There is a wide range of debt financing options for funding a small business.
The common link among these products? All lenders charge some form of interest and have repayment terms. As the borrower, you are responsible for repaying the loan, plus interest on top.
These are the seven main kinds of debt financing you might consider to fund your small business:
Traditional Term Loans
A traditional term loan is the easiest type of debt financing to understand. It’s probably what you already think of when you think of a business loan, so if you’re looking for simple business funding, then this could be your best option.
Best For
Owners of mature businesses who want to borrow money for a long period of time (more than 2 years) and want a predictable monthly payment. Term loans are great for financing business expansions, working capital needs, or refinancing other debt.
How Term Loans Work
This type of small business loan is pretty straightforward: You borrow a fixed amount of money, usually for a specifically-stated business purpose, and pay back the loan over a fixed term and at a fixed interest rate.
Since these loans have low interest rates, owners need to have strong credit to qualify, and their businesses should be financially strong.
Term Loan Example
Say you need $25,000 worth of small business funding to purchase some new equipment for your business. Maybe it’s a few new computers, an vehicle, or an updated piece of machinery.
Whatever it is you’re buying, you’ve done the research—and you know you’ll be able to pay back a loan, plus interest, with the extra revenue your purchase will bring to your business.
You’ve managed to qualify for a $25,000 loan at a 12% interest rate, lasting 5 years. Nice job!
Because your repayment is slightly on the longer side—some loans can get repaid within a year, while others can take 10 years—you can expect a monthly repayment schedule. And for $25,000 at 12% interest over 60 months, you’re looking at monthly payments of $556. With a traditional amortizing loan, the initial several payments will go primarily towards interest, and successive payments will primarily pay down principal.
To access a term loan, we’d suggest you either apply for funding from your bank or look to online lenders like Fundation or Funding Circle.
SBA Loans
The Small Business Administration (SBA) helps entrepreneurs get long-term, low-cost business loans that are often the most desirable types of business funding for business owners. The SBA is a federal agency dedicated to helping entrepreneurs improve their businesses, take advantage of contracting opportunities, and access affordable small business funding.
The SBA itself doesn’t directly loan money to businesses, the agency incentivizes lenders to approve small businesses for borrowing by guaranteeing all or part of their loans. For lenders, that means lower risk, higher reward.
Best For
Borrowers with strong credit who are looking for funding for a small business in the form of long-term loans, low-interest loans.
How SBA Loans Work
There are three main SBA loan programs that help a wide variety of small businesses get debt financing: the 7(a) Loan Program, microloans, and 504/CDC loans.
The 7(a) loan program is the most common out of the SBA’s various programs for one simple reason: It’s the most flexible SBA loan available. Through this program, borrowers can access up to $5 million in small business funding for working capital, equipment purchases, real estate buys, basic startup costs, or even debt refinancing.
Microloans are just what they sound like—loans under $50,000 for business owners who need just a little bit of business funding to take the next major step in their business. Entrepreneurs struggle with getting access to smaller loans from banks because these loan sizes just aren’t profitable for banks, so SBA Microloans fill this need.
The third type of SBA loan is the 504/CDC loan for financing the purchase of real estate or other major fixed assets—like large equipment, land improvements, or the purchase of improvement of an existing building.
Remember, for all these loans, individual, SBA-approved lenders and banks will determine your eligibility. Generally speaking, you should have good credit, and your company should be profitable or have a compelling business plan with positive projections. If the lender approves you, they’ll also determine your loan’s interest rate and repayment term—within certain boundaries set by the SBA.
SBA Loan Example
SBA loans are similar to traditional term loans, but with better interest rates and longer repayment terms. The SBA sets interest rate caps depending on the type and size of the loan. For example, you might get a 10-year $100,000 SBA 7(a) loan, which would have a maximum interest rate of 7.75% at current market rates.
Look to SBA lenders like Celtic Bank or SBA marketplaces like SmartBiz to access this type of small business funding.
Business Lines of Credit
Probably the most versatile small business funding solution available, a business line of credit gives you capital to draw upon to meet a variety of business needs.
Best For
Businesses that have unpredictable or seasonal capital needs and want the flexibility to draw business funding on an “as needed” basis.
How Business Lines of Credit Work
A business line of credit essentially acts like a credit card: You have a certain amount of capital that you can draw on whenever you need—and you’ll only pay interest on what you use. Plus, once you pay back the funds you withdrew, you’ll have access to all that cash again. That’s why lines of credit are also called rotating or revolving credit lines.
With a line of credit, you can get more working capital, buy inventory, handle seasonal cash flows, pay off other debts, or address almost any other business need. It’s also great to have a business line of credit on hand to pay for unexpected business emergencies. Business lines of credit are slightly more difficult to qualify for than a loan because they are constant sources of small business funding, but if you’re able to qualify for one, the peace of mind is more than worth it.
Business Line of Credit Example
Let’s say you’ve qualified for a $60,000 line of credit. You withdraw $40,000 of business funding for a big expense—your available credit goes down to $20,000. But once you pay off that $40,000 you took out, plus interest, your line of credit available moves back up to $60,000.
