As a business owner, you will probably need a loan at some point. Learn about the different types and how to choose one.
Loans are a necessary evil for just about any business. Whether it's to open shop, carry you through a rough time, get upfront money for a profitable project or recover from a disaster, getting the money you need when you need it can save your business. There are many types of loans, from government-sponsored to peer-to-peer. Read on to learn more about each and what you can do to get the best loan for your company.
Types of loans
SBA loans: The Small Business Administration works with lenders to provide loans guaranteed by the government for qualifying small businesses. Because the government guarantees 75 to 90 percent of the loan, the risk to the lenders is decreased, and the lenders can offer a lower interest rate. However, there's generally more paperwork and time involved in securing an SBA loan. These loans range from a few thousand dollars to $5 million and can take five to 25 years to pay back.
Commercial loans: Commercial loans are offered by banks or other lending institutions. Unlike SBA loans, they do not have government backing, so the terms may not be as good. However, they are usually faster to get approval for, and lenders offer more variety.
Alternative loans: In case your credit isn't good enough to qualify for an SBA or commercial loan, there are companies that provide what are called alternative loans. These loans are approved more quickly, making them an option for the company that needs cash as soon as possible. They cover the same purposes as commercial loans, but they often have higher interest rates and more stringent terms.
Lines of credit: Rather than a traditional loan, in which you get a set amount upfront, a line of credit lets you borrow up to a specific amount as you need it. As with a credit card, you only pay interest on the amount you borrow, and as you pay back, you can borrow more to the specified limit.
Merchant cash advance: This loan is based on your credit card transactions and is usually up to 125 percent of your monthly credit card income. You may pay this back in installments or as a percentage of your daily credit card sales. While interest can be high on these loans, you can usually get them quickly and easily.
Peer-to-peer (P2P) loans: Crowdsourcing has grown in popularity. Services now connect businesses needing money with individual investors. These peer-to-peer lenders have terms and interest like banks, but in addition to qualifications, they are interested in your story. If you are a new business with a compelling mission having problems getting a standard loan, you may find this a viable alternative.
How to prepare
The more attractive your business image and the faster you can provide paperwork and answer questions, the more likely you'll get a loan quickly and on terms you like. Follow these steps.
1. Determine the kind of loan that is best for you.
- SBA: Good credit, time to wait
- Commercial: Good credit, less time than for an SBA loan
- Alternative: Poor credit, need cash fast
- Line of credit: Anticipating financial needs but don't need all the money at once
- Merchant cash advance: Steady credit card sales, need speed and convenience
- P2P: Not a good candidate for a commercial loan, but have a strong story and time to wait
2. Polish your image.
Business lenders research potential borrowers. Make sure your online image, from your website to your Yelp reviews, shows you at your best. Address complaints or public issues (like a lawsuit) and attempt to solve them.
3. Fix your credit.
Run a credit check not only on your business but on every principal in the business who might be on the loan. Then improve scores by disputing errors and paying off small loans.
4. Gather your paperwork.
- Name of business (including any DBAs)
- Business legal documents
- List of executive officers and their backgrounds
- Financial statements for the past 2-3 years and year-to-date financials for the current year
- Projected financial statements
- State filings for the company
- Copies of key man and general liability insurance policies
- Business credit report and personal credit reports of principals
- Potential collateral
- Financial statements of the principal shareholder or owner of the business
- Business plan, executive summary or investor pitch deck
- The tax returns of the company for the past 2-3 years (signed, with attachments and exhibits)
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