Small business loans are sought after by many small companies for a variety of reasons, but many do not know which type of financing they need, or where to start. There are many reasons why company would want a small business loan. These reasons could include:
– Working capital
– Purchasing real estate
– Renovating, or construction on, an existing building
– Purchasing inventory
– Taking advantage of business opportunities
– Purchasing equipment or furniture
When most business owners think of business loans, they immediately look to commercial banks to meet their business financing needs. There is nothing wrong with this since banks do provide some of best and least expensive types of financing to small businesses. The only problem is that many do not realize how difficult it is to get approved for a bank loan or line of credit. Small business bank loans have much more strict approval criteria than other forms of business financing. Expect to be able to show good revenue, great personal/business credit scores, significant time in business, assets to secure the loan amount (in some cases), and the most important part is convincing the banker they can trust you with their money. Some call this the 5 C’s:
If your business is in less than ideal condition and cannot qualify for bank financing, but still needs a small business loan, where else can you go? Luckily there are countless forms of alternative small business loan sources to consider. Here are some of the more popular options.
Generally loans of 35K and under for new or start-up businesses. The SBA provides funds to community non-profit lenders who then make loans to eligible borrowers. Each individual lender has its own requirements. You will have a better chance of getting financed if the micro-lender is in your area.
Contrary to popular belief, SBA loans are not given by the SBA. These loans are actually funded by standard commercial banks, but are guaranteed by the SBA. That means that if a bank makes a business loan that defaults, a percentage of its losses will be covered by the government (SBA). This decreases the risk of lending money for the banks and, in turn, loosens the approval criteria for the loan.
If a business is in need of working capital, but has a lot of its cash flow tied up in accounts receivable, then receivable factoring may be the way to go. Accounts receivable factoring involves selling off a portion of receivables at a discount for immediate cash. A factoring company will purchase your receivables with an advance payment of between 70 – 90% of the total value.
Instead of using a significant amount of a company’s working capital to purchase equipment outright, leasing the equipment can be much more effective for newer businesses with limited resources. An equipment lease is when a lender purchases the equipment and then rents it to the business for a flat rate for a specified period of time. In many cases the business will be able to purchase the equipment at the end of the lease for fair market value, or a previously agreed upon amount.
Technically, a merchant cash advance is not a loan, but rather a cash advance based on future credit card sales. Also called a credit card receipt advance, a merchant advance is when a lender advances a sum of money that is automatically repaid through a small percentage of each successive credit card sale. An amount 1-2 times the average monthly credit card revenue of a company can usually be expected.
There are many more types of financing available. These are just some common alternative forms of small business loans. Before you apply for a small business loan, educate yourself on the details of the loan and how it compares to alternatives. The more informed a business owner is the better.
Jarrett Pflieger holds a BA in Entrepreneurship and is a featured writer for BusinessFinance.com. Jarrett specializes in helping small businesses establish business credit and obtain business financing.