can vary from lender to lender. The average amount of this type of loan was $425,500 in 2018.

Other Details Regarding SBA Loans…

SBA loans require a large amount of information and supporting documents for approval. These loans have enviable benefits but the approval process can be quite extensive. SBA loans will likely require you to furnish:

  • A resume
  • Business plan
  • Business credit report
  • Income tax returns
  • Financial statements: Balance Sheets, Income Statements, Cash Flow, Bank Statements
  • Accounts Receivable and Accounts Payable
  • Collateral
  • Legal Documents: Business licenses and registrations required for you to conduct business. Articles of Incorporation, Copies of contracts you have with any third parties
  • Earnings Requirements
  • Working Capital

SBA lenders want to ensure that they are funding business owners who will have the ability to pay back the loan. However, if they approve you for an SBA loan there are many benefits. SBA loans aren’t underwritten by the US Government. Lenders, community development organizations, and micro-lending institutions underwrite them and the average loan amount is near $371,000.

Bank Loans

Bank loans may be an attractive option for businesses seeking a construction loan. Although the terms will vary from bank to bank, it is possible to make a down payment for as little as ten percent. You can get fixed or variable interest rates and the repayment terms and down payment can vary. Businesses often have up to twenty-five years to repay bank-funded loans.

Mezzanine Loans

Mezzanine loans are for situations when the loan to cost ratio is lower. As a result, the business owner has to come up with more money. The loan to cost ratio is an issue. This situation occurs when building costs exceed the funds available for the project. You can use a  mezzanine loan to cover the part of the construction project for which you do not have enough funds. This type of loan is secured through stock which can be converted to an equity stake. Mezzanine loans make it possible for a business owner to fund up to ninety-five percent of a construction project.

What Type of Loan is Best for Your Business?

This question is highly specific and dependent on the goals as well as the current financial situation of your company. However, banks, credit unions, and private lenders are SBA approved intermediary lenders. These lenders offer 7(a) loans, which may be a good option for your company. SBA-approved non-profit CDC provides funds for CDC/504 loans. Banks and credit unions are a good place to shop for business construction loans.  They offer SBA loans, traditional loans, and mezzanine loans. You can also seek funding through hard money lenders. However, the interest rates for these types of loans will probably be higher. These lenders are private and usually offer short term funding. These loans usually don’t require much money upfront and usually issue funds much quicker than more conventional lenders.

The Application Process

Once you’ve decided on the lender, you will need to prepare your documents for the loan application process. Plus, you will also need to provide specific information regarding your construction project. This information includes a building plan with specs and designs. You’ll also need to provide projected expected project cost sand estimates for contractors, materials, and any other miscellaneous expenses.  They will more than likely ask for personal AND business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules.

Your credit score will also be considered.  Keep in mind that negative like bankruptcies, foreclosures, defaults on loans, and other credit blemishes will be scrutinized. Some of these negative blemishes may automatically disqualify you. As a result, it’s a good idea to provide and explanation for the negative information. This can be a lengthy process for the lender and more documentation may be required. The final steps include the underwriting process and approval.

Can I Get a Construction Loan with No Money Down?

Most commercial construction loans will require at least a ten to thirty percent down payment. However, an SBA Microloan doesn’t, although you will have to come up with collateral. The SBA offers various no money down loans that require some form of comparable collateral. If you meet the eligibility requirements, you may be able to secure a no money down loan if the amount you want to fund fits within the SBA’s microloan funding amounts and criteria.

How Much Will Poor Credit Affect Business Construction Loan Approval?

The short answer to this question is “a lot.” Bad credit is a FICO credit score of 629 or less. Business owners with poor credit are a greater risk than their business counterparts with good or fair credit. This is because they are more likely to default on a loan. This is why business owners with poor credit may find it difficult to secure a traditional loan. However, some alternative lenders may give you a shot. Keep in mind that they will probably offer you high interest rates. Also, some of these alternative lenders may look at other things besides credit when determining your creditworthiness. Those areas could include including business revenue or length of time in business. There are five alternative lenders well known for funding business owners with less than spotless credit. They are:

  • BlueVine: FICO Credit Scores As Low As 530
  • Kabbage: Alternative Qualification Requirements
  • RapidAdvance: New Businesses
  • LoanBuilder: Large Loan Amounts
  • Fundbox: Short Loan Terms

These alternative lenders stood out because they were rated highly in three areas. They include customer service, qualification requirements and loan options. These areas may be beneficial in helping businesses with bad credit narrow their search and find a loan that will meet their unique circumstances Also, it should be noted that most lenders will look at your credit as well as your business credit. Furthermore, if you haven’t established business credit your credit will be the only gauge of your creditworthiness.

Take A Final Look at Your Loan Application Before Submitting

Once you’ve decided on a lender, go over your application thoroughly. Have you answered all of the questions on the application? Have you provided all of the requested and supporting documents? Are there areas of weakness on your application that may benefit from an explanation? These are all valid questions that you should answer before submitting your application. Business loan companies will look closely at all these areas and more. However, you need to develop a keen eye for detail and tune into what lenders will be looking at as well as how they may perceive your application.

If you have any areas of weakness on your application, consider explaining. It may be a good idea to wait until they ask you before you provide the information, however. If you have poor credit or some other financial ding that may make you look like more of a risk, clear your head and put together an explanation. YOu may be able to offset some of the negativity by providing a solid explanation of how and why this area of weakness happened. See your application through the eyes of potential lenders and consider any explanations that could bring clarity to any weak spots on your application.

Closing Words

Building a commercial structure for your business is exciting. The new space your business will occupy will house the hopes and dreams of your company. As a result, it’s a good idea to know where you stand when it comes to securing funding for your company. Most Business construction loans require a down payment., as well as other constraints. Understand your why as well as the various other reasons why a construction loan is a necessity for you.

Have you outgrown your space? Has your business location suffered from some form of damage or loss? Is it time to perform renovations on your old commercial space? Regardless of the reasons, understand them and zero in on the best types of business construction loans for your company. A new commercial space is a common goal for many businesses.  However, to secure the right funding for your situation, it’s necessary to dig deep. And take an honest look at what type of funding would be best for you to pursue. Loanry can always help you connect with online lenders, if this is the road you decide to take.

Build Business Credit Before Taking Out a Business Loan

Business credit can have a significant impact on your business’s operations as well as your business’s overall reputation and standing. Positive business credit can give you access to a better credit card interest rate as well as the ability to purchase products for your business without prepaying. However, those are just a few of the benefits. Business credit is important and can help navigate day to day business issues with greater ease and more flexibility and options. However, many may question what needs to be done to build good business credit as well as specific ways their business can benefit from it.

What Is Business Credit?

First of all, business credit must be defined to create a clear understanding of what it is. It differs from personal credit in that it reflects your business’s creditworthiness and not your personal credit. However, it functions similar to personal credit in that it allows you to operate your business and acquire products and services for your business without having to use cash for everything or pay upfront. Like personal credit, business credit allows you to acquire things and pay for them over time. This can be a huge benefit when it comes to keeping your shelves stocked and your tools and other business-related machines running properly.

The Step by Step Building Process

Understanding why establishing business credit is important and as well as understanding the benefits, puts you int he perfect position to move forward with clarity and confidence. IN essence, you have developed an understanding of how business credit can move your business to the next level. Once you have this understanding under your belt, take the first step. incorporate your business. Get your federal tax ID or EIN and open your business bank account. Go a step further and get a dedicated business phone number and open a business credit file. Apply for business credit cards and establish a line of credit with your suppliers and/or vendors. All of these steps promote your business and give you traction by giving you access to funds that will help you build and grow your business.

Establishing your business and seeking credit opportunities lets other related creditors, vendors, and suppliers know that you can be taken seriously and that you’re not a risk if you honor the terms of your agreement. These simple moves have the ability to elevate your business by giving you greater access to more funding as your credit grows and matures and is handles properly. You dont have to worry about digging into your pocket to get the funding you need when you use and handle your business credit responsibly.

Why Is It Important?

