Choosing the Right Business Loan for Your Business

Running a business requires money and almost everyone has heard the expression that you have to spend money to make money, but where do you get the money from if you are not independently wealthy or established? A business loan is the answer to most business needs. No matter the size of a business, almost every business owner at some point has to consider a loan. A business loan can help a business get started, expand once it’s up and running, or get a business through the rough patches that occasionally occur. Deciding on a business loan is a key step, but which loan is right for you and how do you decide between the different types?

Skip the loan and use plastic

Some business owners opt for a slight variation on a business loan, choosing to use credit cards to support their startup, expand an existing business, or help their business get through a rough patch. The positive reason for using credit to finance your business is that it is often easier to obtain, or already exists on a personal credit card, but there are a couple of serious drawbacks to using this type of business financing. The first negative is that unless your existing line of credit is unlimited, there may not be enough funds on your credit cards. The second downside to using personal credit cards is that your personal and business cash flow are not separate. This can wreak havoc if you need to use your credit for important personal needs, and can have a similar effect on business funds if you suddenly have to draw on your credit for personal reasons. Lastly, the interest rate on credit cards is usually much higher than any of the various types of business loans.

A bridge between credit cards and business loans: lines of credit

A line of credit works much like a credit card. You apply for a business loan line of credit and, based on your qualifications, you are approved up to a certain amount. You are not charged for the loan until you actually use the money, and you are only charged for the amount you actually use. Another similarity between lines of credit and credit cards is that the loan is typically an unsecured loan, meaning no assets are used to secure the loan, such as houses, cars, or the business itself. However, unlike a business credit card, lines of credit carry interest rates much closer to a traditional loan level.

On the downside, those interest rates are typically variable like a personal credit card and go up or down over the life of the loan. Another drawback to lines of credit is that, like a credit card, your payments will typically be only a little more than the interest rate each month.

This may seem like an advantage at first because the monthly payments are so low. The problem is that lines of credit don’t go on forever. There is almost always a set number of years for the loan amount to be available. At the end of that time (and sometimes within the last two years of the refund) the money is no longer available. After that period, the payments are higher to ensure that the money is paid back in full at the end of the loan.

If you have the discipline to force yourself to pay more than the minimum every month to pay off the loan, this may be a good loan to get. Allow for times when money is tight. You can pay the minimum at those times without running the risk of defaulting on your loan.

Traditional Types of Business Loans

Even if you don’t have a great deal of credit, and if you don’t think a line of credit is right for you, all is not lost. There are many more traditional business loan styles to choose from:

– Working Capital Loans: These loans are what most people think of when considering getting a business loan. They come in two types, secured and unsecured. Unsecured versions of working capital loans are generally only available to business owners with stellar credit, a solid business plan, and an established business with a proven track record. Startups are often too risky for unsecured working capital business loans. Secured working capital loans are a bit easier to obtain, although the amount of collateral needed to obtain these loans is often based on the borrower’s credit. These loans make it possible for all types of businesses to carry out their daily activities with available cash. Loans are often secured by homes and other valuable assets.

– Accounts Receivable Loans: These are types of short-term financing available when you’re in a tight spot and now have money coming in at a certain time. Your business accounts receivable records act as collateral for such loans. On the downside, the interest rates on these short-term loans are typically higher than a standard long-term loan, and you can end up in a vicious cycle of using your assets (accounts receivable) before you get them and then have no money before your next earnings period. This type of loan should only be considered for a few types of emergencies, such as the need to pay payroll, purchase inventory at value, or other needs.

– Business-Only Loans: This type of loan applies to using the capital and assets of the business only and not any personal credit or credit history of the owner. It is only available to a business with a strong history of reliable earnings, the long-term outlook of smooth operation, and very strong business credit scores.

Loans for other specific functions

There are times during business operation when you need a loan for a specific type of purchase, such as buying new or replacing old equipment, buying real estate for the business, or other specific needs. There are loans designed to be available separately for just those times.

get the loan

The best way to ensure success in obtaining your business loan is to be prepared. Walk into your bank with a well-formulated business plan in hand and make sure your credit is up to par. If you know of a point in your credit history, be prepared to explain it. Lenders are human too, and they know that some situations are unavoidable, but if you can show that your problem is from the past and that you have a stronger foundation, it will go a long way in helping you get the loan you want. Letters of explanation that accompany your loan package help if there were situations like illness or caring for a sick loved one that caused problems in the past.

One of the things that stops most people from trying to get a loan is the fear of rejection. Knowing what to expect can ease that fear.