A business loan is a loan intended to shore up cash flow, increase business growth, add stock or purchase business equipment. A business loan is intended for business purposes. Like any other loan type, a business loan incurs interest upon payment since it is a debt. Business loans despite the interest rates incurred, are cheaper to get than credit cards since upon acquiring the loan, you don’t have to give part of your business to the investor.
Even when your business is not doing well, it is still easier to get a loan to boost your business. There are different types of business loans; among them, the most commonly known is the bank loan, asset-based financing, microloans, mezzanine financing, invoice financing, cash flow loans, business cash advances, among other types of business loans.
Before applying for that business loan, it is best to ask yourself some questions. Take your time and assess your business, and know your current need. Set a clear goal before you begin your research on the amount of money you need to finance your business. Below is a list of questions you may ask yourself.
1.How much money do you need exactly for the business?
2.How much time will you take to pay it back upon getting the loan?
3.Are there other alternatives I can get before shopping for the loan? What is the purpose of the business loan?
4.How long have your company been in active?
5.Do you have other unsettled loans?
6.Is it a long-term or a short-term loan that you are looking for?
7.Do you have any collateral to put up for your loan? And if yes, how much is the collateral?
8.What is your credit score?
9.What is your business’s current financial status?
10.Will the business loan interest affect your credit score?
It is important to have a clear goal before making any moves towards acquiring a loan. The above questions will help you determine whether to continue with the application of acquiring a loan or not. Let’s look at the advantages of business loans.
Advantages of a Business Loan
Many business owners consider business loans to keep their business operations ongoing. Business owners use loans for both short-term and long-term purposes, for example, to boost their financial flow, pursue growth, or consolidate high-interest debt. There are many benefits associated with business loans. Some include the following:
It is an Easier way of Funding the Business
Funding your business through a bank or online lenders can take a short time. Some of these applications are done online and can take only a short period to get approved. This is a faster way of funding your business, unlike other forms of raising capital in your company. Different methods like a venture capitalist or external investors can take long before the money is approved.
You Get to Control Your Business
As much as bank loans come with fees and interest rates, you remain the owner of the business. There will be no stake sharing of the company; you will keep complete control of your business. When you have investors in your business as capital providers, they will want a say in your business, and therefore, you won’t fully be the owner of the company.
Lower Interest Rates in Business Loans
Unlike credit cards with higher interest rates, business loans’ interests are lower than credit cards. If your credit scores are good, the business loans will come with a lower interest rate of between 2% to 13% depending on the type of bank. Your credit score plays a huge role in the amount of loan you need and its interest rate.
Types of Business Loans
There are various ways that a business owner can get capital for the business.
Through Bank Loans
A business loan obtained from a bank can either be a secured or unsecured loan. In the case of a secured loan, collateral will be required, but in an unsecured loan, there is no need for collateral.
You may be asked to produce your bank statements, balance sheet, or business plan before the loan is approved and processed. Other loan options that the bank offers include:
•Working capitals loans. These are short-term money solutions to fund business activities.
•Lines of credit loans. Loans needed for the day-to-day operations that require cash flow.
•Franchise startup loans. When a new entrepreneur wants to start a business and needs capital, a franchise startup loan is provided to open their franchise.
•Equipment loans. Bank offers small loans to businesses for equipment like computers, office machines, tools, and business vehicles.
Small Business Administration Loans
The SBA loans guarantee loans by individual loan lenders, but they do not make loans. There are four types of small business loans that SBA provides.
•Microloan Program. These are small loans provided to new entrepreneurs or small-scale businesses. Most of the funded capital is used to add stock like furniture, business equipment, or working capital.
•Loan Program. In this type of loan, the capital is not limited to what it can do. The borrower can use the money for various purposes.
•Disaster Loans. A lower interest rate is charged on the disaster loan to all businesses. The loan can also be used for various purposes, repairing and replacing equipment destroyed or damaged in a disaster.
This type of finance secures the business debt on its equity. Mezzanine finance allows lenders to get part of the company’s stake in case the borrower does not pay the loan. The loan is provided without security, but there is a risk of losing the principal equity share upon default.
Asset Based Finance
Asset-based finance is considered the best option for businesses that lack credit scores and are in need of loans. In this type of loan, the lender does not focus on the credit rating but the collateral. The loan is borrowed against the company’s assets.
The rise of online lenders began in 2014, where borrowers are loaned unsecured small business loans to boost their business. The loan process requires minimal documentation, and hence the approval is fast.