Loans for a Business — The Why’s and How’s of Getting Funds to Run Your Existing Business

September 28, 2016

Loans for a Business — The Why’s and How’s of Getting Funds to Run Your Existing Business

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In running a business, it is only natural to want to expand and seek greener pastures.  Doing so would open up a lot more opportunities for you to earn more and improve in different aspects. But when talking about business expansion, or with just simply more funding for your business, you would need to have enough cash for that. The number one option that many business persons would opt for is the traditional way — bank loan for business.

Here is some information about business loans, and how they can help you in securing money for venture capital or any financial needs of your business. We have also included some other options you might want to consider. If you are planning to get some funds for your business, read on and be guided.

Before you start applying for a business loan, you need to think things over and ask some of these critical questions, so you’ll determine what kind of loan and lender would be the best option for you:

  1. How much money do I need?
  2. What do I need the money for?
  3. How quickly do I need the money?
  4. How long will it take me to pay it back?
  5. How long have I been in the business?
  6. What is the current financial status of my business?
  7. How much collateral do I put up for the loan, if any?

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business-loan-1

Source: csdnews

By answering these questions, you can determine which type of loan you should go for. Government-backed loans, a line of credit or loan through banks or from alternative lenders, or cash advance are some of the options you can choose from. Here is some information about each type of lender and loan:

SMALL BUSINESS ADMINISTRATION LOANS (SBA)

This is for addressing the financial needs of many business types. The government doesn’t directly lend money to the small businesses, but rather, the SBA will be setting guidelines for loans which are made by its partners (banks, micro-lending institutions, community development groups) and helps in eliminating some risks to lenders through guaranteeing that the loans will surely be repaid. SBA loans have their parameters and stipulations for the different business types, particularly on how the money is going to be used and when it will be repaid.

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business-loan-2

Source: visually

With this option, the risk is eliminated for the lender since the government guaranty covers about 75 to 90 percent of the loan. Its terms are also very favorable for the side of the borrowers. The only downside is that it takes quite a long time before it gets approved since there is a lot of paperwork needed and extra fees to be paid.

Types of loans:

–    7(a) Loan Program

–    Microloan Program

–    Real Estate and Equipment Loans

–    Disaster Loans

CONVENTIONAL BANK LOANS

Unlike in SBA, Conventional Bank Loans do not have the guarantee from the government, and they do not have the strict use terms when borrowers apply. Banks are also useful as sources for SBA loans, and they also act as lenders for Conventional Bank Loans.

The best thing about this type of loan is that they have low-interest rates so that they can be useful for equity funding needs. Also, since the government is not involved, the whole application and approval process is way faster, enabling you to use the money for your business through bank funding. But then, repayment terms are much shorter and would sometimes include balloon payments. It is also quite difficult to seek approval for these types of loan.

Types of loans:

–    Working-capital Loans

–    Equipment Loans

–    Merchant Cash Advance

–    Lines of Credit

–    Professional Practice Loans

–    Franchise Startup Loans

(These type of loans also apply for Alternative Lenders)

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business-loan3

Source: iconfinder

ALTERNATIVE LENDERS

For small businesses which don’t have a great financial background yet, this loan option would be very attractive since approval requirements are not that strict compared to the previous ones mentioned. Alternative lenders offer online application and they can have decisions for approval or rejection in just a few hours, making the whole process easier and faster; funding can be provided in just less than a week. Alternative lenders offer lots of loan types, including working capital loan, which can help you in financing your business’ operations in the short-term.

The good thing with opting for alternative lenders is that your business doesn’t have to have a stellar background and financial status since there are just a few restrictions on the terms of how money is to be used, and loans are approved immediately. The downside would be that interest rates sometimes go higher compared to the ones charged by banks, making you pay more. Since these lenders face an increased risk compared to others, they reflect it in their interest rate charges.

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Frequently Asked Questions

Q: How can I determine which type of lender should I choose for my business?

A: You need to evaluate your business’ needs and situation for you to come up with a choice for the type of lender and loan.

Q: For SBA loans, what information would the banks ask for?

A: You will need to fill out forms and documents, where you’ll encounter some these items:

–    Personal background

–    Financial statements

–    Ownership and affiliations

–    Business certificates/licenses

–    Income tax returns

Q: What will I need for conventional loan application from a bank?

A: You will have to share your financial details and background, plans, and personal information. You have to show that your business is running well so that the bank will have confidence in investing.

business-loan4

Source: Visually

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Q: What are the things to be considered when applying for Alternative Lender loans and what information will I need to provide?

A: You need to consider these factors:

–    Interest rates

–    Fees and policies

–    Lender’s ratings/reviews

You will most likely have to provide personal, financial, and business information. Credit history, income and assets verification, and plan for money use would also be needed.

Q: What would lenders consider when they are deciding for approval of loans?

A: These factors are some of the things they would consider:

–    Credit score

–    How long you’ve been running the business

–    Monthly income

–    Previous tax returns and another history about bankruptcies bounced checks

–    How you would plan to use the money

–    Whether your collateral is sufficient or not

All this information would be helpful for you in getting some background about business loans. Whether you need cash for debt financing or expansion purposes, you can opt for business loans in helping you financially, and you have lots of choices to consider. Aside from the loan types mentioned above, you can also opt for other funding options such as crowdfunding, grants, peer-to-peer lending, angel investors, venture capitalists, and sweepstakes.

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