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.

An 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.

How accounts receivable financing works.

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.

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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.

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Disbenefits To Accounts Receivable Financing

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.

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.

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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

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.

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.

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 U.S. Small Business Administration
Program

504 Loans Provided through Certified Development Companies (CDCs) which are licensed by SBA

Maximum Loan Amount

504 CDC maximum amount ranges from $5 million to $5.5 million, depending on type of business or project

Percent of Guaranty

Project costs financed as follows:

  • CDC: up to 40%
  • Lender: 50% (Non-guaranteed)
  • Equity: 10% plus additional 5% if new business and/ or 5% if special use property

Use of Proceeds

Long-term, fixed-asset loans; Lender (non-guaranteed) financing secured by first lien on project assets. CDS loan provided from SBA 100% guaranteed debenture sold to investors at fixed rate secured by 2nd lien.

Maturity

CDC Loan: 10-or 20-year term fixed interest rate.
Lender Loan: Unguaranteed financing may have a shorter term. May be fixed or adjustable interest rate.

Maximum Interest Rates

Fixed rate on SBA Grow (504) Loan established when the debenture backing loan is sold. Declining prepayment penalty for 1/2 of term.

Guaranty Fees

SBA guaranty fee on debenture is 0.0%. A participation fee of 0.5% is on lender share, plus CDC may charge up to 1.5% on their share.
CDC charges a monthly servicing fee of 0.625%-2.0% on unpaid balance. Ongoing guaranty fee is 0.642% of principal outstanding. Ongoing fee % doesn't change during term.

Who Qualifies

Alternative Size Standard:
For profit businesses that do not exceed $15 million in tangible net worth, and do not have an average two full fiscal year net income over $5 million.

Owner Occupied 51% for existing or 60% for new construction.

Benefits to Borrowers

Low down payment - equity (10,15 or 20 percent) (The equity contribution may be borrowed as long as it is not from an SBA loan) ;
Fees can be financed;
SBA/CDC Portion:

  • Long-term fixed rate
  • Full amortization and
  • No balloons

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.

SBA U.S. Small Business Administration
Program

7(a) Loans

Maximum Loan Amount

$5 million

Percent of Guaranty

85% guaranty for loans of $150,000 or less;
75% guaranty for loans greater than $150,000 (up to $3.75 million maximum guaranty)

Use of Proceeds

Term Loan. Expansion/renovation;
new construction, purchase land or buildings;
purchase equipment, fixtures, lease-hold improvements;
working capital;
refinance debt for compelling reasons;
seasonal line of credit, inventory or starting a business

Maturity

Depends on ability to repay. Generally, working capital & machinery & equipment (not to exceed life of equipment) is 5-10 years;
real estate is 25 years.

Maximum Interest Rates

Loans less than 7 years:

  • $0 - $25,000 Prime + 4.25%
  • $25,001 - $50,000 P + 3.25%
  • Over $50,000 Prime + 2.25%

Loans 7 years or longer:

  • 0 - $25,000 Prime + 4.75%
  • $25,001 - $50,000 P + 3.75%
  • Over $50,000 Prime + 2.75%
Guaranty Fees

(No SBA quaranty fees on loans of $125,000 or less approved in FY 2018.)
Fee charged on guarantied portion of loan only.
$125,001 - $150,000 = 2.0%
$150,001 - $700,000 = 3.0%
above $700,000 = 3.5% up to 1st million;
plus 3.75% on guaranty portion over $1 million,
12 months or less .25%
Ongoing fee of 0.55%.

Who Qualifies

Must be a for-profit business & meet SBA size standards; show good character, credit, management, and ability to repay. Must be an eligible type of business.

Prepayment penalty for loans with maturities of 15 years or more if prepaid during first 3 years. ( 5% year 1, 3% year 2 and 1% year 3)

Benefits to Borrowers
  • Long-term financing
  • Improved cash flow
  • Fixed maturity
  • No ballons
  • No prepayment penalty (under 15 years)

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.

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.

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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.

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.

Roadmap to SBA loan

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.

Reasong to Finance Equipment to Your Business

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.

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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.

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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.

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.

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.

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.

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.

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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.

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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 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 Independence

Your Money or Your Life book cover.

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 Plan

The Ultimate Lifetime Money Plan book cover.

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 Any

The Ultimate Lifetime Money Plan book cover.

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 By

The Ultimate Lifetime Money Plan book cover.

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 Partner

Smart Couples Finish Rich, Revised and Updated book cover.

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 Money

Smart Couples Finish Rich, Revised and Updated book cover.

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 Years

Smart Couples Finish Rich, Revised and Updated book cover.

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.

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.

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. 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.

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.

For me, it is easiest to divide my expenses into five main categories: 

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.

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.

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.

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.

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.

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.

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Pros and Cons of Small Business Loans: Steady Growth

We live in complicated economic times. It’s never been easy to own or manage your own business, but the past several years have certainly added wrinkles most of us never anticipated. Then again, you didn’t get where you are by playing things too safe. Small business owners understand perhaps better than anyone the need to weigh their options, consider the possibilities, and the plow ahead. Maybe that means consolidating. Maybe it means expanding. Maybe it requires evolving in some way. Whatever your decision, funding is always a consideration. Is it time to dial back, or invest more in your business? Just what are the pros and cons of small business loans at the moment?

