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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How to Get A Business Loan With Bad Credit?

Whether you open a business or want to expand an existing one, you at some time will likely need a business loan. Regardless of your situation, you may need a business loan with bad credit because not every business person has a credit score of 800.

Before you jump into applying for loans, let’s look at your other options. Despite where you’re reading this, as a business owner and finance writer, I will tell you that a loan should be your last resort, not your first choice. A lot of people jump at the chance to take out a loan because it seems easy. It seems like a choice that will provide them all the money, all at once.

They do not consider the interest added to the principal of the loan and how much it will add to the cost. Nor do they think about the fees. They do not consider what will happen if their business hits a rough spot and their revenue slows down. They just think, “Hey, here’s a quick way I can get the money I need.” So, before we jump into applying for bad credit business loans, let’s look at how to finance a business.

How to Finance a Business

You really have a wide range of choices in funding opportunities. You could suss out angel investors, venture capital, go public, fund your business with a cryptocurrency token, gather private investors, crowdfund or use a combination of these. Then, when you have exhausted all of those opportunities, you turn to taking out the smallest loan you need. That may mean applying for a micro loan or a standard small business loan. The best place to start for the latter in the US is the Small Business Administration. So, let’s explore each of these succinctly and you can read more about the choice that resounds most with you on your own.

Before you begin, examine your actual financial needs. You should be applying for the lowest amount of capital needed for two main reasons.

First, most organizations, especially lending institutions, loan or invest based upon your ability to pay it all back. Now, you might think, “Hey, an investor doesn’t get paid back. They don’t make a loan, so there is no interest.” Insert angry buzzer sound here. Your investors expect a hefty return on investment. They anticipate that when they invest in your firm or startup they will earn money from it. Either way you go, you should ask for the smallest amount. If it comes from an investor, you can buy them out more easily and go back to being the sole owner of the company.

Second, both lending institutions and investors recognize padding when they see it. Padding refers to when you add extra funding need needlessly. For example, when you create a line item budget and include a laptop computer with a terabyte drive, but the amount of cost you include is twice what the laptop costs. You padded the cost.

Loan officers and angel investors aren’t dumb bunnies, as my Daddy used to say. They recognize padding when they see it. They know what things cost because they look at budgets and budget requests just like yours every single day of their lives. It is the majority of how they spend their time. Your accuracy in your budget and budget discussion shows them your overall accuracy. It also reveals your honesty and transparency. Few people want to loan or invest with a dishonest liar who they have no idea how they are spending the money. Determine the smallest amount of funding you need and chase that amount with ferocity.

Despite all the preparation, prepare yourself to receive less funding than you requested. Less than half, 46 percent, of businesses receive their full funding request. If you already bootstrap your business, prepare to tighten up things further. Waste not, want not – another favorite of my father.

Angel Investors

Many startups hope and pray they’ll land an angel investor. It’s tough. Mainly, three reasons make it hard to land an angel.

  1. They like to remain anonymous.
  2. They typically do not know you.
  3. You need to already have a minimum viable product (MVP) prepared to present.

A very few wealthy individuals or families have formed investment offices to screen potential investment deals. You will need to angel investors that understand your industry and business model. You can check Angel List if you just began your firm, but if you already established, check with board members and business advisors first. Your best bet is an individual or family with whom you already have an established relationship.

Venture Capital

Established firms or startups can seek financing from venture capital (VC) firms. A VC bears close resemblance to an angel investor, except that the angel may be an individual more often than a VC would be. Typically, you will find a VC firm comprised of a group of investors with significant business experience. This firm may provide much more than funding, including:

  • strategic assistance,
  • potential client and partner introductions,
  • assistance drawing high-quality employees,
  • other business growth advisement.

Similar to the tough time landing angel investors, you’ll also find it challenging to obtain venture capital financing. You need an introduction to the VC. Most cold calls go unreturned and feeler emails get ignored. You need a colleague who knows the VC well to provide an actual face-to-face introduction.

At this introduction, you’ll have an opportunity to hit them with your elevator pitch. That refers to a 60-second or less description of your company or product. Until you can describe what you offer in one minute or less and make it sound great, cataclysmic, amazing, you aren’t ready. You also have to be able to prove what you said you deliver in that elevator pitch.

That pitch starts you on the process to getting a meeting. Simply setting up the first meeting can take weeks after your introduction. You get one shot. Go listen to Eminem “Lose Yourself” a few times before you launch into your presentation. Ah, your presentation… make it 15 minutes or less. Include tons of relevant, meaningful graphics. Bring an actual MVP with you with emphasis on the “V” for viable. You need to show the investors that you could take their money and genuinely enter production phase today.

If you do not yet have a MVP, you aren’t ready for this. Take your financials and your projections with you. Be prepared to get hit with every conceivable question. If you watch a few episodes of “Law & Order” in which the district attorney totally grills the perpetrator, you’ll have a relatively accurate idea of what this will be like. Don’t be shocked if they ask about your personal finances, too. At this level, as with angel investors, you are typically asking for a mountain of money. Between the time of your introduction and your meeting, you will be vetted. Expect full background checks.

Here’s why beyond the fact that you are asking for a ton of money. You are also adding a business partner(s). Most angels and VCs expect to either come on as a silent partner or to place a board member. They are buying into your business. Their upfront capital for your startup or expansion comes at a price. You will share ownership of your business with them. Their investment increases the your business’ creditworthiness. Landing a VC can be tough, but worthy.

