Businesses of all sizes have come across the need for a business loan at one point or another. Identifying that need is equal parts being aware of your business’ current state and taking the initiative to continue to help it grow.
You might use a small business loan for inventory financing, new business equipment funding, or even to open up a new location in hopes of reaching a wider customer base.
While deciding if your business is ready for a small business loan can be a trying task of its own, the hardest part of funding your business can be getting the loan itself.
Traditional lenders like banks see small businesses as a risk they are seldom willing to take, resulting in the majority of applicants being denied for funding. Even highly qualified small businesses are often asked to provide collateral in their contract just to be considered for a loan.
With the relationship between banks and small businesses deteriorating, there has been a growing amount of confusion surrounding how to obtain a business loan. To help put an end to the confusion we’ve answered five of the most commonly asked questions about how to get a small business loan.
FAQ #1: What Are the Most Common Uses of a Small Business Loan?
Before the question of how to get a small business loan crosses your mind, you should first ask yourself ‘how you would use one?’ The answer to this question will be different for every business, but there are several common uses for loans that have helped companies across various industries succeed.
Replacing or purchasing new business equipment is one of the most common uses of small business loans. Whether you’re a local coffee shop or a small medical practice, your daily operations would take a severe hit if one of your machines went down.
Needing new business equipment is an unavoidable part of being a business owner, and it’s almost guaranteed to happen at the least convenient time possible. Many small business owners do not have the cash on hand to buy a new oven, espresso maker, x-ray machine, or whatever business equipment they need in a pinch. So, to get the equipment they need fast, owners turn to small business loans.
Another popular use of small business loans is inventory financing. The need to finance a shipment can occur for a few different reasons. Maybe you’re following your offseason and need help getting your initial line of product in so you can start turning a profit. Maybe you’re waiting for a late shipment and need to bring in an emergency order in the meantime to ensure you aren’t missing out on sales. There’s an abundance of reasons why businesses in both the retail and restaurant industries might seek out small business loans, but these tend to be some of the most common uses in these fields.
FAQ #2: Is a Small Business Loan Right for Me?
Loans of all types come with a price, some larger than others. For small business owners, that price can be a hefty one. Because of the risk associated with funding a small business, there is often a significant increase placed on the borrowed amount to compensate for the gamble the lender is taking. For this reason, a business owner must ask themselves how they would use the additional working capital to turn a profit before they ask how to qualify for a business loan.
Having a game plan for your incoming funds is crucial to making the most of them. That’s why the first question we ask our applicants at Business Funding Pro is what they plan to use their funding for. This way we can tell if they’ve given this decision the thought a major decision like this requires and if you’ll be able to improve both your sales and overall profit.
For example, if you’re considering opening a second location, expanding your current space or purchasing new equipment to optimize your work, the right loan can bring on the additional capital you need to make those changes.
While using a loan to improve your facility and appeal to a broader audience is an ambitious business move, taking out a loan can hurt you more than it can help if you’re currently not in a financial position to make these upgrades.
FAQ #3: What is the Difference Between a Business Loan & a Business Line of Credit?
The difference between a business line of credit and a term loan is primarily in the way they function. With a small business line of credit, you are given a specific amount of funding, for example, $100,000, but that amount does not start accumulating interest until it is used.
Small business lines of credit are also often referred to as “revolving.” Revolving business lines of credit allow you to take however much you need from the account at a time and only pay on the amount you use.
So say you have a $100,000 limit on your line of credit and you take out $50,000. You still have access to the $50,000 remaining on your balance, and if you make payments towards the withdrawn $50,000 till it’s back to $0, you’ll once again have a $100,000 limit to use how you see fit.
With term loans for small business, you are given a finite amount of funding that you receive in a one-time transaction and immediately start paying back over a selected amount of time. If you are looking to acquire another business, renovate an existing location, or another large project that may take a year or two to pay off, a term loan is your best option.
Term loans are also used primarily for a specific purpose like inventory financing or new business equipment financing. Most lenders will require you provide an explanation as to why you need the loan and your intended use of it. If you can sell your plan for the incoming funding as a surefire way to increase sales and profits, lenders will be more willing to work with you on the terms of your loan.
FAQ #4: Where Can You Get a Business Loan if You’ve Been Denied by a Bank?
10 to 15 years ago, banks were the only option for small business loans. Over the years, however, the relationship between banks and small businesses has deteriorated. The amount of loans being given to small businesses by banks and other traditional lenders is becoming more and more scarce. This has led many business owners to look elsewhere for the funding they need to continue expanding.
Being denied a bank loan doesn’t mean your need for funding is just going to disappear; you still need a loan. Fortunately, there are other solutions to your working capital needs other than just traditional bank loans. Online funding companies like Business Funding Pro provide businesses who are having trouble qualifying for bank loans a quick and easy alternative.
Using the best third-party funders available, Business Funding Pro can facilitate various funding options from merchant cash advances to small business lines of credit. Using factors other than just your business’ credit score, we are able to judge your business’ health as a whole, which works in the favor of most smaller companies.
If you have been denied by a bank and are left unsure of what your remaining options are, be assured there are other ways to get the cash your business needs fast, without the headache of big banks.
FAQ #5: What is the Difference Between Business Loans & Business Funding?
Small business funding is the preferred alternative for businesses who have been denied by banks for a loan. Because banks are increasingly unwilling to do business with smaller companies, more owners have had to turn to other options. Small business funding works similarly to a traditional bank loan but through a third party funder.
Also like a loan, business funding requires that you pay a form of interest on the amount borrowed called factor rate. Factor rate is determined by a variety of things like your businesses operating history, sales consistency, and monthly credit card sales. Unlike interest which continues to accumulate over time, factor rate is a one time increment determined during your application process.
Another key difference between small business loans and business funding is the length of the term. Most loans are paid back over the course of a year or more, while business funding with third-party funders is generally closer to 3 to 6 months.
Now you have the answers to five of the most frequently asked questions in the world of small business loans! We’ve learned a lot and sure hope you have, too.
If you have read these frequently asked questions and are still unsure how to get a business loan, feel free to contact us at 888-705-8278 or Visit here fast business funding with any questions you may have. One of our passionate business advisors will be happy to walk you through not just our process, but whether or not a business loan is right for your business.