They say it takes money to earn money. Growing a successful business was never going to be a piece of cake. The brave, admirable souls who take on this challenge will realize that as a business evolves, so does its financial needs. Unless you’re heir to a fortune (and good on you if you are, not that you’d be reading this article), business funding is something that every SMB owner will need to get cozy with.
SMB owners need business loans for all sorts of reasons and for the most part, will head straight to the bank. But with a staggering 80% of small business owners being denied a bank loan, not to mention the vast paperwork and slow processing times, perhaps a modern approach is overdue.
With so many loan option alternatives and vast information plastered across the web, it can all be a bit overwhelming. And then questions of; ‘Which method? How much? What will I use it for?’ will circle your mind, and be sure to make any sane person queasy.
Here we break it all down for you; spelling out the types of small business loans and better yet, which are best suited to you with this comprehensive business funding guide.
When Do You Need Small Business Funding?
It would be a dream come true if a new, or small business could open up its doors and succeed without additional business funding. The harsh reality is, 50% fail during the first five years, 29% of which fail after specifically running out of capital. Most business owners need further funding to get their business on its feet and then later on again, for working capital to get their business not only standing but running.
Financing a business may be needed for growth opportunities such as:
- Purchasing More inventory/equipment
- Expanding your team through hiring more staff (quality staff of course)
- Starting an expansion project
- Adding a new location or branch
- Taking advantage of a surprise opportunity
- Buying out investors
There are many types of small business loans offering an ideal solution for if a sudden change in the weather were to cause a downward turn of events. Somehow, the business needs to stay running at the same pace – but how? This is where an energy bar would usually come in handy. Give your business the energy bar it so badly craves – by ingesting money from an external source.
In this situation, it isn’t necessarily a bad thing. That sugar rush can give your business a way of keeping its momentum (which is always better than collapsing and ultimately closing its doors for good), helping a business to evolve and stay up-right.
Financing a business may be needed to turn around a bad situation such as:
- Cash flow issues
- Seasonal business – extra cash may be needed off-season
- Refinancing old debt
- Working capital for paying rent
- Improving cash flow
- Covering delayed invoices
What to Consider Before Taking Out a Business Loan
Red, yellow or blue? Before grabbing money that’s being waved in your face from all directions (hopefully, that is), you’re going to need to think carefully about a few considerations.
1. The Funding Amount
Once you’ve realized that getting a small business loan is your best course of action, you’ll need to determine how much you need. Make sure to keep this number realistic and stay in the ‘Goldilocks zone’ – yes we are talking about the Goldilocks (from your childhood, remember how everything had to be ‘just right?), taking too much will result in costly interest, too little, and you may not have the funds to achieve your goal.
2. Have a Plan
No use in receiving funds if you haven’t planned how you will be spending the money. Make a monthly plan of how you want to best utilize your pot of gold.
3. The Repayment Plan
Think about how long you’d like your repayment plan to last and consider the interest rates of various lenders carefully.
4. Know Your Options
It’s simple really, you don’t marry the first guy or gal that comes along and you certainly shouldn’t do the same when choosing the right business funding for you. Make sure you explore your options and find a loan or lender that is best matched to your needs.
Choosing the Right Business Funding for Your Business
There are many types of small business loans out there. As part of our business funding guide, we give a much-needed break-down of the main loan options that you could use to fund your business.
When thinking about getting a small business loan, the bank is often the first thing that comes to mind. This old-school method is tried and tested, the low APR (ranging from 2.24%-5.43%) means that you’ll gain access to some of the cheapest financing available. It’s a hard pill to swallow but unfortunately, the stats aren’t exactly in your favor. A whopping 80% of small business owners are denied a bank loan. On top of that, even today, sex and race can play an unfortunately large role in those who are accepted.
Best for: Those with high credit scores, documented long-term success, time on their hands and of course, balls of steel.
This is your quick-fix super sonic loan. It may be a little pricey, but its fast cash that could be much-needed to keep your business afloat. One of the biggest benefits of this type of loan is the lax requirements.
