Whether you are starting a new business, or expanding an existing one, you will need capital to get the ball rolling. If you do not have the money required to reach your business goals, you will need to take out a business loan. But which mortgage is suitable for your business and What is Short Term Business Loans ? Such questions will make it difficult for you to make an informed decision.
Borrowing money is neither straightforward nor simple as it may seem. So to make sure you do not get in way over your head, consider these four types of business loans that will suit your financial needs.
Let’s start with small business loans (SBA for short), which are specifically targeted towards small businesses and enterprises from private lenders and backed by the government. These loans are secured, which means you will get the capital you need by offering you personal assets or company as collateral.
When it comes to SBA loans, you have three different types to choose from:
- The Microloan Program: These loans are available to non-profit organizations and small business concerns.
- The 504 Loan Program: This loan is for small businesses that wish to modernize or expand their operations.
- The 7(a) Loan Program: Businesses with particular requirements will benefit most from this loan program, i.e., businesses operating in rural areas, and companies promoting the exports and so on.
The benefits of this type of loan can vary depending on what kind of SBA loan you have opted for in the first place. The 7(a) loan could help you purchase equipment, land, and even cover construction. Microloans are specifically for those times when a business needs working capital. Meanwhile, the 504 loan has both, long-term and short-term benefits, including and not limited to overall savings, fixed interest rates, and financing up to 90%.
SBA loans can be issued under several conditions, including and not limited to change of business ownership, federal withholding taxes, etc. The terms of the loan may vary based on the amount you have borrowed and how you plan to use the money.
Accounts Receivable Factoring
Accounts receivable factoring also referred to as accounts financing, is quite impressive. This loan can be used to get a loan based on uncollected invoices for immediate cash flow.
How it works is that you sell your unpaid invoices to a third party in return for an advance payment. In this case, the third party is the factor, providing you with either a partial or full amount. They will collect on the invoices you traded them later on.
This type of financing is when you need to buy some time for your business so that you can find a long-term and sustainable avenue to finance your business.
One of the best things about account financing is the fact that you will get the required cash immediately. Your capital will not be tied up in unpaid invoices and inventory ever again. To benefit from this financing option, make sure you get to hire an account receivable management firm to take care of your outstanding invoices so that you can focus on other aspects of your business that require your full attention.
As amazing as accounts financing sounds, it can be costly. Before you even consider opting for this type of loan, make sure you have exhausted all other options. With interest rates, discount fee, and additional charges, you will end up paying a lot more in the long run.
Friends & Family Loan
You may know a thing or two about this loan, but there are a couple of things you may not know that will surprise you.
It is always a good idea to put down such a loan in writing. State your repayment plan and the interest rate you have to pay back. Failing to do so can get you in a lot of trouble, as there is always a chance there could be a misunderstanding later on. Documentation regarding the terms of your loan is also essential in case the IRS audits your business.
Borrowing money from your friends and family can result in a low-interest repayment plan; it could be the very best rates you can get your hands on. Apart from this benefit, friends and family investing in your business will give you all the help you need for your business to succeed.
Borrowing from friends and family does have its risks. Some may not be comfortable with parting with their money and may develop a distaste in the relationship. To avoid this, you need to explain to them what you do and how your business operates.
Working Capital Loan
When it comes to working capital loans, they serve as the short-term loans that give your business the money it needs to expand and grow. They can also be used to handle payroll, renovations, advertising, and other day-to-day expenses. They also cover the costs associated with managing debt or dealing with emergencies.
Working capital loans are useful for one reason and one reason alone, they ensure your daily business operations run smoothly. The interest rates are low, which is not a bad thing either. If you negotiate well and have a high credit score, the interest can fall anywhere between 3-7%.
As mentioned above, to get a working capital loan, you will need an excellent credit score. Do keep in mind though, it also involves a lot of paperwork and processing, which can take a few weeks or months even, to complete.
Now that you know of the four types of business loans that will meet your financial needs, make sure you choose wisely.
Emphasis is on the fact that you will need to do your homework. If need be, get some professional help for choosing the right type of loan, and it could be the difference between the success or failure of your business. The information provided above is a start, but you will need to assess the needs of your business to come to a proper conclusion.