There are practical reasons for establishing business credit that can have something to do with your personal credit. Establishing business credit separates your business from your personal life legally, preventing possible harm that could come to you or your assets if something were to go wrong with your business. However, if you run a sole proprietorship or general ownership, the business and the owner are one and the same. This provides no protection for the owner’s personal credit or liability. If something bad happens to the business or concerns the business, a person’s personal life is affected as well. This is one reason why many business owners opt to form a limited liability corporation or LLC. An LLC provides protection for the business owner by separating the owner’s personal life from the business. However, the benefits of building business credit don’t end there. There are many.

Other Benefits…

The importance of building business credit can be looked at in other ways as well. If you have less than perfect personal credit or other blemishes that could negatively impact your business, forming an LLC protects your business from the scourges of your blemished credit. Also, building business credit also has the ability to create credible relationships with your vendors and suppliers, allowing you to use your credit and pay for supplies and products over time. Besides, good business credit can help you to qualify for better interest rates and terms with banks and lenders.

What Types of Things Hurt Business Credit?

When you are negligent with the credit that a lender extends you by missing payments, paying late, or not honoring the terms of your loan, this hurts your ability to secure good interest rates and unsecured loans. Quite logically, you hurt your business credit when you don’t honor the terms and conditions of your lender. If you are a sole proprietor, the financial moves you make in your personal life can vastly affect your business credit negatively.

If you co-sign on a car loan for Aunt Betty and she defaults on her payments, that can vastly affect your business credit score. Regardless of the reasons, it looks like you haven’t handled your credit well.  Furthermore, maxing out your credit cards or not using your credit at all, can also reflect poorly on your credit history. These are all negative scenarios that can negatively impact your business credit. Opening too many credit accounts can also impact your business credit negatively.

The ABC’s of Business Loans

The process of getting a business loan is similar to acquiring a personal loan. You determine your business needs and how much capital it would take to provide for them, then you shop around for the loan and terms that will be most agreeable to you. However, there are several questions you should consider and answer when it comes to determining whether or not you should take out a business loan. The most obvious question to ponder is if you truly need a business loan? However, this question is linked to several others that will yield a clear answer.

Why are You Taking Out a Business Loan?

Has your business outgrown its current space? Are you in need of new equipment? Do you need to establish business credit for the future? Are you failing to meet the demands of your customers? Are you a seasonal business that needs to stay ahead of the boom? These are all pertinent questions that you should consider. More than likely, if you answered yes to any of these questions, you could probably benefit from a business loan. If there is a clear need, this is usually enough evidence as proof that you may benefit from Taking Out a Business Loan.

When You Shouldn’t Take Out a Business Loan…

You should keep in mind that Taking Out a Business Loan is only a good idea if it will truly benefit your business. If you’re taking out loans to make ends meet and your business is already floundering, you’re behind on bills, and there’s not enough revenue to support your current operations, its probably not a good idea. In essence, you’re just digging a bigger hole for yourself. In scenarios like this, you’re not really helping your business, you’re just creating more debt.

What Types Of Business Loans Are Available?

There are a variety of different types of business loans that can meet your needs. However, it requires taking a good hard look at your business to determine what it truly needs to thrive and improve. For example, if your business is in need of updated machinery, there are loans for this. You can take out an equipment loan to purchase new machinery or equipment. This is a short term loan used for the express purpose of buying equipment. These loans are similar to installment loans in that you make equal monthly payments over the term of the loan. If you don’t have a lot of business credit, this type of loan can be beneficial in helping you build your business credit. With this type of loan, the machinery or equipment that you buy is the obvious collateral.

Other Business Loans…

However, you may need a loan to cover more than just new equipment. In fact, you may not need new equipment at all. Instead, you may need a variety of different things to meet your business needs. In situations like this, an installment loan may be one of the most viable options for you. If you are taking out a business loan, installment loans give you all the money you applied for upfront. It’s a general loan that can be used for any of your business needs. The payments and interest are pre-calculated and spread out over time into equal payments. The terms can vary, however. For some businesses, taking out a business loan is best approached by acquiring a line of credit. This is a common form of business credit for many new businesses as well as businesses that have been around for a while.

Line of Credit

Line of credit loans provides a lot of flexibility to businesses. They can be either short term or long term because business owners have the option to pay off the entire balance at the end of the month or pay it off over time. This is perhaps why it’s a popular loan for many businesses. This type of loan can be re-evaluated at the end of the year and possibly renewed if the terms were followed. Line of credit loans also tends to have low-interest rates which also make them attractive. Lenders look at this type of loan as low-risk which may be a reason for the low-interest rates.

Revolving Credit

Some businesses may want to consider taking out a business loan in the form of revolving credit. These loans are very similar to line of credit loans, however, they are actually more like credit cards. These loans work by refilling once you’ve made a payment. For example, if you’ve purchased a piece of equipment that only utilizes twenty percent of your revolving loan, once you pay that amount back in its entirety, you have essentially refilled your loan. In other words, you still have the initial loan amount available for use. This type of loan tends to have a higher interest rate than line of credit loans, but more versatility.

Commercial Real Estate Loans

Commercial real estate loans are very similar to equipment loans. However, they are used to acquire commercial property for your business instead of equipment. These loans are a smart choice for businesses that are interested in Taking Out a Business Loan for the express purpose of acquiring space to run their business. Lenders are often more prone to offer better interest rates for this type of loan because it’s hard to make off with the collateral when it’s real estate. Some businesses may find it necessary to acquire a loan to pay off other financial obligations. This is called an interim loan. Once you have paid off the debt owed for your business debt, like money owed to suppliers and contractors, the funds for this loan become available for use.

Microloans

Microloans and 7(a) loans may also be needed as well. Business interested in Taking Out a Business Loan may be eligible for a microloan for up to fifty thousand dollars. These loans target small businesses and daycare centers. Disaster loans are also an option for businesses that are considering Taking Out a Business Loan. If you have experienced a loss as a business owner this type of loan can help you recoup.

The Small Business Association (SBA) and Unique Loans

Loans that fall under the Small Business Association are more difficult to be approved for. However, terms and interest rates tend to be highly favorable. However, business loans form direct lenders tend to be easier to qualify for. SBA loans are a smart place to shop for business loans because of the respect and positive terms and interest rates that they carry. Even if you don’t qualify, it’s a good idea to try. SBA also offers lines of credit for women and other minorities, franchise owners, doctors, and lawyers. Startup lines of credit are also available too.

Balloon loans are often a consideration for businesses that are considering Taking Out a Business Loan. Essentially, you pay the taxes on a monthly bases and the principal at the end of the loan. Hence the term, balloon loan. The largest payment occurs at the end of the loan. However, the payment schedule is usually agreed upon by you and the lender.

This type of loan is usually best suited for businesses that expect a huge return of revenue and have the means to pay off the principal of the loan in one lump sum. With this type of loan, lenders may require proof that your business will have the means to pay off the principal at the end of the loan.

Loan Language: Secured Versus Unsecured Business Loans

As discussed above, secured loans are loans where there is some form of collateral that functions as security for the lender. If you default on the loan, the lender has some form of payment to recoup their losses. These are usually the types of loans that business acquires initially until their credentials can justify a business being creditworthy enough for an unsecured loan or a loan without collateral.

Unsecured loans are a benefit or perk that businesses can work toward once they have displayed or shown their creditworthiness by making their payments on time and honoring the terms of the loan.

Do Business Loans Affect Personal Credit?

Business loans can affect your personal credit if you don’t have a limited liability corporation that separated your business credit from your personal credit. If you have a sole proprietorship or general ownership, the owner or owners and the business are as one. It’s in your best interest to separate the two. Separating your business from your personal credit by forming a limited liability corporation legally separates the owner or owners from his or her business.

What Steps Should a Business Take to Secure a Business Loan?

Any business owner can improve their chances of securing a business loan by doing a few simple things. Start by incorporating your business. This is a protective step for both your business and your personal assets. You should also get a federal tax ID if you haven’t done so already. This is referred to as an EIN number. In essence, this serves as a social security number for your business. You will need this important number to open a business bank account, file your taxes, and when dealing with some vendors. It’sd also a good idea to use your business bank account to pay for and conduct your business transactions. If you have a business credit card you should use your business bank account to pay your bill.

You should also get a business phone number and list it under your business name. In addition, it also helps to open a business credit profile with all three credit reporting agencies. All of these actions show lenders that you are a serious business. This looks good when it comes to Taking Out a Business Loan. If you can, establish a line of credit with your suppliers and vendors and ask them to report your payment history to all three credit agencies. This is a powerful move. Logically speaking, simply paying your bills on time is important and makes a huge statement. This is a simple move that reflects positively on your business credit.

