| Posted in Financial Literacy, Lending
Why small business loans?
For anyone who’s ever dreamed of owning their own business, the options for making that dream a reality have never been more available. While it can be daunting to start your own business from the ground up, help is available and often less complicated to secure than you might initially think.
A small business loan is a loan provided by a bank or lending institution for the purposes of financing a small business expenditure. While there are many different types of loans that range from small businesses to large, and allocated for different tasks and uses, we will focus on the main ones here that are used by most businesses seeking a small business loan, and how to go about securing one.
Term loans
A term loan is one of the easiest loan types to understand: At the beginning, you are given a determined lump sum upfront. You then repay this amount with interest over a fixed amount of time according to a predetermined schedule. Term loans have the benefit of being flexible in the amount and easy to understand and manage. They can, however, be competitive to secure, and often require a good credit score and possibly several years of demonstrated business. You might also be required to provide collateral.
SBA loans
SBA loans are loans partially guaranteed by the federal U.S. Small Business Administration. These loans are offered by banks that choose to participate in this government program. While it can be tough to secure an SBA loan, as there are very specific lending standards, if you qualify you have the benefits of lower interest rates and more flexible terms. For businesses that qualify these are a safer and affordable option.
Business lines of credit
A business line of credit is a flexible source of revolving credit that provides your business access to a predetermined amount of funds over a certain period to cover short-term cash flow gaps. Much like a credit card, you can access the funds when needed and payback the principal balance at your convenience with only periodic interest payments being required. Qualifications are similar for business lines of credit as they are for term loans, however, they are more flexible than term loans and the funds can be used for a variety purposes. An example of some of these uses would be for paying business operating expenses, employee payroll and inventory purchases.
Equipment loans
An equipment loan is exactly that: a loan to purchase equipment for a business. Many small business implements, such as farm equipment or trucks, can be expensive to obtain but are essential for business operations. Equipment loans can be easier to qualify for, as the collateral for the loan is the equipment itself. Your personal credit and other business information (financials) can be used in figuring out your eligibility for an amount of credit and terms for an equipment loan.
Business credit cards
A business credit card, like a business line of credit, is a revolving source of funding on a card that you can draw from that is paid back, plus interest, over time. Much like a personal credit card, you can obtain different rewards or credit amounts that vary with lenders. With business credit cards often being unsecured and not requiring collateral, it can be easy to accumulate a lot of unpaid debt that can get the business into serious trouble later if not monitored very closely.
Personal loans
While riskier, a personal loan is an option for those needing startup cash quickly and lacking a business or operating history from which to draw credit. Depending on a variety of common factors, such as credit score and history, personal finances and assets, you can obtain a personal loan that is then used for a business purpose. It is important to note, however, that businesses can accrue expenditures and debts fast – faster than an individual often can. As such, you risk seriously damaging your credit history and future credit score with this lending method if you aren’t financially stable or the business is hemorrhaging money.
Many ways to achieve your business dreams
As you can see, financing your small business vision is entirely possible and often much easier to obtain than you might imagine. However, it is essential to be careful and do your homework. You should also consult with your bank or lender before making a choice. Dreams are worth funding, and they’re worth protecting – and the best way to do that is to fund them responsibly to give them longevity and lasting value.