There are more small business loan options than ever before, and consequently, even more competition for the cash. According to a survey conducted by OnDeck, 82 percent of business owners were turned down for financing from their bank. But this doesn’t mark the end of the road. Business owners should be well-versed on a myriad of loan options — not just the loan options available at the bank.
Whether you have great credit and decades of business experience or average credit and a recently-launched small business, there are several options on the market. Consider your needs and current status as a business owner, and use these points as a steering guide to choose the right type of loan for you.
As a business owner, you’ve most likely heard of SBA loans, and probably even applied for one in the past. This is a classic fix for many businesses. Small business loans are not directly from the Small Business Administration, but this loan type is more attractive to lenders because it’s partially guaranteed by the government, and therefore less risky.
There are six types of SBA loans. The three most popular are the 7(a) loan, the 504 loan, and the microloan. Each have their own set of rules and regulations and benefits. Though the application process can take several weeks or months, SBA loans are better equipped to suit small businesses than traditional banks, who have more strict requirements for approval.
Equipment financing is a popular asset-based loan that provides capital for business owners to purchase equipment vital to the business. This could be anything from computers to machinery or vehicles, and the loan covers 100% of equipment value. This is an especially popular option among retailers. When you use an equipment loan to fund the purchase, you’re essentially buying to collateralize the loan. This method increases the chances of qualification and could even help you get a better rate. Think of it as a better alternative to leasing. Once the loan is repaid, you own the equipment.
Working Capital Loans
Working capital loans provide the crucial funds necessary to finance everyday operations of your business. These short term loans have a much quicker application process and less stringent eligibility requirements. These loans, like many online loans, have more flexibility than your bank. For example, some online working capital loan lenders might require business owners to have just three months in business and don’t ask for collateral, while traditional banks expect at least two years and extensive collateral is required.
With working capital financing, business owners can better bridge the gap between the cash flowing into business operations and the cash flowing out. This is especially beneficial to businesses who need to even out cash flow due to periodic or seasonal fluctuations. This ensures a smooth year-round balance. To make the most of working capital loans, you should have a thorough understanding of your business’s cash flow, be prepared to handle payments, and understand the cost of the loan.
Invoice financing is similar to equipment financing because it gets you exactly what you need to keep the business running. This type of loan comes in many shapes and sizes and the premise is simple: you get a cash advance from a lender based on the outstanding invoices the business is waiting on. Typically a lender will offer 85 percent of outstanding balance upfront, hold onto the remaining amount until the loan is paid off, and then return the 15 percent minus interest charges (around 1% per week plus a flat processing fee). This is a great option for business owners who don’t want to make a huge commitment but who need the cash flow to hold them over until customers pay.
Online Term Loans
Online term loans are similar to bank term loans, but require far less paperwork and get the cash to the recipient much quicker. This offers a decent balance between the monetary benefits of getting a loan from traditional banks and the more versatile requirements and speediness of online lenders. The concept is still the same: you borrow a certain amount of money and monthly payments against the accrued interest. This is a viable option for business owners who don’t have the time to go through the paperwork process and want more flexibility.