How Do I Qualify For a Small Business Loan?

Where Can Businesses Apply For a Loan?

Business owners can apply for a business loan at a bank or credit union. These are the entities that typically provide these types of loans, although there are others. Business owners can also apply for a loan through the Small Business Association as well. SBA loans typically span from five thousand dollars to five million. The amount you can borrow is dependant on your business credit and your ability to pay the loan back. You can also look for a business loan from an online lender as well.

And you can even apply for an SBA backed loan from a bank or credit union, however, the application process is different. You will have to present proof that you are a good risk, even though SBA loans do have leniency. However, it should be noted in general, that qualifying for a business loan is more difficult than qualifying for a personal loan. However, begin with the end in mind. Know how much you want to borrow and why, and be prepared to support your requests with supporting information.

Applying for a Business Loan

Any business owner who plans on Taking Out a Business Loan should gather certain qualifying documents as proof of creditworthiness for a business loan. Of course, you will need personal identifying information, your business license, and a resume with your education, and other supportive information. You will also need financial statements from your business. The lender will indicate how far back these statements need to go. Any business credit history and personal credit history of any partners will need to be presented as well. Cash flow predictions and a guaranty form all of the business owners will also be a requirement.  You may also be asked to provide a business plan as well. However, the best solution is to be prepared for any document the lender may ask you to provide. Not all lenders ask for a business plan, but its best to have one.

The Nuts and Bolts

Know your why. Why do you need a business loan? What purpose will it serve? How will it help your business? Get clear on this. Secondly, decide on the amount you need to borrow. If you Know your why,  you can determine how much you truly need to borrow.  Dont be too modest with your request. Be realistic. How much do you truly need to borrow to accomplish your business goals? Ask for what you truly need, not less or too much more. If you’re too modest, you will fall short and fail to fully accomplish your business goals. However, if you’re too grandiose with your request, it may raise the eyebrows of lenders and cause them to question your business goals as well as your ability to pay the loan back.

Dont Be Caught Off Guard

Know your credit score and history. Dispute anything that needs disputing and have any errors removed from your report. This is a step that should be done before you apply for a business loan. Do your homework. Create a business plan. This is a road map of your business that lets lenders know what your business goals are. Keep in mind, all lenders won’t ask for a business plan. However, some will. A business plan will show your business intentions, operations, and market analysis. Lenders know what to look for when it comes to how to finance a business and which businesses are finance worthy.

Shop Around

As a business owner, you know how much money you need to borrow and why. This should help narrow your list of potential lenders. You’ll want to choose a lender with favorable interest rates. You’ll also want to look into the terms offered by different lenders. Payment schedules and options should be considered too. Ther are a wide variety of different lenders to choose from. Be sure to take your time and shop around to find the lender that’s going to best suit your needs.

Every lender will have their own way of doing things and the terms will reflect this. Keep your needs and the amount you want to borrow in mind and choose a lender that’s most compatible with your business goals. Taking Out a Business Loan or business finance is a serious matter that should be approached soberly. Do your homework when it comes to choosing the right lender. Shop business loans that make the most sense for your business. And contact us to help you. Loanry connects you with reputable lenders.

Important Documents

Lenders will want to see your financials. A business plan is a concrete summary of your business, however, lenders will want to see cold hard numbers as well. You will need to show three years’ worth of tax returns, cash flow statements, profit and loss statements, balance sheets, business financial statements, and projected financial statements.

This creates a clear picture of your business, both past, and present, and gives lenders an idea of how well your business will likely do in the future. All these documents help greatly when it comes to risk assessment. once you have everything in front of you, fill out your loan application. Make sure you do your research when it comes to what documents lenders need for a business loan. If you gather everything in time, you will go through the entire process much quicker.

Was Your Application Rejected? Dont Worry…

Rejection is a part of life. However, a lot can be learned from it. If your application for a business loan is rejected, try to figure out why. Most lenders will provide some information on why your loan application wasn’t approved. However, the reasons may be many. You may have too much debt or the industry you’re pursuing a loan for may be considered too risky. Market trends may even be a reason why your loan application was rejected. However, it still behooves you to know the possible reasons why your loan application was rejected. Once you find out the reason, you have the opportunity to rectify the situation so that your next application has a better chance of being successful.

Final Thoughts

Many businesses feel that a business loan would greatly enhance their business functions and overall operations. There are a wide variety of different kinds of business loans available to meet the many needs and circumstances you may be experiencing as a business owner. However, your business’s creditworthiness is a fundamental precursor when it comes to being approved for a business loan. Many factors can negatively impact your business credit, just as there are many factors that add to the creditworthiness of your business. Take the steps needed to put your business in the position to get the funding it needs. This requires taking a sober look at your business and determining whether or not you truly need a loan, why you need a loan, and how much you should borrow.

A Guide to Understanding Different Types of Business Loans

Everyone has heard about personal loans, but not everyone knows the difference between business loans and personal loans. To make it even more complicated, there are many different types of business loans out there to choose from. If your business is a startup, needs new equipment, or is looking to expand, then you might benefit from getting a business loan. Before you make such a big commitment, though, you should learn about the different types of business loans out there. Business loan shopping doesn’t have to be difficult if you have a great understanding of what is offered.

Reasons for Taking Out a Business Loan

Taking out a business loan is a big commitment. You need to carefully consider whether a loan is the best idea and what the effects will be if your company borrows money. The basic premise is the same as with any other type of loan, as far as that you will need to fill out an application and try to get money. But there is a lot to consider.

The first question you should be asking yourself is: why does the business need this loan? Here are some legitimate reasons for business loans:

  • Do you need more space? Are you doing so well your supply can’t keep up with demand? Do you need to hire more employees but don’t have space for them? Business growth is a great reason to take out a business loan.
  • Do you need new equipment? Is your old equipment outdated, or do you just need new equipment to keep up with your current demand? If you really need new equipment, it’s better to get it than to let your business suffer without it.
  • Does your business have seasonal needs? You might need to get supplies for an upcoming rush, or you might need to pay for expenses during a break. A business loan can help you get through those kinds of periods.
  • Does your business need to build its credit? Just like with your personal credit, your business also needs to build its credit. Your business builds credit the same way you do, by taking out a loan and making regular payments on time every time. If you work on building the credit for your business, your business will qualify for better loans with more favorable terms in the future.

Warning Signs

You don’t want to take out a business loan for the wrong reason. Using loans to meet everyday expenses or overextending your business will only hurt you financially in the long run. There are many pros and cons of small business loans, so it is important to make sure that you are making the right decision for your business. Here are some warning signs to look out for:

  • Are you regularly falling behind when it comes to meeting your responsibilities? Is your business just not producing the kind of income you expected?
  • Have the original circumstances changed? You made your original business plans based on a particular set of circumstances. But the only thing you can really count on is change. Take a good look at the current situation and be honest with yourself.
  • Are you trying to bite off more than you can chew? Everyone has big plans, but you need to be realistic if you are going to be successful. Don’t take on more than you can handle.

What Are the Different Types of Business Loans?

As a small business owner, you will need to find funding from outside sources every now and then. It is important to understand the different types of business loans available to you. There are several kinds of business loans, and you may or may not qualify for all of them depending on factors such as how old your business is, what your credit is like, and what you want to use the money for. There is also a big difference between traditional business loans and some more nontraditional ones, and knowing how to seek out the kind of loan you want can save your business money and help build your credit.

One important thing to keep in mind is that most loans go to individuals, but business loans go to the business itself. A business is a separate entity, with its own credit history and creditworthiness. Any effect of not paying will only affect you in relation to how you are tied to the business. The liability you carry depends on what kind of business you have, such as whether it is a sole proprietorship, partnership, limited liability company (LLC), or corporation.

Traditional Small Business Loans

SBA Loans

SBA Loans can be one of the best options because they can offer great benefits. This isn’t the kind of loan to take out for most last minute or emergency needs; U.S. Small Business Loans are for big decisions, like acquiring a company or refinancing a mortgage. Among the benefits:

  • You can choose between fixed rate and variable rate loans.
  • The financing from the SBA is good for up to 90%.
  • There are various loan terms, up to 25 years.

