Putting ideas into place and succeeding is extremely difficult. Launching a new business, or even expanding an already established business is an incredibly costly venture. New businesses require a certain amount of operating capital and without a loan, most new business owners would not have the immediate cash flow needed to execute a business plan. After taking necessary steps to convince a lender of the plausibility of success, deciding upon the right loan for you is crucial – as a wrong decision can have lasting consequences.
Steps in obtaining a Business Loan
Your chances of obtaining a business loan will increase if you are adequately prepared. In order to show a potential lender that a business loan will lead to your success and that you are in fact a good risk, there are several documents that will need to be provided. The first is a business plan, which gives the lender insight as to what exactly you plan to use the money for.
The second document required for a business loan is a statement of cash flow projections. This statement will list all of the expected cash inflows and outflows for an upcoming year. These forecasts are paired with a document detailing your personal financial status, which would include a list of both your personal assets and any debts that you may have.
After the 2008 financial crisis personal guarantees became standard. This means you are personally liable if anything goes wrong within your ability to pay back the loan by way of your business. Lenders start the personal guarantee by evaluating your personal credit reports. If the lender is still looking for more information to complete your financial puzzle, you may be asked to present a past tax returns. If you have a poor credit rating then the likelihood of a decline is high.
Most lenders will be expecting a presentation, one that should persuade the lender that your business is sustainable. This summary of your current circumstances as well as your trajectories should answer any questions they may have about your business plan. If you do present a financial risk, addressing that within the presentation is advisable. Your lender will most likely want to know what collateral (assets) you are willing to put up to secure the loan. They will want to know how much of your money you are willing to risk in committing yourself to the business.
All of this information helps the lender to determine whether or not you are a worthwhile risk. The presentation and documents are a means of instilling confidence in the lender that you will fulfill your part of the bargain and repay the loan in full.
Business Loan Type
There are several different avenues to go about getting a loan for your business. One of the most common is called a term loan. A term loan is obtained from a bank or an online lender for a specific amount and includes a predetermined repayment schedule. Term loans have borrowing amounts up to $1 million and are generally used to buy equipment, real estate, or working capital used to expand your business. The biggest benefit of a term loan is the opportunity for quick cash up front. The principal negative is the potential requirement for a personal asset from the borrower to be put up as collateral if you default a payment. Overall this type of loan is most useful for borrowers with good credit who can’t afford to wait long for funding.
An SBA loan is a type of long-term financing loan, guaranteed by the Small Business Administration and offered by banks and other lenders, loaning up to $5 million. Repayment periods are dependent upon how the borrowed money is used and can range from 7 to 25 years. An SBA loan will benefit a borrower who is not in a hurry for funding, one that is looking for low interest rates to repay over a long period of time, typically used for fixed assets such as real estate or equipment.
Merchant Cash Advance
A merchant cash advance enables a business owner who accepts credit card payments or has other payment or receivables streams to obtain an advance of funds. Specifically, this is an advance of the funds regularly flowing through the business’ merchant account. Although this loan produces fast cash without offering up collateral, it is most often a last resort for many companies who can’t get financing anywhere else and are desperate for capital. A merchant cash advance’s chief disadvantage is the frequent repayment schedule and the considerably high borrowing costs, in some cases up to 350%.
A microloan is a much smaller type of loan, typically lending up to $35,000 and in some cases $50,000. Generally this type of funding is used for start-up cash, primarily for new businesses in need of working capital. Microloans have stringent eligibility requirements but if these conditions are met, this type of loan would prove itself very useful for startups in disadvantaged areas or businesses in need of only a small amount of financing.
Invoice Financing and Invoice Factoring
Invoice financing and invoice factoring are two additional options in loans. Invoice factoring is available exclusively to businesses that invoice government agencies or other businesses. If your business has unpaid customer invoices, invoice factoring can be utilized to provide short-term working capital in exchange for selling and assigning invoices to a factor. This factor advances the company approximately 80% of the invoice’s value, allowing your business to receive money now for those unpaid invoices. Once the invoice is paid, the factor pays the remaining 20%, keeping a small fee as payment.
Invoice financing is similar to factoring, but instead of directly selling your unpaid invoices to a factoring company, you use the invoices as collateral for a cash advance. The main benefit; customers won’t know their invoice is being financed.
Other loans to explore are business lines of credit, business credit cards, equipment loans, and personal loans. Business lines of credit are a flexible way to borrow and are best for short-term financing demands, managing cash flow, or handling unexpected expenses. Business credit cards are revolving lines of credit, best used for ongoing smaller expenses such as office supplies, travel, or utilities.
Equipment loans are for the sole purpose of purchasing equipment for your business and the equipment serves as collateral for the loan. The final loan to be aware of is a personal loan. Approval for this rating is primarily dependent upon the credit rating of the borrower. The advantage is fast funding and the primary disadvantages are the high borrowing fees and the potential danger in damaging your credit score. Educating yourself on every opportunity and every loan option is the responsibility of an industrious debtor.
Credit Reports & Scores
The Credit World website and platform was launched so consumers can control their personal credit and finances easily. By doing so consumers are more prepared for transactions and doors are opened to lending opportunities over the course of their lifetimes. Control your credit world and reap the benefits cost effective transactions and consumer confidence.