Why You Should Take Out A Business Loan
Running a business has its challenges, and one of the main concerns of keeping a business afloat is funding. At some point, you will most likely need to invest in your business in order for it to grow.
Whether you are a small business that is just starting up, or an established business with a large operation, business funding can help with nearly any purpose:
Starting a business
- Business expansion
- Purchasing real estate
- Purchasing equipment
- Purchasing inventory
- Covering any gaps in cash flow
- Covering unpaid invoices
- Increasing working capital
- Hiring new employees
- Opening a new location
- Refinancing another loan
- Buying insurance
- Covering emergency costs
- Building your business credit history
Additionally, the type of financing you choose for your business can vary based on your needs. Some types of loans you may consider include:
- Startup loan
- Working capital loan
- Crowdfunded loan
- Small business grant
- Business credit card
- Business line of credit
- Short-term loan
- Installment loan
- Equipment financing
- Merchant cash advance
- Long-term business expansion loan
- Real estate crowdfunding
- Business acquisition loan
- Franchise loan
- Invoice Factoring
- SBA 7(a) Loan
- Commercial Real Estate Loan
- Hard Money Loan
- Emergency Business Loan
How To Pick The Best Business Funding
Not sure how to choose the right business loan for you? Consider the following tips to help you narrow down your search:
Evaluate your situation: Pinpoint why you need the loan and know where you stand when it comes to your personal and business finances, credit, and debt-to-equity ratio. Lenders will view you more favorably if you have a higher credit score and lower debt-to-equity, which will help you qualify for lower interest rates and save thousands over the life of the loan.
The type of loan you take out depends on its purpose so be sure to consider all types of business financing. (Example: If you are looking for steady cash flow, a line of credit may be your best option; or if you are looking to purchase inventory, you may look into an equipment financing loan.)
Know how much you need to borrow: Do you need several thousand or millions for your business? Make sure that you take out as much as you need -- no more, no less. After all, you have to repay the borrowed amount in full and any interest accrued.
Compare your interest rates: Consider how your interest rates will impact the amount that you borrow and how much you will pay over time.
Compare your repayment terms: Think about your payment schedule. Will you be able to pay it off early and save thousands of dollars or will you accrue interest over a longer period of time?
Consider the fees: Loans can come with many fees that include application fees, origination fees, late fees, and repayment fees. If the fees outweigh the interest rates, continue looking for other options.
Weigh all of your options before making a decision: Even if you are faced with an emergency expense, take your time and compare all of your options before ultimately taking out a loan. The health of your business is on the line and choosing the wrong loan can be disastrous.
Submit your application: Once you decide on a lender (whether on your own or through a lending network), you simply have to submit a loan application and any necessary documents (such as bank statements and tax returns). If the application successfully goes through, then you can use your funds as intended; if you are denied, you can try to apply with a different lender or apply for a different type of loan.
Advantages Of Business Funding
- Business owners can find business financing for specialized needs.
- Business loans made specifically for business owners or the type of business (for example: business loans for women).
- Business financing allows you to choose what type of loan to take out and how you use your funds.
- Business loans generally have lower interest rates when compared to other types of financing.
- Interest payments on a business loan can be used as a tax deductible.
- Using your loan correctly and paying it off on time can help you build your creditworthiness.
- Business loans are fairly easy to find. Whether online or at your local bank or credit union, there are many lenders who can cater to your needs.
- Business owners can borrow a large amount of funding -- sometimes up to $1 million.
Disadvantages Of Business Financing
- Qualifying for business financing depends on your credit rating and business finances, meaning that you may be denied for a loan if you don't meet the necessary requirements.
- Interest rates not only depend on your creditworthiness but also the market, resulting in fluctuations in your APR.
- Many lenders require that you provide collateral (personal or business assets) in order to ensure that they will be paid back if you aren't able to pay back the funds.
Frequently Asked Questions
How does business financing work?
Business financing allows your company to get the funds it needs to expand and cover any expenses. These loans are repaid over a set period of time with interest added.
What type of financing is available for a small business?
- Business lines of credit
- Equipment loans
- Invoice factoring
- Invoice financing
- Merchant cash advances
- Personal loans
- SBA loans