Part of the loan is guaranteed by the SBA, even in cases of default, making this one of the safer options. However, there are some drawbacks, such as:

  • The application can be time-consuming and will include everything from financial reports to background checks and possibly even owner information.
  • Because of the stringent requirements, not everyone will qualify.
  • You may be required to put down collateral to guarantee the loan.

There are different kinds of SBA loans, such as the SBA 7(a) which is specifically designed for very large decisions; the SBA 504 which focuses on real estate, including construction projects; and the SBA Express, a smaller class of loan with a $350,000 cap that is designed more for sudden needs like business equipment, working capital, and other needs. The SBA Express is also different in that once approved, the funds can be available in as soon as 48 hours. The SBA guarantees 50% of SBA Express loans.

Term Loans

Term loans are a more traditional kind of loan and are probably the most common kind of small business loan. Business term loans help with any kind of business needs that can’t be paid with cash, such as new equipment, working capital, or large expansions. Term loans are flexible and have flexible terms, and you can get one from a regular bank or a nontraditional lender.  More established companies like term loans because of the flexible terms, but companies with less history might have a harder time qualifying. The advantages to business term loans are:

  • Term loans have flexibility, such as the amount borrowed, the repayment terms, and the kind of lender used.
  • You can use a term loan for almost any kind of need or situation.
  • Using a term loan can help to improve your business credit ratings.

Drawbacks, on the other hand, can include:

  • Term loans may require at least some collateral to guarantee the loan.
  • There is a lot of documentation required in order to apply for a term loan, including business statements.

The interest rate is often easier to predict on a term loan because it will carry standard fixed rate interest or flat fees. The actual rate may vary widely and can be anywhere from 6 to 30 percent. If your company has been operating for at least 2 years and you can show a high enough level of solvency, a business term loan might be the best one for you.

Equipment Financing Loans

An equipment financing loan is a loan or lease used to purchase or borrow hard assets, like equipment, vehicles, machinery, or computers needed for your business. Unlike the loans already mentioned, an equipment financing loan is a secured loan, in the sense that the equipment itself can act as collateral for the loan. Because it is a secured loan, your equipment financing loan may have better terms, such as a lower interest rate. Not every lender offers equipment financing loans, and your credit will need to be good to qualify. This may also be a good time to consider the advantages and disadvantages involved in buying versus leasing your company’s equipment.

Lease vs Buy Equipment

When it comes to equipment buying versus leasing, you have to take into account your own short term and long term needs and assets. While buying seems like a good idea because it means you can keep the equipment forever and give you more flexibility in dealing with it, leasing could end up saving you money.

When you lease equipment, you don’t have to come up with as much money to start. Unlike the major expenditure when you buy expensive equipment, leasing will probably not affect your cash flow much if at all. Also unlike when buying, lease payments can be written off on your taxes as business expenses. You may be able to get better terms when leasing, especially if your credit isn’t stellar. It is also easier to upgrade to better and more modern equipment as soon as your lease expires.

On the other hand, if you buy equipment, you will own it forever. With some kinds of equipment that lasts a long time, like office furniture, it makes more sense to buy it. If you decide you don’t need it anymore, it’s yours to sell. You may be able to get a tax break during the first year after a big purchase by using Section 179 of the Internal Revenue Code to deduct up to $500,000 of equipment. There are also potential tax incentives for depreciation, so you may be able to deduct money off your taxes because your assets have gone down in value.

Commercial Real Estate Loans

Other traditional loan possibilities are commercial real estate loans. These are secured loans like the equipment loans, and the collateral is the real estate itself. If you have ever been involved in buying your own home, you understand what a long and complicated process it can be, with many players working together to provide the financing, appraise the property, and clear the title, among other tasks.

Because of the strict rules around selling property, the lenders can feel assured that the property really does belong to the person taking out the money. Like property loans, real estate loans are also secured loans. With that security and the fact that the loan is secured, you can get some great rates when it comes to buying real estate. You also get longer to pay off a real estate loan, usually 30 years, although you can usually get a better interest rate with a shorter repayment period.

Business Line of Credit

If you just want to have the funds available if you need them, you may want to look into applying for a business line of credit. You would basically apply for a certain limit but only take out as much as you needed at one time. Lines of credit are a lot like credit cards, in that you have a maximum limit but you can use them to purchase whatever you need at any time. You would need a strong credit rating to apply for this kind of loan, as it is an unsecured loan with a lot of flexibility. It offers some great benefits, including:

  • You can take out funds whenever you need them, up to your limit, without going through another application process.
  • You will only ever pay interest on funds you have actually withdrawn.
  • This kind of credit can help with all kinds of both short term and longer term business needs.

The disadvantages of using a business line of credit include:

  • If you do have poor credit and they offer you a line of credit, you will likely pay a higher interest rate.
  • A line of credit isn’t for big purchases that you would normally take out in one lump sum.
  • They may ask you to provide collateral to back up your loan, turning it into at least a partially secured loan.

Before you consider getting this kind of loan, think about what you need the money for. Some businesses use a line of credit to meet ongoing needs. To purchase supplies they need, or to make up for income they lose when business is slow, such as in the off season. Interest rates tend to be between as little as 8% and as much as 24%.

Nontraditional Small Business Loans

If you’re just starting out, you may not have much credit history yet, so you may not qualify for the traditional business loans. And if you do qualify, the rates might not be as good as you can get with a more nontraditional business loan.

If you are committed enough to your business, you may take it a step further and take out a personal loan to get what you need for your business. If you take out a personal loan to start a business, the rates and terms will depend on what kind of credit you have personally.

The Pros of Using a Personal Loan for Business

The positive reasons that you should use a personal loan for business include:

  • It’s easier. When you apply for a personal loan, the lender will only consider your personal trustworthiness, so you only need to provide information about your own income and credit trustworthiness. When you apply for a business loan, you will need to provide all the information about the business, including business tax returns and other information that can be difficult to get together. You may even be able to apply for a personal loan online.
  • Your interest rate may be lower. Especially if your business is new, you probably have a much longer history of borrowing money and paying it back. That means you may personally be able to get better terms than your business can.
  • It’s usually faster. Because of the larger amount of information that needs to be processed for a business loan, it usually takes much longer to be processed. A Small Business Administration Loan can take months to approve because it is a government loan. You could get your funds with a personal loan in just a few days.

The Cons of Using a Personal Loan for Business

The downsides of using a personal loan for your business include:

  • You’re on the hook. If your business isn’t able to pay back the money, you are the one responsible for paying back all the money. Even if the business closes because it doesn’t succeed, you will have to pay back the entire loan or your personal credit will suffer.
  • Your income to debt ratio suffers. Even if you plan on using all the money for the business, the amount of money will show up as personal debt when you use a personal loan. That means that you may be turned down if you try to take out another loan, like for a house or car, or you may not be offered good terms because of your high amount of debt.
  • It may not be big enough. Even if you have great credit, you probably won’t be able to borrow as much as a typical business loan. An unsecured personal loan might be for thousands of dollars, while business loans can be millions. Unfortunately, the amount you borrow will depend on your own personal salary and ability to pay the money back.

When it comes to business finance, you want to make the best choices every time if possible. In order to grow your business, you have to make some tough decisions, but you can make better decisions if you have more knowledge. To make money, you often have to have money, and shopping for business loans is a way to find a good deal that will give you the cash you need to make an investment in your business.

Long Term and Short Term Business Loans

Another important distinction between types of business loans is between long term and short term business loans. Long term business loans are paid back over an extended amount of time, but there are more differences than that.

Short Term Business Loans

These types of business loans need to be paid back on a daily, weekly, or monthly basis. Normally the entire period for paying back a short term loan is only 3 to 18 months. When it comes to short term business loans, they are usually for emergencies, for immediate financing needs, or to take advantage of an opportunity. Short term loans may have a higher interest rate than longer term loans, and they need to be repaid quickly. The interest rate can vary from 9% to 80%, which is very expensive. Some people make the mistake of turning to short term loans to fill regular needs, keeping them in an endless debt cycle. Unfortunately, if your business doesn’t have good credit, your business may only qualify for a short term loan.

