The best option depends on what kind of business you are running, what stage of growth you are in, and generally your current situation and needs.
When it comes to business loans, the first thing that a lot of less experienced entrepreneurs think about are bank loans. The fact is that banks have a very specific set of requirements, which generally includes a history of business operations, which small businesses that have just started to establish themselves in the field do not have. However, what these entrepreneurs don’t know is the fact that there are various other options to get loans for their business, each of them with their own conditions, terms, and rates, which are mostly significantly easier to get than when it comes to banks.
In this article, we are going to discuss several types of business loans that you need to know of, so that you can decide how to properly start financing your business.
Friends and family loan
An option that a lot of people come to think of when they realize that they can’t borrow money from a bank is to get a loan from their friends or family. It’s a good option because it comes with an optimal low-interest repayment plan. First, you need to present them with a business plan and some kind of outline on how you are going to use the money, in order to make them believe in your cause and want to support you. Getting money from people close to you can really help you in terms of expanding your staff as well.
However, it’s not as simple as you may think. For starters, the best way to approach the whole deal is to have everything in writing. The interest and repayment plan have to be clear-cut. Because, even though dealing with your family and friends is one of the most probable ways to get financed, it can also be very risky, because if your plan doesn’t work out, you may jeopardize the relationships that are the most important to you in your life.
This type of loan is specifically related to entrepreneurs who need to buy or lease a certain kind of equipment or vehicles. If this isn’t something that is important for your business to happen as soon as possible, then you can postpone it for when the time comes. Otherwise, it’s an approach that will make things a lot easier for you. It’s basically an asset-based kind of loan, and it is also known as equipment financing. What it’s all about is taking a loan or a lease to buy expensive equipment so that you don’t have to instantly pay the big costs.
It’s an option both for small and big businesses. But startups can gain from it the most as the equipment itself works as collateral and ensures the loan. Furthermore, equipment financing has very decent rates, from 8 percent to 30 percent. This, of course, depends on how old your business is, your credit, and your finances. When you opt for this type of financing, you can get a wide variety of different equipment and vehicles.
Working capital finance loans are the kind of financing with the purpose of getting more money in order to enable your business to grow and expand. It is also used to cover various daily costs, including inventory purchases, marketing, salaries, and so on. Furthermore, it is very helpful if you find yourself in a dire situation when you need the money in order to save your company from sinking.
What you should know about working capital loans is that they are a little harder to get than the two previously mentioned ones. In this case, you need to have a great credit history. Also, it comes with a lot of paperwork, and the whole process can take some time. However, it can be extremely beneficial, as it tends to have very low-interest rates, which enable you to cover any business operations. If your credit score is as good as it can be, you can get a rate between 3 percent and 7 percent.
Invoice financing is a great solution if you are running a B2B kind of business, and have problems with your cash flow. Basically, you get a loan according to your pending invoices, which secure the loan themselves. You get about 85% of your total invoice, while the lender keeps the remaining 15%. This money can be of great help to take care of business expenses while you’re waiting for the payment.
While you are both waiting, you will be paying a fee on a weekly basis (which is about 1 percent). When you get paid, you get the 15% from the lender. This will, of course, exclude the weekly fees, as well as a bonus flat processing fee which is about 3 percent.
If you are unable to lend money from a bank, you should know there is a variety of other options. The best choice depends on what kind of business you are running, what stage of growth you are in, and generally your current situation and needs. Consider these four types of business loans if they could help your business.