Best for: Those who need fast cash, have a poor credit score – perfect for emergencies and quick fixes.
Business Line of Credit
A business line of credit is a certain amount of credit that’s made available, allowing for the withdrawal of funds against a predetermined credit limit. With a business line of credit, there’s a cash pool to dip into whenever you need, just in case. It provides an alternative method that’s usually less costly than most other products, making it ideal for businesses with minimal cash flow.
Best for: Short-term investments and perfect for covering unexpected expenses at a moments notice (such as cash flow shortages, seasonal expenses or ongoing operating expenses).
For more information on business lines of credit, click here to read a more comprehensive guide.
This type of loan is great for businesses that have a little more experience under its belt. They aren’t as speedy as short-term loans – funding can take up to ten days, but this is still faster than the snails-pace of the bank.
Best for: More experienced businesses with high revenue and strong credit scores
SBA loans are government-guaranteed long-term loans with low interest rates that come in all sorts of shapes and sizes. SBA loans uniquely agree to cover a large portion of a loan if a situation where the borrower is unable to fully-repay their SBA loan arises.
There are three main types:
- SBA 7A Loans – huge purpose variety, including refinancing, growth and capital.
- SBA Micro Loans – great for using to start a new business
- CDC/504 Loans – this is specifically for purchasing fixed assets (e.g. real estate and heavy machinery)
Best for: A range of users depending on the type of loan. Good option for those who are unable to get a bank loan. Micro Loans are especially great for businesses looking to take that first step and need a helping hand to get their feet off the ground.
Merchant Cash Advance
A merchant cash advance isn’t so much a loan but more of an advance (it’s in the name) and works by paying business owners in advance for a certain percentage of future sales. This lump sum of money should be used wisely and as a last case scenario option if all else fails. It’s paid back by offering a portion of your daily sales to the lender until the debt is cleared. One should be careful here with the large APRs (15-40%).
Best for: A short-term fix and those who couldn’t receive alternative funding means.
Peer-to-peer lending connects borrowers and lenders to each other and eliminates the middle-man, cutting out time-consuming old-school banking protocols. In this modern, online approach, you can borrow funds directly from peers. The requirements are much less stringent with the process giving a much-needed ease to the entire lending system. With just the click of a button, you can secure business loans online within a few hours without having to step foot in a bank or spend centuries waiting for approvals.
Best for: Those with poorer credit scores or any SMB seeking alternative funding solutions.
How to Apply for a Business Loan
Getting a small business loan requires a slightly non-exciting application process (sorry to burst your bubble). This process varies depending on the type you ultimately choose. Going to the bank will involve providing many dead trees i.e. paperwork and could involve a fair few visits to plead your case.
An online application will involve:
Step 1: Finding the lender/loan you want to use, there are hundreds of methods and lenders out there to choose from
Step 2: Finding the application form and filling out the basic information
Step 3: Filling a number of details including credit score, time in business, income/financial statements, tax returns, bank accounts and more (this varies depending on the lender/loan type)
Step 4: Get approved and receive funds
Applying for a Business Loan with Become
Become essentially cuts out ‘step 1’ mentioned above. Using proprietary AI technology, it’s specialized matchmaking algorithm will match you (the SMB borrower) with the most relevant lenders to suit your needs. This saves you sifting through the internet’s many lenders and won’t cost a cent. Become offers a means to turn this headache into a match made in heaven, think of it as Tinder for loans if you like.
To apply for a loan via Become:
Step 1: Apply online with one simple application form
Step 2: Get multiple tailored loan offers from relevant lenders
Step 3: Choose and receive your funds
In this business funding guide, we’ve outlined the main types of funding and the factors to consider when financing a business. If the loan hunting process has got you feeling queasy just reading this, then finding the right loan or lender may feel like a daunting task. Make sure to go over your businesses needs and once you know what it is that you need, find a suitable lender. Using Become you can ease the entire process and receive the funds you need in no time.
Good luck! The rest is up to you…