All you need to know about small business loans
For a small business owner, getting additional cash for working capital is an extra step to seeing their business grow to the next level. But as much as many business owners would want to get small business financing, the main concern is usually on where to get the loan, and whether it can be obtained at an affordable cost. One of the most effective ways to ensure business survival is maintaining a positive cash flow. But if your clients take longer to pay, emergency situations arise or you get a big order, it can be quite challenging to keep your cash flow pumping. This will force you to find an alternative financing option, and among them is getting access to small business lending. Fortunately, there are many loan options for small business owners to improve their working capital. This article will help you know the types of small business loans, how to pick the best lender and whether this is the best option for your business.
Types of small business loans
With an increase in online lenders, there are several loan options available for small business owners. The loans can be useful when used responsibly. To get a deeper understanding of the loans available and how they work, here are some of the best affordable business loans, their benefits, and drawbacks.
- Bank loans
There is no denying in the fact that traditional bank loans have the most affordable rates around. If you need a business loan with low rates of interest, bank loans are obviously a perfect choice. But why don’t most small businesses get loans from traditional banks?
First, being approved for a bank loan isn’t that easy, not only for startups but also established businesses. Secondly, the loans have a long application process with lots of paperwork required. This can be inconveniencing to business owners who need urgent funding. Lastly, most banks will require you to provide collateral before approving the loan, and this may not work well for startup businesses that still generate low revenue.
- Bank lines of credit
There is a little difference between a business loan and a bank line of credit. However, they have the same benefits and rates as a traditional bank loan. Basically, lines of credit work the same way as business credit cards. They provide a certain amount where businesses can withdraw a portion of it when they need short-term funding. One benefit of business line of credit is that you only pay interest rate on the funds you withdraw and not the principal amount. This helps minimize the cost of borrowing. If you apply for a line of credit in a traditional bank, you will still have to go through the long application process and tight qualifications. The good thing is that many online lenders provide lines of credit with the same advantages as banks line of credit.
- SBA loans
Just like bank loans, Small Business Administration, SBA loans also have affordable rates of interest. In fact, the interest rates can be as low as 6.5%. Part of SBA loans is government guaranteed, which reduces risks for the lender. This makes the loans very accessible. But the loans have their drawbacks too. It takes a longer time for your business to be funded and just like bank loans, borrowers also have to go through hefty paperwork processes. Funding for an SBA loan takes up to 3 months, if you need fast business financing, this may not be a good option for you.
- Invoice financing
If slow-paying customers are a hindrance to having the working capital you need, invoice financing can be a perfect alternative to long-term loans. With this financing option, also called invoice factoring, you use your customers’ invoices as collateral for getting short-term financing. First, the factoring company provides an advance rate of 70%-80% of the total invoice value. You can actually receive the funds within 24 hours. Once the invoices are paid, you receive the remaining balance, less the fee charges (a processing fee and factor fee charged every week until the customers pay). Compared to other short-term lending options, invoice financing is costly, but it is also among the best ways to can have access to urgent small business funding.
Finding the best small business loans online
If you happen to conduct a Google search for small business loans, you will obviously find a lot of small business lenders who are willing to fund small businesses based on certain terms and conditions. These are, in other words, referred to as alternative lenders.
But what does the term alternative lending mean? And are all the lenders you find trustworthy? To effectively answer these two questions, here are some of the things you ought to know before you begin your small business loan search.
- If you have less than stellar credit
For decades, personal credit scores have been a key determinant in accessing both personal and business loans. If you have poor credit, there will be fewer chances of qualifying for affordable business loans. However, there are alternative lenders who also provide loans to business owners with poor scores. What these lenders value more are your annual revenue, time in business and your cash flow. Some of them will also consider your future financial forecasts. But bad credit business loans are also limited. Besides, you may end up paying a higher rate of interest on the loan compared to good credit borrowers.
- If you have good credit
Generally, companies that have been in operation for more than 10 years with good credit history stand higher chances of qualifying for traditional bank loans. On the other hand, start-up businesses that have not yet build their credit find it difficult to access such loans. However, most alternative lenders tend to provide small business loans without such stringent business loan requirements. Business owners with good credit can easily qualify for affordable loans from online lenders.
- A business loan for every need
Unlike traditional banks, alternative lenders have a wide range of loan options for small business owners depending on the business needs. How you use the money and the repayment terms also matter when it comes to choosing the best loan product. For businesses that have cash flow problems, short-term loans can be a good option to purchase inventory. If you opt for merchant cash advance, you will benefit from the flexible repayment structure since the loan is repaid with a portion of your daily credit card receipts. If you have a startup business and do not have sufficient collateral to secure a traditional loan, you can consider invoice financing and use your customers’ invoices as guarantee of payment. With any business need that you may have, the online lending market is always fast to come up with a new product to provide a convenient solution.
- Varied pricing structure
When it comes to alternative lending, it is also important to know that lenders have different requirements for your business loan to be approved. Besides offering different products, the maximum loan amount, interest rates and repayment terms also vary. By comparing loan products from different lenders, you can easily find the one who offers affordable rates and flexible repayment terms.
Applying for a small business loan is easy
Compared to the tiresome paperwork and long waiting period involved when you apply for a bank loan, the process is much easier and straightforward for alternative lenders. Small business owners can easily apply for the loan online, a process that can take less than 10 minutes and have their loans approved within 1 business day. This works well with businesses that need urgent small business financing to cater for their short-term needs.
As a small business owner, you obviously want to see your business grow. But the problem comes when you do not have enough cash to purchase more stock, improve your cash flow or expand the business. Luckily, there is a wide range of options available for small business owners. As much as bank loans come with affordable rates, the loan application process is much involving and it can take several weeks for the business to be funded. But with alternative lending, you can receive funds to cater to your business needs whenever you need it. If your business is in good standing and you have good personal credit, qualifying for low interest small business loans will be easier. Startups also have several options available depending on their needs, provided you can prove to the lender that the loan will be repaid on time. All you need to do is have your application ready with all the required information and you will surely find a reputable online lender who is willing to fund your business.