Long Term Business Loans

You can use a long term business loan for almost any kind of purpose. You don’t have to use these types of business loans in a certain way. So you can use them for everything from purchasing new equipment to opening a new branch of your business. There is no limit to how much you can borrow with a long term business loan, as long as the lender is willing. Traditional lenders like banks don’t offer small long term loans, so if you are trying to borrow a smaller amount over an extended repayment period, it is better to use a service that can help you find a loan online.

It is important to do your research when looking for a lender for a long term business loan. Because different lenders offer different amounts, different interest rates, and different terms. Longer term business loans tend to have lower interest rates than short term business loans, with rates ranging from 4% to 30%. While the terms are better for longer term loans, these types of business loans are harder to get.

Keep In Mind

The longer term is a longer commitment. And the lenders want to make sure they can trust you that you will pay off the loan over an extended period of time. Competition is also very high to receive a long term business loan, and there is a lot of paperwork involved. The bank may collect personal information from you before approving the loan, and some lenders will require collateral for at least part of the loan. On the other hand, online loans aren’t as cumbersome and don’t require as much paperwork.

Where Get a Business Loan

But where to find a business loan shop? There are many places where you might look, but make sure you are dealing with reputable companies. Not every company is legitimate, and some offer deals that are legal but barely so.

Luckily, there are ways to recognize and avoid personal loan scams. Plus, there are a lot of legitimate business loan companies that want to lend companies money. Because they know it will help their business. There are so many ways to finance your business. Once you have looked at all of your options and have decided to get a business loan, then it is time to find the right lender. Credit unions, banks, online lenders, and the Small Business Administration (SBA) are all great places to start. The process of applying for a small business loan is pretty simple from there.

The Process Explained

First, you need to select the right loan amount for your business loan. Then you should pull your credit history and score, to see what kind of options you have. For instance, a better credit score could mean a better interest rate. Once you know what your credit is like, you should create a business plan and gather all of your pertinent financial information. Evaluate a variety of lenders, so that you are sure that you have found the best option for you and your business. Then all you have to do it fill out the application and hope that the lender approves it!

Don’t worry if your loan application is rejected, it just means you need to try again. Once you find out the reason or reasons that they rejected your application, you can fix any of the issues that you have control over. Once you have fixed any issues that you possibly can, you should wait for a better time to reapply. Maybe waiting for different market trends is best for your business, or maybe you just need a year or so to improve your credit and build up your business profile. Sometimes you think you found a perfect fit, but it turns out differently.

Conclusion

Regardless of the reason your business needs financing, there is a way to get help with financing. There are many different types of business loans to choose from. And there should be one out there that is just right for you and your business. There are traditional and nontraditional types of business loans. As well as short term types of business loans and long term types of business loans. One of these will be the right one for you.

7 Best Personal Finance Books for Beginners: Read On

Budgeting can be hard, no matter how much experience you have. You may have done well in your math courses in school, but personal finance is more complex. It requires you to keep a variety of financial activities in mind. Whether you are a teenager who is just beginning school or your career or someone who has been handling your personal finances for years, you probably still have more to learn about personal finance. Regardless of whether you want to learn about business finance or personal finance, it is important to start with the basics. If you keep reading, you will get information about the best resources for learning about finance for beginners, including best personal finance books for beginners.

Personal Finance for Beginners

Learning about personal finance can be a challenge for beginners, but there is an abundance of resources out there to help you. If you are interested in learning more about personal finance and how to manage your budget, then you should consider visiting a finance education store. There are a variety of games, curricula, and other products that can help you understand the basics of personal finance. There are even online programs and apps that can help you learn about and manage your personal finance. If you are serious about learning and have additional time and money, then you can consider taking a personal finance course at your community college. One of the best ways to learn about personal finance is through personal finance books for beginners.

Personal Finance Books for Beginners

Apps and websites are great for learning about the basics of personal finance, as well as helping you manage your personal finances, but nothing compares to good, old-fashioned books. Personal finance books for beginners are a great way to find all of the information you might need for handling your own personal finances. Personal finance books for beginners can help you manage your money better, explain how to make a budget, assist you in creating a debt payoff plan, and teach you how to stop living from paycheck to paycheck.

Most importantly though, personal finance books for beginners can give you the motivation and inspiration you need to take action towards managing and improving your personal finances. Our top seven best personal finance books for beginners are below.

You can get the following books on Amazon, at your local library, or possibly on Audible. No matter what your financial situation is, these books are available for you.

1. Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial IndependenceCover of Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence

This is one of the best personal finance books for beginners. This highly-recommended book by Vicki Robin and Joe Dominguez helps you transform your relationship with money in order to achieve financial independence. With a simple framework comprised of only nine steps, Robin and Dominguez make it easy to achieve your personal finance goals. They provide some exercises that “completely changes the way you view your money” and allows you to “take control of your financial situation and lead a more fulfilling life.” If you already have a budget in place and are working towards your financial goals, then this book can help you take the next step. The framework in this book focuses on not just decreasing your expenses and sticking to a budget, but also on actually building up your wealth.

2. All Your Worth: The Ultimate Lifetime Money PlanCover of All Your Worth: The Ultimate Lifetime Money Plan

All Your Worth, which was co-written by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, is also among the top of the list of personal finance books for beginners. This book came up with the popular 50/20/30 rule of thumb. This guiding principle explains how to best spend your money. 50% should be spent on Must-Haves — such as bills, 30% should be used on the Wants — or fun things, and the final 20% should be put into your Savings. Rather than focusing on strict budgeting, this book instead gives you a new mindset on money and how to get your personal finances on track. According to Elizabeth Warren and Amelia Warren Tyagi, balance is key. If your goal is financial freedom, then this is the book for you. This book can help you take control of your money and personal finances.

3. How to Manage Your Money When You Don’t Have AnyCover of How to Manage Your Money When You Don't Have Any

It is hard to manage your money when you don’t have any. When you are just living paycheck to paycheck, savings and investment are probably not your first priority. Sometimes it is hard enough just to get by. Eric Wecks wrote this book specifically for Americans who struggle to survive financially on a month by month basis. If you are in debt or do not have any background of financial education, then personal finance books for beginners like this can help you. Weck uses tips and everyday examples and references in order to share his wisdom on “[doing] the best [you] can with [your] income no matter its size.” It’s not how much you have, it’s what you do with what you have. If you need help managing the money that you do have, then this is the book for you.

4. Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live ByCover of Why Didn't They Teach Me This in School?: 99 Personal Money Management Principles to Live By

Not all personal finance books for beginners were written by people trying to pass on their financial wisdom to their own children, but this one was. When Cary Siegel was writing down these personal money management principles to live by for his children, he realized that many of this “basic” information isn’t taught in school. This quick, easy read is divided into eight important lessons, which focus on important lessons Siegel learned from personal life experience. Some of his principles are unorthodox, which creates for an interesting read and memorable lessons. Whether you are in high school, college, or a working adult who feels like they didn’t get taught about personal finance and money management in school, then this book can help you with some of the basics.

5. Smart Couples Finish Rich, Revised and Updated: 9 Steps to Creating a Rich Future for You and Your PartnerCover of Smart Couples Finish Rich, Revised and Updated: 9 Steps to Creating a Rich Future for You and Your Partner

It is important to be on the same page as your partner, especially when it comes to your shared personal finance. Not many personal finance books for beginners focus on the importance of shared decisions and a shared vision for personal finance for couples, but it is important to be able to align your values, especially your financial values, with your partner. If a couple does not work as a team, then there is no way that they will achieve their (hopefully shared) goals. No matter what stage your relationship is at — engaged, newlyweds, or a couple who has been married for twenty years — this book can help you achieve your shared personal finance dreams. “Couples who plan their finances together, stay together!”

6. The One-Page Financial Plan: A Simple Way To Be Smart About Your MoneyCover of The One-Page Financial Plan: A Simple Way To Be Smart About Your Money

Making an in-depth financial plan can be difficult and time-consuming. But is such a long financial plan really necessary? Not according to Carl Richards. And as the author of multiple personal finance books for beginners, including The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, he may have a point. According to Richards, “anyone can write a one-page financial plan. He believes that you can prioritize what you really want in life by writing it on a single page. Those are the things that make a difference to your financial plan. What you need in order to be successful in your financial goals is to have a view of the big picture of what those goals are. In this book, Richards provides you with multiple strategies to help you write your own one-page financial plan.

