“I'm convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” - Steve Jobs

Deciding to become a business owner can be equally the most rewarding aspiration any individual can decide to pursue as well as the most stress inducing. First of all, you need an idea for a business. When you have decided on what your developing, now whats left is to get the location you want as a home base. Although those aspects are crucial for creating the foundation of your business, there’s one thing that is just as if not more important and that is… Funding! You have employees that need wages, equipment that needs to be purchased and rented out workplace property that has a bill coming each month. This article will delve into the different nuances of business loan acquisition. You will gain knowledge on where and how to get a loan, types of loans available, and typical questions you should ask when applying for one.

Business Loans Pros and Cons

Pros

  • Although repayment terms vary; business loans typically have a low interest rate when compared to other funding options.
  • Commercial lenders do not have any stock in your profits; they only receive the debt repayment.
  • Commercial lenders have no say in your business operations as well as management over your funds.
  • Even the smallest of businesses can have access to large sums of capital depending on how you are planning out your enterprise.
  • The interest payments on your loans can be deductible on your taxes.

Cons

  • First of all, a bank loan belongs to the bank; which means it falls under the liability side of the balance sheet.It affects the valuation of your business.
  • Many commercial institutions will ask for collateral in the form of property assets such as; the stock portfolio for your business. Consequently, this is done so that they can cover all their bases in the event that your business goes under prematurely.
  • Most lenders also need to be assured that you have a good credit rating. Therefore, this will create a layer of trust in your ability to pay back the loan.
  • For commercial lenders a lengthy review process is common for start-up companies. As a result, this process can be extremely extensive and time consuming.
  • Commercial lenders rates are dictated by government policy as well as the whims of the market; this means rates can be ever fluctuating.


Types of Lenders

  • Small Business Administration Lenders
    • They offer several loan programs engineered to meet the financial needs of a plethora of business types.
    • The government isn’t directly lending money to small businesses. The SBA sets guidelines for loans made by its partners, which can include community development organizations banks and micro-lending institutions.  
    • SBA’s reduce the risk for the lender by guaranteeing the loans will be repaid.
  • Conventional Bank Lenders
    • Conventional bank loans carry low interest rates and the approval process is fast.
    • These types of loans typically include shorter repayment times than SBA loans and often include balloon payments.
    • The approval process is the most rigorous of the loaner types, they stress the need for good credit in order to be approved. 
  • Alternative Lenders
    • They typically are attracted to small business but lack quality financial history, this is because their approval requirements aren’t as stringent. 
    • These types of lenders typically offer online applications and make approval decisions in a matter of hours. 
    • They lend directly to small businesses and lending marketplaces.

Types of Loans based on Lenders

1. Microloan program:

This is a standard relatively small business loan offered to growing small businesses. Therefore, the loans are typically used for working capital or the purchase of machinery, equipment and inventory. The loans can be up to $50,000 with the average being about $13,000. Consequently, the loan repayment requirements are determined by the intermediary lender and the needs of the small business borrower.

2. Real estate and equipment loans:

This Loan Program provides businesses with long-term, fixed-rate financing for major assets, such as real estate and equipment costs. The loan is typically divided between a participating lender, the SBA and the borrower. Consequently, the ratio goes 50%, 40% and 10% in that order with the borrower contributing the least. These loans cannot be used for working capital or inventory.

3. Disaster loans:

These funds, provided by SBA, are low-interest disaster loans given to businesses of all sizes. They can be used to repair and replace real estate , equipment and machinery as well as inventory and business assets that were damaged or destroyed. Consequently, these loans can reach up to $2 million.

Conventional Bank Lenders and Alternative Lenders

  • Working Capital loans:

These loans are short-term solutions for businesses in need of money to fund operations. As a result, with this type of loan small businesses can keep running their normal operations and still be increasing their revenue. Due to the convenience factor that comes with this loan the only downside is that they often come with higher interest rates with short repayment terms.

  • Merchant cash advance:

The business’s monthly amount of credit card transactions dictates the amount the loan is. These business loans are easy to obtain, funding can take just a few days. Fortunately, the unique thing about this loan is that it can be repaid from credit card sales. The only significant downside to using these loans stems from the fact that the interest on the business loan can reach an upwards of 30 percent a month depending on who the lender is.

  • Equipment loans:

Equipment loans and leases provide capital to small businesses for office equipment, machinery, tools, and vehicles. As a result , a borrower will only need to pay monthly payments instead of a lump sum amount. Since the equipment being purchased is considered collateral there’s a less stressful process when trying to apply for equipment loans.

  • Lines of credit:

These loans give a business owner per-day cash-flow. As a result, the loan lifeline can last from 90 days to as long as several years. With a line of credit, you take only what you need and pay interest only on what you use.

  • Franchise startup loans:

This type of start-up loan is designed for entrepreneurs needing financing to open their franchise. In short,the loans can be used for working capital or to pay franchise fees, build stores or restaurants and buy equipment.

  • Invoice factoring:

These loans operate when an alternative lender advances small business’s money for outstanding invoices. As the invoices are collected the lender receives the money in addition to a fee.

What do I ask when applying? 

  1. Can you tell me the interest rates for this loan?
  2. What is the total cost of the loan?
  3. In terms of payment schedule what will be applied to this loan?
  4. What is your Better Business Bureau (BBB) rating?
  5. Can I converse with your past loan recipients?
  6. When will my first loan payment be due?
  7. What type of loans do you have available for me to choose from?
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