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Home Business Loans What Type of Financing Does Your Business Need?
Why do you need small business financing? That’s not an existential question. It is one that has a myriad of answers. Maybe you want more space for your inventory or you want to reach a larger market. Or you want to expand your team, improve its skills, or help them with their productivity. Or you may simply want to ramp up operations so you can sell more goods or have more products to sell.
Aren’t all business loans the same? The short answer: No.
By taking stock of your company’s needs, you can also determine the right type of financing for your situation. But aren’t all business loans the same? No. So even if you’ve had your heart set on an SBA loan (which we’ll explain below), your situation may be more aligned with a business line of credit or even a merchant cash advance.
In financing, accessing the right capital comes down to that important question: why do you need the money? And with a little research and planning, you can find the lending option to fit your situation.
Remember, “I need money…” isn’t the best business-planning strategy, nor is it a good enough reason to help narrow the list of financing options that you may be eligible for. Instead, frame your request/application in terms of “I need money for” a specific business reason, “because” of specific factors. Keeping your needs in mind will help you stay focused with your plans, too.
Over the past decade, the number of lending options available to small businesses has exploded as alternative forms of financing, as merchant cash advances and short term business loans, have become accessible online. No matter the nature of your industry, how long you’ve been in business, why you need funds, or your credit score, there are financing options to fit most goals and needs. Here are a few examples:
Let’s say your service business is booming, but your billing cycle leaves you with 30-60 days between the time you complete the work and when your clients pay your invoice. How do you get through the gap? Accounts receivable financing is an innovative small business lending product that lets you sell your unpaid invoices for an infusion of capital. Accounts receivable financing has become popular recently because of approval speed—decisions are typically made quickly, some within 24 hours of applying. Loan amounts are based on the amount owed to you in unpaid invoices, and interest rates can be low.
Starting a business from scratch can be labor-intensive, which is why many entrepreneurs opt to purchase an existing operation: for example a restaurateur might expand by buying an already open cafe. Business acquisition loans cater to this situation: these loans are specifically tailored to help entrepreneurs take over an existing operation, as opposed to starting one from scratch. Business acquisition loans have longer repayment terms, usually from 10 to 25 years.
While business credit cards typically have higher interest rates than other small business financing options, they have built-in flexibility and interest is only charged on the balance due. Additionally, collateral isn’t needed with business credit cards, and the application process is less cumbersome than an SBA loan or similar option. With smart use, business credit cards also can help your business build its credit history.
Business lines of credit are flexible and can provide an ongoing safety net that a company can utilize whenever needed. Business lines of credit are offered by lenders as a fixed amount of money you’re allowed to borrow. So how does a business line of credit differ from a business credit card? Lines of credit are often used for larger purchases or with expenses that can’t be charged to a card, like payroll.
When people mention a “small business loan,” they’re usually talking about a business term loan. Term loans are large loans of money, often from traditional lenders like banks, that are meant to fund a business and with repayment periods that may span a decade or more. They can be as large as $2 million (as of December 2021). Term loans typically have lower interest rates than some other options, but also include a more rigorous application process—expect to have collateral as well as a P&L statement and other documents. Since term loans can be large, banks may also take longer to make a decision, although once approved, funds may be available quickly, even in as little as 24 hours.
Commercial mortgages are suited for any business looking to purchase a physical location. Commercial mortgages are similar to home mortgages, but for a business. Buying a property has some advantages over leasing—your rent won’t go up every year, for example, and you’ll have control of the space. Plus the property could be seen as an investment and collateral.
You’re a farmer and you need a new tractor, a sales team that needs new computers, or a food manufacturer that wants to invest in new packaging equipment. What do all of these needs have in common? They can be financed through equipment financing—a useful solution that helps a small business acquire needed equipment for ongoing success. Notably, with equipment financing, the equipment itself often serves as collateral to secure the funding.
Cash advances (also known as ACH) are a popular alternative lending product because they allow you to leverage future sales. These short term financing options are paid back frequently (possibly even daily or weekly) through credit card receipts. Decisions on applications are usually rendered quickly. A cash advance may also be appropriate for businesses that have existed for a short period of time—even less than a year. While a cash advance may have a higher interest rate, the loan itself is paid back quickly and as a percentage of daily or weekly receipts. During the application process, the business will be asked to provide 4-6 months of bank statements or even credit card receipts. Cash advances fund quickly.
Loans partly guaranteed by the U.S. Small Business Administration (SBA) are popular with both small businesses and lenders because they take some of the risk off the borrower. Like term loans, SBA loans often have very long repayment periods ranging from 10 to 25 years, but with more flexible interest rates. SBA (7)a, SBA 504, and SBA Express loans are very common in the funding landscape, and their interest rates are some of the lowest available for any small business loan. SBA loans can take a while to process and are variable rate, which means the low rate you see today may not still be in effect at the date of funding.
Short term business loans can become necessary options for businesses with an unexpected slump or cash crunch. True to the name, short term loan applications can be approved in as little as 24 hours. Unlike merchant cash advances, short term loans are not directly connected to daily credit card sales.
While almost all lenders require you to have a business in operation for at least a few months or years, startup loan lenders understand that you need capital at the outset to launch your dream. With a startup loan, you can receive funds in as little as 2 to 4 weeks. Startup loans can have higher interest rates than many term loans, but with a researched business plan, you can consider your repayment terms as you start your business.
Not sure which loan or financing you should apply for? Sites like Lendio.com can help. Business owners complete one short application to determine which financing options fit their business needs. Then applicants are paired with a Funding Manager, who explains the process, the products offered and terms of each, and even why you were offered the specific terms. Business owners can also ask their Funding Manager questions at any time so there’s no guessing.
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