7. Your Mortgage and How to Pay it Off in 5 YearsCover of Your Mortgage and How to Pay it Off in 5 Years

This book stands apart from the other personal finance books for beginners because of its focus on mortgage information. This book combines the basics of budgeting and money management in order to help you pay off your mortgage faster. It may seem impossible to imagine paying off your mortgage in only five years, but the author Anita Bell, and her husband Jim, did just that…only faster. With a combined income of less than $30,000, they paid off their mortgage in just three short years. In Bell’s book, she explains just how they did it — and how you can do it too — in simple steps.

Personal Finance for Beginners: Apps

One of the most challenging parts of personal finance is organization. In order to be successful in your personal finance goals, it is essential to be able to keep track of everything. Unless you are naturally a very organized person, this can be easier said than done. This is why you should consider downloading a finance app.  With all of this financial information in one place, it will be easier than ever to keep track of your personal finance. You will be able to instantly access your financial information, pay bills, and even save money in the process.

For instance, with GasBuddy, you can find the best gas price nearby, no matter where you are. Dosh can also make it easier for you to find great deals, whether you are shopping or dining out. If you are looking for something to just help you keep track of your bills and expenses, while also giving advice on how to cut expenses, then Trim could also be a good option for you.

Personal Finance for Beginners: Sites

In addition to finance apps, it can be very helpful to take advantage of the many personal finance websites available online. These personal finance websites can help you get your personal finance on track. Whether you are interested in tracking your budget or shopping for personal loans, they can help you. If you are interested in figuring out what your credit score is and how it affects your personal finance, there are websites for that as well.

Personal Finance for Beginners: Debt Statistics

When dealing with your own personal finances, you have to look at the big picture in order to truly understand what your own personal situation is. In this case, the big picture refers to the United States debt statistics. In order to understand your own debt, it is easier to picture what the average household is going through. This is one reason the Federal Reserve issues a report about the nation’s economy four times a year.

These United States debt statistics refer to consumer debt. This means they look at money that is owed by people — everyday citizens like you — rather than business debt, which would refer to the money owed by institutions. Unfortunately, the most recent report says that total personal debt in the United States is on the rise. In fact, the total personal debt has increased “every quarter for the past five years.”

Details

According to these debt statistics, by far the largest portion of total household debt is due to mortgage loans. In fact, mortgage loans make up more than two-thirds of the total household debt balance. Though the rate of delinquencies on mortgage balances has recently decreased, there is still nothing else that compares to mortgage loans when it comes to “total dollars owed, but as of yet unpaid.” Other major causes of total household debt in the United States are attributed to student loans, auto loans, and credit card debt.

Though it is important to make informed decisions about your own personal finances, the collective choices of others in society will have an impact on you. It is important to understand where your debt comes from, but also where the debt from everyone else comes from.

Personal Finance for Beginners: Budgeting Basics

Budgeting may seem like an overwhelming task at first glance, but it gets easier over time. It can be time-consuming, but once you have an idea of what your budgeting goals are, then the process will go faster. The first step of budgeting basics is to gather all the information. When making your budget, make reasonable goals for yourself. Then track your expenses over time — generally month by month — and make changes to your budget as needed.

Before making your first budget, determine why you are doing so. Are you over-spending every month, making it hard to get by each month? Does your credit card debt make it hard to live paycheck to paycheck? If you are currently financially stable, are you looking to improve your credit or your living conditions? Even if you already live in a nice apartment, it is always okay to improve. If you are looking into buying a house or renting an even better, more expensive apartment, then you may have to reprioritize your current expenses. This is where budgeting can help you.

Now that you have decided to make a budget for yourself, you need to gather information. This includes information about your total income each month and total expenses each month. It is important to know where you are currently at, so that you can make realistic decisions on how to change your spending habits. For me, it is easiest to divide my expenses into five main categories:

Fixed Expenses

Fixed expenses include things that I have to pay every single month and are the same (or relatively the same) price each month. This includes things like rent, Internet, utilities bills (such as gas, water, and electric), Netflix account, gym membership, health insurance, and student loans. Try to record everything that you have to pay regularly every month, even if it seems as small as a Hulu or Amazon account monthly payment.

It can also be beneficial to make a small note next to each fixed expense about when it is due. This way, you have another reminder to help you pay off your monthly expenses on time. This can also help ensure that you don’t have any issues with overdrafting your account. If you know that you still have a $10 payment from Netflix coming out of your account in a few days but only have $20 left in your account, then you should not spend over $10 shopping at the mall.

Groceries

I make a differentiation between groceries and eating out, so that I can still have allocated funds for fun things like ordering pizza, while not going way over budget. It helps to keep track of your groceries expense month to month, so that you can see if there are any fluctuations. Whether you are trying to eat more healthy or have some change in diet, it is important to keep track of how much you spend on groceries, since it is one of your biggest regular expenses.

Cutting back on your groceries expense is hard, since you need food to live and it is cheaper to get groceries than eat out, but if you feel like you are spending too much on groceries, there are ways you can cut back. If you want to decrease your groceries expense, then consider buying generic versus name brand products, use more grocery store coupons, and plan your meals in advance.

Eating Out

It is extremely important to keep track of how often you eat out and how much you generally spend when you do so. You may use something as an excuse (such as going to the gym) to treat yourself with a meal or ice cream out, but this can quickly add up. It is generally more expensive to eat out than it is to cook at home. Free time, or lack thereof, can be a big factor in one’s decision to eat out, but it should be recorded separately from groceries, so that you have a chance to compare how much you spend eating out versus at home. Then you can determine if eating out is eating up too much of your budget. Don’t forget to record your morning coffee, since this is something that is easy to forget but also adds up over time.

Going Out

It is also important for me to go out regularly, if not often, so I keep a section of my budget for going out. This section can include things like going to the movies or going on a date with your significant other. It doesn’t matter what you enjoy doing, you should not give it up (completely) just for budgeting purposes. Cutting back is often the best way to go. If you enjoy going out with friends for food or drinks, then keeping a budget should not stop you. Your expense-tracking from budgeting may show that you spend too much while going out with your friends, but this does not mean stop doing what you enjoy. It means maybe you only go out with your friends once a week and only have one instead of three drinks. Don’t lose who you are for your budget.

Miscellaneous

For me, my miscellaneous section is for anything that is unexpected and/or does not necessarily belong in one of the other sections. This could mean anything for your household, such as emergency BandAids or Tylenol, to a new frame for an important or sentimental picture. Miscellaneous can also refer to unexpected large payments, such as for a vacation or emergency medical care. A vacation or emergency medical visit aren’t regular monthly occurrences, so they should not be tracked as such. It is important to me to have this miscellaneous section so that I can keep track of even small expenses made during the month.

It is important to remember to make realistic goals when budgeting. For instance, you may want to decrease your food expenses. It would be reasonable to make a plan where you allocate less money for eating out, if you want to decrease your food expenses. It would not be reasonable, however, to just allocate $50 for your monthly food expenses. You know you will need more money for food than just $50, but you can fairly say that, if you are single and live alone, you will not need a whopping $300 for food expenses. Always keep your goals tailored to your own personal situation, and make sure they are reasonable.

Personal Finance for Beginners: Personal Income Tax Basics

The tax system is confusing. The Taxpayer Advocate Service, which is an independent organization within the Internal Revenue Service, even developed a new roadmap guide for taxpayers to try to alleviate some of the confusion taxpayers have about their taxes. This colorful roadmap guide just shows how complex the system really is. Even with such a detailed and color-coded roadmap guide, it is clearly not simple enough for average taxpayers.

It is probably overwhelming trying to figure out where to even start with finding out what you need to know about taxes. There are so many different kinds of taxes you have to pay every year. Sales tax, property tax, taxes on savings and interest, taxes on your car or car payments, and personal income tax are just some of the taxes you have to pay for. A good place to start is with personal income tax basics or in personal finance books for beginners.

It can be exciting getting your first real paycheck, until of course you see all of the taxes deducted from your gross income. It can be frustrating to see how much is really taken out of your monthly checks. Money you worked for but never get to really hold in your hand. It can be uplifting when you get a big refund check in the mail though.

