Starts are always rough, and you more than anyone should know it, as a small business owner. Getting the funds to get your business on track looks like another complicated process. However, it’s good to make a deep research and analysis to determine if you need a business loan and if it’s the right fit for you.
According to a survey held by Electronic Transaction Association (ETA), 3 is the average number of loans small business owners take in a period of 5 years. 54% of the interviewed small business owners said it was for equipment purchase, and 51% for inventory purchase. But the truth is that there may be many other reasons why you would need a business loan and there are different kinds of loans that might adapt to your needs.
You can get business loans from different entities: government (SBA), banks, credit unions, or what has become more popular nowadays because of the efficiency of their services: online lenders.
There are several types of business loans, however, we consider that the following might be more relevant to a small business:
Types of loans
An installment loan consists of a contract signed by both the lender and borrower, where the borrower receives an amount of money and pays back every month until the agreed deadline. The interest is calculated from the date the money was received until the day the loan ends. If the loan is paid before the deadline, the interest becomes lower.
The duration of this business loan may vary from one to seven years, depending on the quantity requested and the agreed time between the lender and the borrower.
Line of credit loans
This type of business loan can be provided by banks. It’s perfect for emergencies and cash flow stagnation. A line of credit loan is similar to having a credit card: it’s money you have available for the moment you need it. It has a low-interest rate, the interest is paid monthly, and the main part of the loan is paid at your convenience. However, each bank has it’s own requirements, so you better check first which one is the most convenient for you.
They are similar to installment loans. The quantity and deadline are agreed between the lender and the borrower. The difference is that the loan is paid in full at the agreed date: it doesn’t really require a monthly payment. It can be very handy when you are expecting money from a client but first, you need to buy the supplies; once the client pays you, you can pay back the loan, with the percentage of interest included.
So maybe you already have a type of loan in mind, or maybe you’re still trying to decide. Regardless of your choice, make sure you consider the following points before actually signing a contract. You could end up getting a loan you don’t really need, or one that could damage your business rather than helping it grow:
Things to take into consideration
Reason for the loan
It is key to identify what is the reason why you want a business loan. It will also help you realize how much money you need and under what terms. As any other thing, getting a loan is something you should plan smartly. Take a look at the financial situation of your business and the planned growth. At early stages of a business, a loan is very helpful, however, it is not the best time to request it because your business is still in a very fragile state.
Time & Money
This two go hand in hand, and after defining the reason of your business loan, you also have to start considering time. With time we mean: how soon do you need the money? Knowing this will help you find out which kind of loan you need and from which kind of lender: Remember they all have different processes and require different documentation. It could take longer than you have planned, and this could cause a delay in your cash flow. Online lenders are usually known for fast and accessible loans.
And with money we mean the actual quantity you will ask for. According to your business profitability, how long will it take you to pay it back?
Your business eligibility
All lenders have different requirements for a business loan. The following three are the most common. First of all, your lender will require your personal and business credit score, to make sure you have paid your debts in the past without any problem. You have to understand the difference between both. Your lender will also look at the length of time in business. Most of the time, if your business is too new, it’s difficult to get a loan; however, if your small business has been around for a couple of years, you have more possibilities. A third factor is business revenue: lenders need to know if your business is profitable enough to pay the debt.
As we have seen, every loan comes with interests to be paid at the end or during the term of the loan. You need to be aware of how much this interest will be and if it’s suitable for your business. Make the total sum of how much your loan will be after interests. For example, if you borrow $15,000 and by the end of the loan you have to pay $17,300, that means that the cost of the loan is $2,300. Depending on size and needs of your business you will determine if that’s good or not.
The same way lenders can be a bit picky with all their requirements, you should also be careful about what kind of lender you’re working with. Getting a business loan is a very delicate topic that has to be handled with care. Make a research about the lenders you are considering, whether they support the kind of business you’re having, or they cover your needs. Talking to current customers or reading reviews and ratings can also help you determine if the lender is suitable for your small business.
Now that you have all this information, consider all the pros and cons of getting a business loan, and you will reach a conclusion that best benefits your small business. Here you can read more about the perks of getting a small business loan. If you have any further or specific questions regarding business, you can approach us at Camino Financial. We will be happy to see you grow!