Are you in need of extra cash to keep your business afloat or to take it to the next level? Consider these sources of loans for the small business owner:
The 7(a) Loan Program is offered to businesses that meet certain requirements as deemed by the U.S. government. Qualifying businesses can receive up to $1,000,000 for equipment, real estate, working capital or purchasing existing businesses.
The benefit of working with the SBA is that it increases your chances of receiving a loan because the SBA provides loan guarantees, which promise to pay back a certain percentage of your loan to the bank if you default.
The negatives are that the SBA carries strict guidelines and the loan can take a while to process. The SBA reviews data from the last 2 to 3 years, so if your business is new, it could be hard to obtain a loan. In addition, the fees and interest can be higher than other sources of funds.
Microloans, also approved by the SBA, are intended for the purchase of equipment, fixtures, furniture, inventory, machinery, supplies and working capital. The loans for up to $50,000 are great for helping businesses to update office spaces and to purchase needed technology upgrades. However, terms of the loan typically require you to attend a self-employment training course, allow the SBA to closely monitor you and the funds, and prevent you from using the money for existing debt. The loans typically need to be paid off in six years, and the rates run between 8 and 13%.
The SBA offers Real Estate & Equipment Loans: CDC/504 for the purchase of land, buildings, construction of new facilities or improvements of existing facilities, and heavy equipment or machinery. The SBA also offers Disaster Loans that can be used to repair or replace the items damaged or destroyed in a declared disaster, including real estate, personal property, machinery and equipment, inventory and business assets.
Bank loans tend to be the go-to source for small business funding. They are quicker to obtain than SBA loans. In addition, because they offer a range of funding amounts and payback options, you can find a loan to fit your budget and needs. However, because there are so many options, it can be confusing to make the best choice, and you could wind up with unfavorable terms if you don’t educate yourself. Furthermore, regardless of what happens to your business, you are responsible for paying back the loan—without any backing. Here are a few of the most popular banks loans:
Conventional business loans
These loans tend to be for larger amounts, and the terms of the loan will be based on a number of factors, including how much you borrow, what you need the money for and the state of your business at the time of the loan request. One positive of business loans is that lenders usually are more willing to negotiate terms and conditions than with a government-backed loan. However, lenders often require that you put 20% down, and if you can’t cover that, you have to qualify for and pay private mortgage insurance (PMI). Additionally, if your credit score is low, your interest rates can be high, often higher than SBA loans.
Lines of credit/working capital loans
These loans provide businesses with cash flow for day-to-day needs to keep the business going. Typically these loans are unsecured, so you don’t need to put up collateral or worry about losing that collateral if you default. Additionally, you aren’t working with a large sum of money, and you only pay interest on the money you do use. On the downside, interest rates tends to be higher—similar to credit card interest rates—and many banks require you to pay an annual maintenance fee and other transaction fees; those fees do not usually apply to small business loans.
If you need to fund purchases for business equipment—including vehicles, manufacturing or production machinery, farming equipment or other necessary equipment—instead of making a large purchase all at once, you can use an equipment loan to make monthly payments on needed items. Such loans are a great way to build credit, and they allow you to budget more carefully. Conversely, the loan is only for a single piece of equipment you buy, so you have to apply each time you need to purchase a new item.
Personal Loans From Family/Friends
Small business owners can hit a wall with bank loans, and so they sometimes turn to family and friends for sources of cash. But this route is risky. If you can’t repay the person, you could lose their friendship or cause a family rift that is hard to repair.
In addition, those great people who invest in your business may want to become decision makers, and if you turn down their ideas, you can cause conflict and ultimately destroy the relationship. Counter those potential problems by treating this arrangement the same way you would any business arrangement:
- Be upfront. Disclose all information and let lenders know what risks are involved. They need a clear picture of what your business is worth so that they can make an informed decision. Make sure that the person lending you the money understands the tax requirements, specifically if the person charges you interest for the loan; they’ll need to claim that interest as income.
- Maintain professionalism. Present sales reports, cash-flow statements, profit projections and your business plan in the same manner you would if you were presenting to a bank. Additionally, do your best to separate your business and personal relationships. For example, don’t discuss business over Thanksgiving dinner; instead, schedule meetings to talk about the business.
- Make it legal. You could be accepting money from your parents, but you still need to put the agreement in writing to ensure that there are no misunderstandings about the loan. Make it legal with a promissory note. In the agreement, state that you are in charge of all business decisions. It may seem overly formal at first, but it will benefit both parties in the end.
For more suggestions on asking friends and family for money, check out this video.
Lending Networks (Also Called Peer-to-Peer Lending or Lending Clubs)
Small business lending solutions are popping up everywhere, allowing communities of investors to provide funds to business owners. Such businesses make it possible for business owners to borrow money on fair terms while also offering investors an opportunity to make a return on their investment.
Funding Circle USA is one company that is making it easy for small business owners to apply for loans. The qualification, application and initial credit-standing evaluation occurs within 48 hours. If you are approved, you receive your loan funds in 5 to 14 days. There are many other small business lending-network options, such as BoeFly and Dealstruck, so be sure to take the time to research which is right for you.
Help Your Business Thrive
Get our Newsletter
Sign up for our newsletter to receive your free 30-day trial of QuickBooks