But why is understanding taxes important? Besides the fact that you have to pay them, and you should know what you are paying, how and how much, there are also tax refunds which you can put to good use. But only if you know what they are and how they work. Americans tend to use their tax refunds in many ways, and you can too.

How Americans spend their tax refunds

Conclusion

Personal finance can seem confusing before you have the chance to learn more about it, but today there are so many opportunities to educate yourself. Whether you decide to use websites, apps, or personal finance books for beginners, gaining the knowledge you need to achieve your personal finance goals is not out of reach. Whether you are looking for help creating and managing your budget or organizing and managing your debt, there are an abundance of resources available for you.

Education is key, especially when it comes to your finances. If you need a mortgage, a personal loan or a credit card, you need to know what you’re getting into. So make sure you keep reading and getting to know the world of finances. Another useful thing you can do is join the Loanry family. We are here to share our extensive knowledge, but also to help you find potential lenders and best credit cards , if you need them. For example, our partner Fiona may offer credit card options based on your credit rating and the purpose of the card. Enter the relevant information and follow the steps:


 

Pros and Cons of Small Business Loans: Steady Growth

Can we talk shop for a moment?

I know you’ve been wondering if it’s time. Is it time to get serious about that home business you keep wanting to try? Is it time to expand that part-time work you actually like more than your “real job” so that maybe it becomes your “real job”? Or is it time to hire actual employees for that store front you’ve been managing by yourself or with your spouse? Maybe add some equipment? Increase your inventory? Expand your services? Are there small business loans out there for situations like mine? How should someone like me even approach business loan shopping?

I’ve wondered some of the same things.

The Unique Challenges of Small Business

It can be frustrating, trying to explain your vision to people who aren’t entrepreneurs. They don’t get it, because in their worlds “playing it safe” is always the answer. And for them, maybe it is. Maybe it always will be.

I’m thankful for those friends and their ability to be content with that. They’re hard workers and great people and we love and value them.pros and cons personal loansThat’s just not me. Maybe you’ve been wondering if it’s just not you, either.

Maybe you’ve been toying with the idea of starting your own business, or taking your current hobby to the next level. Or perhaps you’ve already established yourself as an entrepreneur. You’re working out of your home, or you have your own shop, booth, or stall, and you’ve learned some of the hard truths of business finance. I’ve known successful business owners who spent years working out of their truck and their garage. For you, the question may not be whether or not to take the leap, but whether to make the next one longer and higher than you’ve tried before.

Whatever the exact status of your business, your hobby, your passion, small business owners (or those who wish to be) are at something of a crossroads right now. In many ways, you hear, the economy is active and strong. Small businesses are on the rise. At the same time, working for other people no longer seems to offer the promise it once did over time. Some of you have read this in the financial pages; others have experienced it yourself in far too personal terms.

Leaps and Lurches: The Search for Steady Growth

So what should you do? Is it time to jump, or better to play it safe and see how things unfold in upcoming months and years? Is it possible to take small but significant steps forward without unnecessary risk? How can your business plot a course for evolutionary growth? For expansion instead of explosion?

If you want to grow, or get serious about changing course or starting something entirely new, you’ll need resources. That’s not a problem if you have a wealthy relative ready to finance your efforts out of familial affection or the hope of a small cut of the profits down the road, but for the rest of us that means taking out one or more small business loans. It means risk, and commitment, and making endless decisions – many of which we can’t even anticipate yet. It means consequences – good ones, bad ones, and some which may be both.

I can’t tell you what the right call is for you in your situation right now. I wish I could. I’d make a fortune advising folks just like yourself when to wait, when to leap, and when to step cautiously ahead. Plus, I’d be wildly popular and everyone would come to my parties just to hear me pour my wisdom like champagne, only twice as bubbly.

What I can, do however, is help you revisit some of the pros and cons of small business loans and suggest a few things to consider as you shop business loans. Then, if you decide to move forward, we can help connect you with online lenders ready to compete for your business. What you do after that is entirely up to you; that’s how running your own business works, after all!

Business Loan Basics Spelled Out: Loans 101

Growing Pains

Before exploring the various types of small business loans or the specifics of business loan shop, the most fundamental question is whether or not you really want or need a small business loan. What are some good reasons to shop business loans to begin with?

Physical Expansion

Feeling a bit snug where you currently operate? Finding it difficult to display your products or promote your services? Do your employees have to take turns with the community desk and chair? Perhaps it’s time to move or add some square footage to your existing location.

Branching Out

Maybe the solution isn’t making your location bigger so much as making it the first of several. Is it time to add locations in nearby cities or utilize multiple locations for maximum efficiency? Explore your options, but don’t be afraid of taking this leap if the numbers justify it.

Adding Inventory

If your business involves selling products utilizing a large variety of materials, you know the importance of having the right goods on hand. In this age of next-day delivery and immediate gratification, fewer and fewer customers are willing wait for you to order in their preferred colors or replenish whatever supplies are required to serve their specific needs. Or, if your business is seasonal, you may regularly experience “feast-and-famine” cycles which could make periodic small business loans a practical element of your overall business financing.

Adding Employees

While you don’t want to borrow money to meet payroll on a regular basis, initial expansion of human capital may require some upfront investment. There are interviews to conduct and salaries to guarantee – not to mention you’ll need somewhere to put them once hired (see above).

Updating Equipment

There’s no sense buying something just because it’s shiny and new, but if your business uses special equipment or manufactures products, it makes even less sense to fall behind your competitors. Chances are no matter what sort of business you do, you’re using one or more computers, smart phones, and other technology. Don’t upgrade just for bragging rights, but make sure you have reliable, efficient tech if you want to remain competitive.

Establishing Credit

Maybe everything has gone magically for you since day one; kudos to you if that’s your story. For most of us, however, our journey has included some wrinkles along the way – some “downs” which make the “ups” that much more fulfilling. Our credit report probably reflects this range of experiences (hopefully telling a story of determination and recovery as much as risk and periodic reward). The time may come that your business would benefit immensely from access to substantial credit. Don’t wait until that day to shore up your credit history; small, reasonable small business loans now, paid back in a timely and consistent manner, can lay essential groundwork for those moments.

What To Look For In Small Business Loans

If you’ve decided that now is a good time to grow your business, and that a small business loan is part of that, it’s time to break down the basic elements you should consider as you begin to shop business loans. Sometimes it helps to step back and start from scratch in order to think clearly about the right choices for your business and your circumstances.

How Much Do You Need?

If this sounds like an easy one, you haven’t thought it through enough. Take out too little, and you’ve put yourself in debt without doing what you set out to do. Take out too much, and you risk overextending yourself unnecessarily. At best, you’ll be paying back interest on money you didn’t really need. There’s no perfect answer to this one, but run the numbers several ways and get as close as you can before reaching out to business lenders. Be ready to explain to them how you arrived at your total if asked.

What Kind of Collateral Is Required?

Depending on your credit history, your relationship with the lender, and the purpose of the loan, you may be asked to put up collateral on your small business loans. This would be something of value you’re offering to the lender in case you are for some reason unable to repay your loan as scheduled. Don’t take this part lightly. Your home or business may provide ample collateral and allow you the resources you need to grow. They may even help you secure a better interest rate. But if you’re unable to repay your loan for any reason, you risk losing whatever you’ve put forth as collateral. That’s not how the lender wants it to go down, and I’m certain it’s not what you want, but it happens. Think through the ramifications before you sign.

What Interest Rate Can You Get?

Your interest rate is largely a function of your business and personal credit score history, but there’s no need to be discouraged if you don’t have perfect credit. Different lenders use different factors to determine what they’ll offer you. This is one of the biggest reasons you should look at multiple lenders. Try your local bank or credit union, but it’s the 21st century – try a few reputable online lenders as well. Pay attention to the specifics of each (not just the interest rate) before you decide, but I suspect you’ll be pleasantly surprised by some of the online options that didn’t exist for small business loans a generation ago. You may decide to accept a higher interest rate now to begin rebuilding your credit record so that you can negotiate better terms down the road.

What’s the Length of the Loan?

This is another balancing act. You want to keep your payments manageable, and longer terms certainly help with that. At the same time, a 48-month loan will cost you more than the 24-month version, even if the interest rate is the same – which it probably won’t be. If you need that longer-term option and the lender offers it, great. But if you can reasonably pay back the full amount in three years instead of five, you’ll save substantially on total interest paid. Some longer-term loans are particularly difficult for newer businesses to secure and lenders may require additional documentation or security for the loan (see below).