That’s what we’re going to consider today. Some of what we’ll talk about may be familiar to you already. Other considerations may not have crossed your mind. Our goal isn’t to decide for you what you need to do – it’s to help you think through your options more clearly, despite all the noise and distractions. We could all use a little more of that these days, don’t you think?

Let’s start off by clarifying what we’re talking about when we discuss small business loans.

Small Business Loan Basics

In general, small business loans allow you to expand your business, survive seasonal fluctuations, update your technology, or otherwise push your business forward without exhausting your company savings or exposing yourself to unnecessary personal risk. A small business loan essentially offers your operation flexibility and resources beyond what it can manage in isolation.

When things go well, your business benefits from the opportunity and the lender makes a reasonable return on its investment. If things go poorly, however, you may end up with your business weighed down by debt that didn’t accomplish what you’d hoped.

There are several varieties of small business loans. Which one makes the most sense for you depends on your business and your current situation.

Traditional Term Loans

This is the type of loan most of us think of anytime the issue is considered. A financial institution like a bank, credit union, or online lender loans you a lump sum based on your needs, credit history, and ability to repay. Sometimes collateral is required; other times it’s not. You repay the loan in predetermined monthly installments for a set period of time. Interest rates are traditionally fixed for this sort of loan, but adjustable rates might be considered in some cases.

The advantage to this sort of loan is that you acquire the full amount up front and can largely spend it however you think best for your business. A traditional term loan can offer great flexibility and, with the right terms, make it easier to accomplish your small business goals. In addition to local banks or credit unions, many online lenders specialize in offering very competitive terms on relatively small, short-term small business loans.

Potential disadvantages are largely determined by your credit history, either personally or as a business. Unless you’re able to secure a reasonable interest rate and favorable repayment terms, you risk putting your small business into debt for more than you gain from whatever you do with the loan. You’re also committing yourself to regular monthly payments for an extended period, whether business is great that month or not. The larger the loan or the longer the repayment period, the better credit is typically required. 

SBA Loans

These are term loans backed by the Small Business Administration. They’re logistically similar to traditional term loans, but with a few important distinctions.

The biggest advantage of an SBA loan is that because they’re guaranteed by the federal government, these loans often offer better rates and similar or slightly lower fees than non-guaranteed loans. On the other hand, SBA loans are sometimes a bit harder to qualify for. Because you’re going through a government institution, there may be a bit more paperwork and additional requirements before approval.

Don’t assume you won’t qualify based on your business history or recent credit problems. The only way to be certain you won’t get an SBA loan is not to try.

Microloans

These loans are a subcategory of SBA loans in some way and they are given to newly established start-ups or small businesses, including non-for-profit childcare centers. SBA makes the fund available to nonprofit community-based lender up to a maximum of $50,000 per borrower. However, the average loan size is substantially lower at $13,000. 

Microloans can be particularly beneficial if you’re a veteran or you can claim membership in any category other than the traditional “straight white male” small business owner. We can argue the politics of it some other time; for now, it’s a wonderful opportunity for traditionally underrepresented entrepreneurs to kickstart their vision.

Even if you are a straight white man, it could very well be worth looking into the Microloan program anyway. There are all sorts of factors which might mean you qualify.

Line of Credit Loans

These loans operate in many ways like a credit card for your business. (In fact, many small businesses choose to utilize a company credit card to accomplish the same thing.) The application process is similar to any other small business loan, but once approved, you only withdraw the amount you need at that moment. You can spend as much or as little of the total available in whatever way you like as long as you make the required minimum payment each month.

The major advantage of a line of credit loan (or small business credit card) is that you’re not paying interest on the money you haven’t spent yet. You don’t have to do everything at once to make effective use of your line of credit – you can pay as you go. Repayment is based on the total amount utilized so that monthly obligations can be managed through the strategic timing of your spending. Unlike a traditional loan, every time you make a payment lowering your balance, those funds become available for you to borrow again as needed.  

The potential disadvantage is one familiar to any credit card user. Unless you pay attention and avoid letting your balance swell month after month, it’s easy to spend more than absolutely necessary and to let your balance and monthly interest payments pile up. It’s often harder to qualify for a line of credit loan than for a more traditional small business loan, but thanks to the proliferation of online lenders, this is no longer as true as it used to be. Interest rates largely depend on your credit history, but as you continue to meet your repayment obligations, you put yourself in a position to secure better and better terms.

The 9 Best Business Lines of Credit to Consider

Having a line of credit available for your business is important for numerous reasons. As a business owner, you need to understand the business lines of credit. You also need to find the best available credit line for your growing company. Establishing business credit is important for acquiring capital when you need it. For success [...]

Equipment Loans

If you’re looking to expand your business via the purchase of new or better technology or equipment, this may be the loan for you. When considering the pros and cons of small business loans, the two most common issues that come up over and over are qualifying for the loan and securing decent terms. An equipment loan improves your position in both categories.