Initial Public Offering (IPO)

In today’s business climate, you have a choice between methods of initially going public with your business. If you choose the traditional route, your company will offer a public sale of stock via an initial public offering (IPO). From this you will amass a group of shareholders to whom you pay dividends when revenue is good. These shareholders obtain voting rights in major company decisions. You must undergo a formal process with the US Securities Exchange Commission (SEC) which includes a not so small mountain of paperwork. The SEC also sets rules for how you can run your IPO and the regulatory environment remains complicated. IPOs only work for those with an already established business.

IPO vs ICO

Initial Token/Coin Offering (ITO/ICO)

Your other option in today’s business climate is an initial coin offering (ICO) or initial token offering (ITO). This option creates and sells a cryptocurrency coin/token on a blockchain. Unlike stock, the coin or token offered on a distributed public ledger, theoretically gains value and allows the purchaser to resell it on an open market.

Startups or existing businesses can use this as a method for fundraising. Depending on the type of token issued, you may have to adhere to SEC rules similar to those for an IPO. Tokens provide a great way to raise seed capital, especially for those not yet to point of proof of concept. You do need a well-researched whitepaper describing the proposed minimum viable product with a complete competition analysis. With an ICO/ITO you retain control and management since you give up no voting rights to shareholders.

Private Investors

A friendlier way to obtain funding is to take on private investors. This includes friends, family and customers that might have interest in your business. Again, you will add business partners and they can want varying degrees of control. As with VCs, the private investors add their creditworthiness to your business. You also benefit from their collateral and industry experience.

Crowdfunding

Crowdfunding has become a go to for startups. Register with any of the major crowdfunding companies to gather funds from a multitude of micro investors. You can start a campaign on Indiegogo, Kickstarter or GoFundMe. Each website uses different rules. Some require you to raise the full amount to access funds while others allow access to partial funds.

Bad Credit Business Loans

After you have exhausted all of the above possibilities, turn to the option of a obtaining a business loan with bad credit. You may by this point need to take out a much smaller loan than previously. This is awesometastic.

This will save you money in the long run. The less money you require, the less money you have to pay back. That matters even more if you have bad credit. Here’s why.

When you have bad credit, you will not qualify for prime interest rates. Prime rates, the lowest interest rates available, go to those with exceedingly great credit scores. You would need a 680 to 720 to qualify for a prime rate loan. Those are the loans that provide interest rates of ten percent or less.

Bad credit to you might mean a credit score of 300 or so. To a bank or lending institution, it means anything under 680 or so. To a bank, you’re either a sure thing or nothing. Your credit score lets them know how likely you are to pay off your loan.

Remember that when you start a business, you will not have the business’ clout or finances to back your loan. You have your own personal finances. So, if you have bad credit or no credit, you need to obtain as much of your funding from a source besides loans as possible.

Spend a little time building your credit score up. You can start this process by visiting Creditry.com. The site will help you take charge of your credit and get things under control.

You need to get copies of each of your credit reports. You will have three – one from each of the credit reporting agencies. Study your reports to determine whether each is correct.

Complete a report form for any mistakes you find. Each credit reporting agency has its own. The agency will investigate your report and make an inquiry to the organization that issued the credit information.

If it really is a mistake, the agency removes the negative information from your report. If it is not, you will have an opportunity to discuss it with the creditor and make a payment plan. Either way, you will produce the result of improved credit.

You can begin this process when you first start your business financing activities. That way, while people are checking your credit score, potential investors will see it continue to move up. When your score improves while you are applying for funding, potential investors and financial lending institutions look upon this favorably. By the time you have exhausted all other possibilities for funding, you will have an improved score and be ready to apply for loans.

You now need to determine which loan type you want. You may still need a significant amount of start up or expansion capital. In that case, you need a standard small business loan. After all the other funding pieces, you may only need a small amount. That means you could use a micro loan.

Standard Small Business Loan

As I mentioned, you can still get a business loan with bad credit. It will not provide the prime interest rate you probably hoped for, but you can obtain a business loan. Remember that unlike all the other funding types discussed which bear closer resemblance to grants, you must pay back a business loan. You are just borrowing the money. The lender will charge fees plus interest. You literally promise, via a legal contract called a promissory note, to repay the money, typically in monthly installments for a specified length of time. Depending on the loan, you may or may not make a lump sum payment at the end of the repayment period.

You can opt for an unsecured or secured business loan or a line of credit. You will probably find it simplest to obtain a secured business loan since this uses collateral to guarantee you will pay back the loan amount. An unsecured loan is much tougher to get since you have provided no promised collateral that you will repay it. The third option is a line of credit. You typically get a line of credit based upon equity in your home or business.

Shop Business Loans

You probably do not think of shopping when you think of business loans. You can shop for them though. Visit Loanry.com to use the awesome loan mall there.

You will simply need to complete a really short form with basic identifying information which will enable Loanry to match you with potential lenders. Remember, Loanry is just there to make the process easier, but Loanry does not make loans. Lenders do. Additionally, if you use a loan mall, you avoid reducing your credit score since a soft check is conducted, and not a hard one.

Loanry then may connect you to potential lenders that typically loan to individuals with your credit score and situation. It does not mean that you will qualify or obtain a loan from them. It just reduces your research time by finding potential lenders for you. You still need to fill out the loan application from each lender that’s on the list.

Do not apply for all of them at once. Go through the list one at a time. Wait for a reply. If you get turned down, you move on to the next lender. If you get a yes from a lender, you are done.

Every loan application costs money. You must pay an application fee to be considered for a loan. These can run as high as $50.

In Conlusion

You can obtain the business loan you need. It may not be easy or quick, but you can get the money. Start with the methods that do not require you to pay back the loan. Move on to business loans for bad credit only when you must. You can get your business off the ground or expanded. It takes time, effort and hard work.

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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.

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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.

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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.

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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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