Ambition and grit are critical entrepreneurial traits that help overcome the challenges faced during business startup and expansion. However, these traits alone do not ensure spontaneous cashflow that can stimulate the business. Entrepreneurs need some help, especially when starting their ventures, at least for the initial financing for raising business capital to get a new business off the ground by arranging for a business loan.
Entrepreneurs are familiar with business loans, which is one of the most common forms of business financing. But whether to avail a business loan is a critical decision that needs some serious thinking to decide, feels Eric Dalius. In this article, we ill discuss the various factors that help determine how good it will be for applying a loan for your business. What to expect from the process and the types of business loans available will become clear on reading through this article.
Getting Ready: The Eric Dalius Way
To get a traditional business loan, you must have ample time on your side because it is lengthy and entails quite a lot of documentation. Moreover, you must prepare well for taking the business loan by figuring out the loan amount and lining up all documents required when applying for a business loan from banks, credit unions, or other financial institutions. Determining the type of loan that would suit you is also an important decision. The loan processing time depends on the type of lender and can vary from a few hours to several days. Planning for availing loans can make the task easy.
Determine the Loan Amount and Why You Need It
Knowing why you need a business loan should help determine the amount you need, says EjDalius. Consider the type of business and the infrastructure and resources that youneed for starting up the company, which constitutes the capital required for getting it off the ground. Besides, consider the funding that your business would need after the initial investment. Besides the installation of equipment, furniture and other assets consider the cost of its maintenance and upkeep. The post-installation prices are especially critical for businesses that operate on tight margins like the food and beverage business that has considerably longer breakeven time. Working out the time it takes to breakeven will impact the repayment capability of the borrower.
A Business Plan is Essential
A business plan is essential to envisage the business viability and prospects of revenue generation and a mandatory requirement for most traditional lenders that insist on a business plan to qualify for the loan. Some online lenders that offer alternative avenues for borrowing do not require a business plan to accompany the loan application. Some other new-age lenders even do away with the application process and preapprove eligible businesses based on several criteria like total sales. Such loans suit existing companies that are on an expansion drive.
Although lenders that provide loans without a business plan might appear attractive because of speedy loan processing, they offer short-term loans with higher APR. Loans with higher APR translate either into higher monthly payments or a longer repayment term. Typically, such loans can have high APR to the tune of 24%, which goes up for borrowers with a poor credit score.
Types of Business Loans
SBA loans, term loans, short and long-term online loans and invoice factoring are common types of business loans.
Small Business Administration loans are like the term loans that private lenders offer. Lenders that belong to the category of SBA lenders look after the interests of borrowers in a much better way by favoring groups like minority business owners and women entrepreneurs that might struggle to secure traditional business loans. SBA does not offer a loan but only help in loan administration by connecting borrowers with lenders. A business plan is essential for applying for an SBA loan and some collateral like some property. SBA loans are long term loans that can go up to 25 years and available for a loan amount ranging between $10,000 to $350,000. A credit score of 650 is good enough to qualify for an SBA loan that suits small businesses the most, but it can take up to 90 days for processing and disbursement.
Term loans are among the most common types of business loans that have a tenure ranging between 2 and 10 years. The loans are popular because of their reliability to borrowers, but the qualifying terms for such loans can be quite stringent. The loan is suitable for businesses with a successful track record for at least two years of operations after inception. Some private lenders may offer loans not less than $500,000 that leaves out small ventures from its ambit. The minimum credit score is 680 to qualify for term loans that take 2 weeks to 2 months for processing and disbursement.
Online Loans: Short and Long Term
Online loans have become popular in recent years as an alternative that gives more options to business owners who can avail loans speedily with minimal documentation. The loans are attractive for borrowers with low credit scores because scores of 500-600 are acceptable to many lenders. Businesses that generate $100,000 as annual revenue and have been in operation for at least one year can qualify for term loans from private lenders. The loan amount can be as less as $5,000 and go up to $250,000 for short term loans and up to $500,000 for long term loans. Term loans are unsecured loans and do not require any collateral, but APRs are much higher than traditional SBA loans, which can be as high as 99% annually in some extreme cases.
Invoice factoring is a less conventional loan arrangement that consists of business offering their outstanding invoices for sale to get a quick loan almost within 24 hours for securing 70% of the invoice value. Customers with better credit can avail of 90-95% of the invoice value.
Consider your business financials and the revenue forecast to decide whether it is worth to take a business loan.
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