The advantage to an equipment loan is that it includes natural collateral for the loan – the equipment being purchased. Because the value of your purchase is presumably pretty close to the amount borrowed, lenders have greater protection in the event you default on your payments or otherwise prove unable to pay. Much like an auto loan or home mortgage, your personal and business credit history certainly matter, but they’re not all the lender has to go on when considering your application.

The downside, of course, is that if you default on repayment for any reason, the lender could seize equipment essential to the operation of your business. Any business expansion assumes the resulting growth will offset expansion costs relatively quickly. If it does not, you may be left paying for expensive equipment or other materials which haven’t had the impact you’d hoped on your bottom line.

Merchant Cash Advance (MCA)

This is a short-term option which relies primarily on your business’s cash flow. Lenders offer small, short-term advances in exchange for direct access to a set percentage of your revenues. Repayment is deducted from your account automatically based on an agreed-upon formula.

On the one hand, merchant cash advance offers great flexibility and convenience for your small business when you know money will be coming in soon, but you need the cash now. Because repayment is based on a percentage of your revenue, you repay more when times are good and your obligation decreases during slow periods. You’re less likely to end up owing a large monthly installment when business has been unexpectedly slow.

On the other hand, MCAs are typically one of the most expensive forms of financing available. Fees can be high and interest rates reflect the unpredictable nature of the loan. In other words, these can be short-term solutions or seasonal strategies, but you probably don’t want to rely heavily on merchant cash advances over the long haul.

Merchant Cash Advance When Money Today Matters Most

Owning your own business can be a tricky thing. It takes a special kind of business owner to be able to make sound financial and administrative decisions. Even if you have made the best decisions for your business, you may find yourself in need of funds quickly. There could be a wide range of reasons [...]

Invoice Factoring / Invoice Financing

Both invoice factoring and invoice financing rely on your small business’s outstanding invoices as “assets” or “collateral.”

With factoring, the factor (they’re not officially considered “lenders”) purchases your outstanding invoices at a discount and takes on the responsibility for collecting those balances. You get the cash and they profit only if they secure repayment on their own. The downside is that you’re giving up a sizeable slice of revenue in exchange for rapid access to the funds. Not every customer is thrilled to discover they’ve been “handed off” to what sometimes seems like a collection agency (but isn’t).

Invoice financing, on the other hand, is an actual loan for which repayment is guaranteed by your outstanding invoices. The money currently owed to you by customers becomes security for the loan. As with factoring, however, you tend to sacrifice a higher percentage of your revenue in order to get what’s left more quickly. This can give you the pliancy you need to navigate difficult periods, or it can inject increasing instability into your business as you scramble to get back on top of your profits.

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. [...]

Investors / Partnerships

The ideal scenario is for some rich uncle or weird acquaintance from college to hear about your efforts to start your own business and offer you a blank check to get in on the action. These “angel investors” provide working capital with minimal interference in exchange for a reasonable return when and if you become wildly successful.

More commonly, you might consider taking on investors or even forming a partnership in order to combine resources. The pros and cons of this have been covered elsewhere, but basically you’re giving up a little (or a lot) control in exchange for better funding.

Kickstarting / Gofunding / Online Campaigns

The 21st century has introduced a wide range of options for pitching your ideas to others and giving them a chance to chip in on your dream. The rules vary from site to site, as do the pros and cons. In general, however, these sorts of sites work best for specific projects or limited goals. They’re not really set up to sustain an ongoing operation in a meaningful way.

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”.

Conclusion

These are challenging times for many people, and for small businesses in particular. But that doesn’t mean it’s not possible to succeed in the face of those challenges. The right financing and effective strategizing can propel you forward while so many others are still trying to figure out how they ended up so far behind.

Goalry has never been about telling you what’s best for you or your business. We prefer to offer insights, tools, and connections to the sorts of financial options which were only available to a handful of insiders a generation ago. The Goalry blogs break down complex financial ideas into easy-to-understand terms with practical examples. The Goalry App makes it easy for you to track your various accounts, categorize your small business spending, evaluate investment options, compare insurance companies, and conveniently navigate dozens of other fiscal decisions all in one central location.

Life is complicated enough without having essential information and tools scattered all over the internet or divided up into countless hiding places. Some are experts in dentistry, others know their chemistry, history, optometry, or podiatry. You may excel at microbrewery, puppetry, or archery. We’re all about goals – hence the name: Goalry.

Whether your goals are, short-term, long term, personal, financial, or whatever else you decide is important to you, we’d like to help you get there. Dreams are wonderful, but steps are what move us towards them. At Goalry, our priority is to help you take more effective control of your personal or small business finances – to get focused and stay organized so that you can better accomplish whatever your goals happen to be. Sometimes that’s weighing the pros and cons of small business loans, other times it might mean evaluating the benefits and risks of refinancing your mortgage or helping you figure out how to start saving for retirement when you’re already worried it’s too late.

Whatever your goals – and whatever’s stopping you from reaching them already – let us help. They may be closer than you think.

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