If you’re an entrepreneur who’s hoping to secure small business financing, sifting through different lenders and loan types can be an intimidating process. The type of financing you choose to pursue can have a profound impact on the future of your business, so it’s important to take the time to evaluate your loan options carefully. To help you make an informed decision, here’s a quick guide to the different types of financing available to small business owners.
Traditional term loans are a good choice for small businesses that need to cover a purchase that will help the business continue to grow, such as buying new equipment, opening a second location, or investing in new property.
With term loans, you receive the money you in one lump sum that has to be repaid over a defined period of time. Getting approved for a term loan typically requires that you have good credit, a history of positive business performance, and could require collateral, depending on the lender.
Business Lines of Credit
Lines of credit provide the money your small business needs for daily cash-flow needs or financing recurring costs such as inventory and payroll. With an LOC, you have a set amount of credit available to you, and you only pay interest on the funds that you use. The LOC option typically offers a lower interest rate than term loans. As long as you make your payments as agreed, you build credibility and you can access higher lines later on. Remember, if you miss payments or go over your approved amount, your interest rates can substantially increase and your credit limit can also be reduced or revoked. This is a good choice for entrepreneurs who are trying to build their credit rating, so long as you make timely interest payments. LOCs are usually unsecured, which means they don’t require collateral.
Merchant Cash Advance
If your business accepts credit cards, and you would prefer a flexible payback option, then a merchant cash advance may be a good option for you.
You’ll be advanced a lump sum of cash that’s simply paid back through a small percentage of your future credit card sales. One major advantage merchant cash advances have is that in most cases there isn’t a specific time for the cash to be paid back. The payments get remitted when you batch out for the day. If there’s no batch, then nothing is taken out, which gives you peace of mind. The advance is paid back as you make money.
Due to the underwriting flexibility of this type of financing and the higher risk associated with that flexibility, this option tends to be a little more expensive than other lending options. However, younger businesses and those in higher-risk industries may not have another option until they can establish a track record of success.
Purchasing new business equipment can be a financial challenge, but equipment financing helps you get what you need while using the equipment as collateral. Instead of paying for office equipment, machinery, vehicles, or whatever else you need up front, you make monthly payments. Since the equipment serves as collateral, this is often an easier loan to maintain for new business owners.
While not every small business qualifies for an SBA loan, their lower interest rates and extended repayment options make them a good choice for funding. Lenders look at your credit history, financial documents, and business plan to determine if you have the resources to repay the loan. There are many SBA loan types available depending on the size of your business, how long you’ve been in operation, and what you plan to do with the loan.
With so many small business financing options to choose from, it’s helpful to have a knowledgeable guide to walk you through your choices. At ValueOne, we’re just as dedicated to your business as you are, which is why we work to help you identify which type of financing works best for your needs. Contact us today to get started.