A common misconception among many first time business owners is that if they are unable to secure capital from a bank, that they are left to fend for themselves without access to any funding at all. But in today’s financial climate, such a notion is as misguided as it is untrue. In reality, business owners today have multiple options to pursue when looking to raise extra capital.
But, despite the fact that many different types of loan arrangements are possible for business’s today, they are also subject to varying qualification criteria, terms and rates. Each product is designed keeping in mind certain specific business requirements. Whether that includes funds to buy new equipment, inventory, real estate or to address a sudden unexpected cash flow crunch, this guide will cover all bases for you.
What Are The Best Loan Options For Established Businesses?
One important factor that is bound to influence your search for extra capital is the longevity of your business operations. If your business has a successful track record over many years, lenders will be more confident in your ability to combat any potential ups and downs in the future. More importantly by being in business for a long time, you would have built up sufficient revenue, credit and profits, all of which remain important factors in determining whether a loan application is approved or not.
Here are some loan options that are ideal for more established businesses:
- Bank Term Loans
Even though small business lending market has evolved considerably over the past decade, this type of loan remains one of the cheapest ways to secure more capital. However, qualifying for a bank loan is easier said than done. The biggest banks reject almost 75% of small business loan applications. The reason why this loan is particularly to difficult to secure is that, well, it is just not that profitable for the banks.
Additionally, the entire process can be exhaustingly time consuming. If you are in need of a quick influx of capital, this is definitely not the option you should consider. But, if time is not of the essence in terms of securing the required capital, this remains the most economical loan option available on the market, with interest rates typically ranging between 4%-10%.
You could avail a basic bank term loan for the following reasons:
- To purchase real estate
- To takeover another business
- To renovate your current workspace
- To account for long term business expansion
- Bank Lines of Credit
One of the most popular business loan options available today is a line of credit made available for a business by a bank. In this, the bank will lend you a fixed amount of funds that you can withdraw at any point in time based on your requirements at the time. Such an arrangement can be revolving or fixed. If a revolving line of credit is sought, the credit amount will reset as soon as you pay the remaining amount in full, similar to a credit card.
This type of funding arrangement is offered by many different financial institutions, but banks continue to remain the most preferred option as they provide the best interest rates along with the longest repayment intervals.
A business can benefit with a line of credit for any of the following reasons:
- To account for recurring expenses
- To deal with a cash flow crunch in the event that the invoices are not cleared on time
- To account for seasonal cash flow problems
- To cover the expenses for emergencies or unexpected mishaps
Lines of credit are useful if you are looking to tide over a sudden unexpected cash flow emergency. Both secured as well as unsecured lines of credit are offered by banks to businesses. If you are seeking a secured line of credit, you will have to provide certain assets as collateral. But, like term loans, lines of credit can as hard (if not harder) to qualify for, while the process remains as painstakingly time consuming.
What Are The Best Loan Options Available To Start-Ups?
If you are running an emerging business and are still striving to build revenue, credits as well as profits, it would extremely difficult for you to secure loan products offered by high street banks. This does not mean that you are left with no options.
The entrepreneur’s personal credit history comes under greater scrutiny when we are talking about loans for start-up businesses. Put simply, the better your personal credit history, the greater the chances of being able to secure a small business loan.
Also, as an emerging business you will have to figure out what qualities differentiate you from the clutter that already exists in the market in order to convince potential lenders. If you are able to list business assets as collateral, it will considerably increase your chances of being approved for the loan.
Here are some of the best loan options available to start-ups:
- Equipment Loans
Perhaps one of the most common assets based loan option available to business owners today. If you are trying to raise extra capital to fund for new equipment, this option can prove to be the right fit. Instead of stretching your available capital too thin by buying the equipment upfront, you could instead look to lease the expensive equipments or apply for an equipment loan.
While this loan arrangement is available for both established as well as start-up businesses, it is a particularly handy option for new business owners. In this, the equipment you are about to purchase with the help of the loan itself doubles up as collateral.
You can get good interest rates ranging from 8% to 30% when applying for an equipment loan based on your business’s credit, finances and age.
- Invoice Financing
Invoice finance is another popular loan option for B2B businesses. Through this you can use your business’s existing unpaid invoices to secure a cash advance from a provider.
In this type of finance, the provider will loan you a fixed percentage of your total unpaid invoice balance (typically around 85%) and keeps hold of the remaining amount. You can use this cash advance to address cash flow issues plaguing your business as you are waiting for your customers to pay out. In the interim, your provider will levy on you a weekly fee (for instance 1% every week). Once all your remaining invoices are paid out, the provider will pay back the balance 15% percentage minus the fees charged (usually 1% per week along with an extra flat 3% processing fee.)
Invoice finance is the ideal loan option for you, if your business continues to be hampered by several unpaid invoices. The cash advance you receive can be used to cover for various operating expenses.
- Purchase Order Loans
In this type of finance, a purchase order is enough to secure the loan, similar to how an unpaid invoice works in the case of invoice finance. This type of funding is particularly useful for businesses that have a number of orders, but don’t have the means to execute them.
Once you get a purchase order, your lender will directly pay the funds to your supplier/manufacturer to supply the product to the customer. Once the delivery is completed, the lender will be paid by the customer. Once this happens, your lender will deduct their own amount and pay you the remaining amount owed to you by the customer.