What’s the Late Payment Policy?

No one plans on paying late, but we should be honest about the possibility over a period of several years. What’s your lender’s policy about late or missed payments? Are there extra fees, or just additional interest? At what point do they consider the loan in default? You should pay back every loan in a timely, professional manner, but you may find substantial variations in how different lenders treat minor inconsistencies. Better to know up front just what these are.

Are There Penalties For Early Payments?

I know – who could possibly object to you paying your loan back early? With most traditional business loans this isn’t a problem, but you should clarify up front whether extra payments automatically go towards the principal of the loan or will simply be counted towards next month’s scheduled payment. If your lender does invoke some sort of penalty for paying early, you’ll want to consider that before you commit. This factor alone might shape who you choose for your small business loans.

Small Business Statistics

Interesting Small Business Statistics:

  • 69 percent of entrepreneurs in the United States start a businesses from home.
  • According to the National Association of Small Business’s 2017 Economic Report, the majority of small businesses surveyed are LLCs (35 percent) followed by S-corporations (33 percent), corporations (19 percent), sole proprietorships (12 percent), and partnerships (2 percent).
  • Out of the 50% of those asked, “What’s the best way to learn more about entrepreneurship?” responded with “Start a company”.

 

In 2018, the most popular small business loan methods were:

  • Personal funds 77 percent
  • Bank loan 34 percent
  • Borrowing from family/friends 16 percent
  • Other funding 11 percent
  • Donations from family/friends 9 percent
  • Online lender 4 percent
  • Angel investor 3 percent
  • Venture capital 3 percent
  • Crowdfunding 2 percent

Short-Term Small Business Loans

These are loans usually scheduled for repayment in a relatively tight time frame – from several months to several years. They’re somewhat comparable to buying a car. It’s still a lot of money, but it’s doable, and in a few years, if you keep up as you should, you’re clear. If you’re trying to build your business credit history, these are where you’ll start. Some lenders require short-term small business loans to be tied to specific purposes – purchasing equipment, expansion, inventory, etc.

Short-term loans tend to be for relatively small amounts, although what that means will vary widely with the type of business you own. While your credit still matters, lenders are more likely to take a chance on small business loans scheduled to pay off over a shorter term. Some forms of these loans dramatically differ from your car payment by being scheduled for repayment in weekly, or even daily, amounts. It all depends on the terms you work out with your lender.

Long-Term Small Business Loans

Most of the time, small business financing for gradual growth will involve relatively short-term loans of manageable amounts. There are circumstances, however, in which you may need to shop business loans for much larger amounts and for longer periods of time. If you’re building new locations or purchasing expensive equipment, the investment required may not be something you can reasonably repay in four or five years. If short-term loans are somewhat like buying a car, long-term business loans are more like buying a house.

I suppose we’d all love to have this sort of problem – so much growth that we have to start business loan shopping just to keep up. Perhaps, then, we should take a moment and consider a few of the realities of longer-term small business loans and what you need to know going in.

Long-term small business loans aren’t usually tied to specific purchases or purposes. They may be taken out to cover a variety of needs while your business establishes itself or grows. Just because the lender may not require proof of specific purchases doesn’t mean you shouldn’t have a good idea where the money is going before you sign up, however. While it’s impossible to predict all factors with certainty, you should have a fairly detailed business budget broken down into a spreadsheet – for your own reference as much as anything.

How will this loan help you move forward? How will it make you more profitable, enabling you to pay back the loan and still come out ahead over time? Just like in our personal lives, even large amounts of money can suddenly disappear quickly if we’re not fully intentional about where each dollar is going.

Features of Long-Term Small Business Loans

Most traditional lending institutions like banks and credit unions are going to have fairly rigid requirements for long-term small business loans. Your credit score will be a larger factor, and most will have minimum amounts you must borrow to qualify for extended financing. While you’re generally expected to arrive with documentation demonstrating your personal credit worthiness and your business’s ability to pay back any loan, the paperwork requirements will be more extensive for a long-term business loan. It’s unusual for traditional lenders to extend long-term loans to new businesses or any small business unable to document several years of substantial profitability and a clear plan for growth in the near future.

Online lenders are more likely to demonstrate flexibility both in terms of minimum amounts required to take out a long-term loan and their willingness to work with newer businesses. It will probably not surprise you to hear that we’re big fans of online business lenders – but we’ll come back to that in a bit.

Interest rates on long-term loans

Interest rates on long-term loans tend to be a bit lower than for shorter-term loans, which is great but not the money-saver you might expect. The extended terms mean you’ll be paying more over the life of the loan than you would with a much shorter-term loan at a higher interest rate, even if the amount borrowed were comparable. That’s not necessarily a bad thing; it makes sense that it costs a bit more to borrow larger amounts or for longer periods. Still, it’s always a good idea to run the total amount you’re likely to repay under whatever terms you’re able to secure. Thankfully, it’s the 21st century and there are free online loan calculators available for you to experiment with zero risk and no one even watching.

As with a house payment, the most traditional repayment schedule for long-term loans involves monthly payments. You may be given the option of fixed-rate interest or adjustable-rate interest. Fixed-rate, as the name implies, means the interest rate established at the birth of the loan remains the same throughout repayment, whatever happens to market rates in the meantime. With an adjustable-rate loan, the interest on your repayment varies with market rates – it might go up or down from month to month, a little or a lot. Given the nature of long-term loans, some lenders are more likely to push this option than they are with shorter term.

Why Look For Business Loans Online?

No one is suggesting that you only consider online options for your small business loans (or any other sort of loans), but part of making responsible business financing choices is being aware of and weighing your options. In fact, I’d suggest starting with local options – the bank down the street, the credit union you belong to through your spouse’s work, etc. Set up an appointment to talk about your business and their loan options. See what they offer you.
Then explore your online options as well. As I said before, this is the 21st century, and while some things about entrepreneurship have remained the same, other realities are evolving because of technology, changing political dynamics, and the evolution of the modern economy. If you haven’t tried online lenders before, let me suggest a few reasons maybe you should.

Flexible Terms

Online lenders aren’t bound by the same traditions or conservative lending culture typical of most banks and even many credit unions. Because they exist primarily as lenders (rather than as institutions geared towards savings or investment management or large safes full of bullion), they very much want to lend you funding – small business loans, personal loans, auto loans, mortgage loans, etc. It’s literally what they do. Some will allow longer terms on smaller loan amounts, or creative payback schedules based on the specifics of your business. Others will work with you on revolving credit or new equipment loans so that the terms of the loan accommodate your unique business realities. Online lenders have the freedom to be more creative when it comes to specific terms because lending isn’t peripheral to their primary function; it is their primary function.

Reasonable Risk.

You’re in business (or trying to be), so you understand how business works. Online lenders only make money when they loan money and that money eventually gets paid back with reasonable interest. While your credit report and other indications of your ability to repay certainly matter, online lenders have different thresholds for determining acceptable risk. In other words, they’re more likely to “take a chance” on a determined young entrepreneur or a hard-working small businessman trying to move her company to the next level.

Convenience

Let’s be honest – no matter where they’re located or how comfy the chairs, driving from institution to institution, signing in on that little e-pad at the door, then waiting to talk to a guy in a suit who seems to be typing in way more information than you’re actually sharing, is seriously time-consuming when you’re trying to also run a small business and have a life at the same time. Working with online lenders allows you to do everything from the comfort of your office or home and access multiple options all in one sitting. While specifics vary, online lenders often require less paper documentation, so while you’ll absolutely want to have all the same information prepared, there’s less time devoted to photocopying or filing hard copies in manila folders (and zero stamping on things with big rubber ink stampers).

Final thoughts

That’s where we come in. At Loanry, we gather some basic information from you, then connect you with one or more online lenders we believe to be a good match for your needs. There are no fees, no surprises, no point in the process we suddenly pressure you to buy something or upgrade to our “pro” version (it’s all the “pro” version and the “pro” version is free). Connecting lenders and borrowers is what we do – and, at the risk of sounding rather proud of our track record, we do a pretty good job of it.

Let us know when you’re ready, or if you have any questions. We’re always here.