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Business Loans: Which One Works For You?

As a small business owner, options for working capital vary depending on your business needs, the length of the loan, and the specific terms of the loan.  Making a smart decision on which one to choose, means making an informed decision. Here are a number of common loan choices specifically for the small business owner:

Bank Loans

Traditional bank loans offer long terms with fixed payment terms. They offer some of the lowest interest rate loans available, but this interest quickly accrues and costs more than you think. It is also difficult to acquire these loans, as only 30% of small business owners who apply are approved. Banks also typically require strong personal and/or business credit scores, a personal guarantee, collateral, and solid 3 year financials. Applying takes considerable effort and time. The whole process lasts about one to three months.

Pros: Can be a good fit if you don’t need the money right away. Going through a bank lets you build a relationship with them and they will have a vested interest in seeing you succeed and can be a helpful, long-term resource.

Cons: Costs are camouflaged as rates, so it is very difficult to determine actual costs and the approval rate is considerable slow.

Small business line of credit

This type of loan is secured usually with a financial banking institution and establishes a maximum loan balance for the business owner.  This arrangement allows the borrower to draw and repay on the funds as long as they do not exceed the maximum allowed amount.  The good thing about this type of arrangement is that you only pay interest on the amount you use and collateral is usually not required for this type of loan. Day to day costs, meeting payroll and surprise expenses makes this a flexible option for business owners.

Pros:  It’s quick access to money with small payments and it can build your business credit score as you make the payments on time.

Cons: A personal guarantee is required and it is tied to personal credit.  This also ties up your ability to borrow from other lenders.  Interest accrues quickly if balances are not paid quickly and there up-front fees to obtain the line initially.

Business Credit Card

These cards are designed for business owners.  They provide a revolving line of credit with a set credit limit in order to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You may be able to get a credit card through your bank.

Pros:  It’s a convenient piece a plastic you can carry around with you for day to day purchases.

Cons: There are annual fees, cash transfer fees and balance transfer fees.  The interest rates are VERY high on unsecured debt.  Interest compounds rapidly every day, and because payments are very minimal, it can create debt that is overbearing on businesses.  These are not designed to finance business, just to be used for small day to day purchases.

Alternative Funding Lines

The majority of small business aren’t bankable for one reason or another. Alternative lenders have filled the financing gap for many of them.  Alternative lenders evaluate the cash flow, growth potential and overall strength of the business. As a result, alternative business loan options have much higher approval rates at 75%.  Typical arrangements are:

  • Small Business/Working Capital Funding Line – Alternative lenders are usually more flexible than banks when it comes to loan approval and repayment schedules and provide cash much quicker than traditional banks can. Usually no collateral is required to apply.
  • Merchant Cash Advance -This is technically not a loan, but an advanced based lump sum of money. The funds are usually dispersed quicker than other traditional loans.  Payment amounts will fluctuate depending on sales.

Pros: It’s an easy approval, quick access to cash with no collateral required.  Programs are designed on a case by case basis and there is no effect on your personal credit. You can also re-up at the mid payment point.

Cons:  Generally lenders aren’t open to long term financing. They work with terms no longer than 12-15 months. They also lend in amounts no higher than $500,000.

SBA Business Loans

The SBA offers a variety of loan programs for very specific purposes:

  • General Small Business Loans – 7(a) the 7(a) Loan Program, SBA’s most common loan program, includes financial help for businesses with special requirements. Key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates.
  • Disaster Loans – SBA disaster loans can be used to repair or replace items damaged or destroyed in a declared disaster such as real estate, personal property, machinery and equipment, and inventory and business assets.
  • Microloan Program – The Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.
  • Real Estate & Equipment Loans: CDC/504 – This loan program provides financing for major fixed assets such as equipment or real estate.

Pros: They are cheap with minimal payments. Borrowers are typically able to provide a lower up-front equity injection and get much longer loan terms and pay off schedules with SBA loans in comparison with conventional commercial loans.

Cons:  There is less than a 20% approval rating and can take up to 6 months to apply and be approved.  Limits are capped by credit and business income and it hinders your ability to borrow from other lenders simultaneously.

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