Small business loans: Funding your growth.

The truth is, at one time or another, applying for small business loans will become reality for most smaller companies. It’s the nature of entrepreneurship.

If that’s where you are right now, then you’ll be glad to know that I’ve done some initial research for you. What follows are synopsized descriptions of some of the most popular types of small business loans. If you feel any are right for you, my advice would be to do some more in-depth research on the particular loan, then contact your banker or financial advisor for further information.

Small Business Financing Options.

Banks

Other than personal savings, banks are the main source of small business loans. Banks will loan money in exchange for collateralized hard assets such as equipment, company vehicles, and buildings. They will also loan against inventory and receivables, but don’t give much credence to these types of assets since they can be converted to cash to cover operating expenses and losses.

Banks typically make small business loans to companies that can show at least two years of profitable operation. There are two basic types of bank loans:

- Lines of Credit: These are also called working capital loans, operating lines, and overdraft protection, and can fluctuate based on your business’s cash flow needs.

- Term Loans: These are the most common, and are used mostly to finance long-term assets, these loans generally have a monthly principal and interest payment for a specific amount of time, most five years or less.

SBA Loans

Through the Small Business Administration, the government partially guarantees repayment to banks that make small business loans that might fall outside a bank’s standard lending criteria. The SBA offers numerous small business loan programs, including:

- SBA’s MicroLoan: Geared to small business start-ups for loans up to $35,000 to purchase inventory, supplies, furniture, fixtures, machinery and/or equipment.

- SBA’s 504: This loan gives businesses long-term, fixed-rate financing for real estate purchases, modernization and business expansion.

- SBA’s 7(a): This is the SBA’s primary business loan program to help existing and growing businesses purchase existing businesses, real estate, equipment, or for working capital.

For more information on SBA loans, go to www.sba.gov

Personal Loans

These are loans that business owners take out using personal assets as collateral. One of the most common is a home equity loan. Be aware that you have to disclose your intention to use the money for your business on the loan application, or you will be committing fraud.

Venture Capital Firms

These firms typically finance established businesses, but some will also consider start-ups. They expect high returns on their investment, and tend to lean toward businesses that can demonstrate they are positioned to grow rapidly.

Lease Financing

If you need money to purchase equipment or vehicles, you might consider leasing them instead of outright purchase. There are many advantages to leasing – one of the biggest is that it isn’t viewed as “debt” even though it is an ongoing liability (as opposed to an asset). This makes a difference if you go to find additional cash funding from a lender.

Factoring

This is a financing tool that lets you sell your outstanding invoices / receivables to a factoring group at a discount for immediate cash. This may be a good option if you have slow-paying clients, or if you can’t obtain financing through more traditional means. However, as with any financing option, research it carefully first.

Merchant Cash Advance Loans

With this type of small business loan, cash is made available almost immediately, and repayment comes from credit card sales automatically, with a specific percentage taken automatically from each transaction. The amount paid is determined by the strength of the market…when your card sales are slow, you pay less, and vice versa. The interest rate for this type of loan is typically higher than a more traditional loan, but the approval rate is generally much higher. This type of loan can work for small businesses that have a seasonal clientele and may find themselves cash crunched during down times.

Friends and Relatives

I put this small business loan option at the end because for most people, this should be used as a last resort. With borrowing money from friends and relatives, there is an obvious emotional risk involved so approach this financing source cautiously. If you decide to go this route, put together a professional presentation, and be prepared to show financial statements, tax returns, a business plan, etc. If they decide to fund your business, have an attorney prepare a written loan agreement - with payback and interest terms - to avoid friction.

Have a look around.

I hope you have found this section interesting and helpful. I’d like to invite you to visit the other pages on this site before you move on. You’ll find each page packed with insights and advice geared specifically to the small business.

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