This is a pretty simple example, but it illustrates the “revolving” aspect of a business line of credit.
Business lines of credit are available to small businesses through lenders like Kabbage and Headway Capital.
Business Credit Cards
Many small business owners overlook credit cards as a way to finance their businesses, but the best business credit cards are one of the easiest and most affordable business funding solutions.
Best For
Business owners who don’t need too much business capital funding and don’t need access to cash, but want the ease of having regular access to business funding in the form of credit.
How Business Credit Cards Work
Business credit cards work just like personal credit cards, but you can only use them for business purchases. There are an additional few differences as well. They typically have higher spending limits than personal credit cards, as well as lower interest rates and better introductory offers than personal credit cards.
Although you do need good credit to qualify for the best business credit cards, there are options for business owners who are rebuilding credit as well. Even startups can qualify for business credit cards. That being said, if you need a large amount of capital (over $50K), a term loan or SBA loan will be a stronger option than a business credit card.
Business Credit Card Example
Introductory offers can go a long way to helping you save money. Some business credit cards offer 0% introductory APR for as long as 15 months after account opening—that’s like being able to borrow money for free for 15 months! After the introductory period, the APR changes to a rate that varies depending the market and your creditworthiness. The average interest rate on business credit cards is 13% to 14%.
Check out business credit cards from issuers like AMEX, Chase, and Capital One to see what they have to offer.
Equipment Financing
Applying for an equipment loan can be a quick, streamlined way to access funds to purchase computers, machinery, vehicles, or virtually any other equipment for your business.
Best For
Businesses that need small business capital funding to purchase or lease a vehicle, computer, tractor, or other specialized machinery or equipment for their business.
How Equipment Financing Works
An equipment loan is asset-based financing, which means lenders rely on the equipment to collateralize the loan.
Term loans, SBA loans, and lines of credit depend more on your credit history and business financials. However, equipment financing is more like a car loan. Since the equipment itself acts as collateral and backs up your loan, the lender is more likely to approve it even if you don’t have stellar credit or financials.
Equipment financing can be structured in one of two ways: a lease or loan. With a lease, you are not the owner of the equipment, but are instead paying to rent it. You pay monthly payments and sometimes have the option to purchase the equipment at the end of the least. Equipment loans are more like traditional term loans with a fixed repayment schedule and interest.
Equipment Financing Example
Let’s say you’re looking for business funding to purchase a vehicle that’s worth $30,000. You could get a two-year lease with a 20% interest rate and pay $1,500 per month. Alternatively, you might get a five-year equipment loan with a 10% interest rate and pay just $550 per month.
Consider applying for lenders like Balboa Capital or eLease for equipment financing to fund your business’s infrastructural needs.
Invoice Financing
If delayed payments from clients are seriously endangering your cash flow, invoice financing could be a great small business funding option to get your receivables back on track.
Best For
B2B companies that have money tied up in unpaid invoices.
How Invoice Financing Works
Also known as accounts receivables financing, invoice financing is a form of small business funding through which companies advance accounts receivable through a quick cash advance of about 85% of the value of your invoices. Later on, when your client pays the invoice, you’ll receive most of the additional 15% (minus fees). Invoice financing companies charge a small weekly percentage on the amount of your invoice.
If your business relies on customers paying their invoices, then you’ve probably encountered this problem before: A slow-paying customer could seriously endanger your cash flow. With invoice financing, you’re essentially paying a small fee to get your invoices paid immediately instead of some undetermined time down the road. Depending on how your business’s cash flow works, it might be well worth the cost.
The nice thing about invoice factoring is that the provider won’t check your credit. They care more about your customers’ repayment behaviors.
Invoice Financing Example
Let’s say you have a $5,000 invoice that’s due in 8 weeks, but you need the money now. An invoice factor will invoice you 85% of that invoice—$4,250—immediately. They might charge a fee of 1% each week that the invoice goes unpaid—that’s $50 per week in this example. If the customer pays you back after the full 8 weeks, that’s $400 in fees. You’ll pocket $4,600 of the invoice.
Look to lenders like Fundbox and BlueVine for invoice financing to fund your business.
Short-Term Loans
The more quickly you need small business funding, the more you’ll usually have to pay. And short-term loans offer up a happy medium between affordable and quick small business funding.
Best For
Those that need quick funding for small businesses and can’t wait (or aren’t able to qualify) for other types of lower-cost financing.
How Short-Term Loans Work
Short-term loans work like condensed versions of traditional term loans. You’ll receive a lump sum of business funding that you’ll pay down, plus interest, according to an agreed-upon remittance schedule. With short-term loans, though, you’ll have to pay down your debt much quicker than you would with traditional term loans—typically within a year. As a result, short-term loans will be much smaller, be much more expensive, and come with much more frequent payments than their longer-term counterparts.
That said, short-term loans will be one of the most accessible types of small business funding a business owner can get their hands on. Short-term lenders often provide same day business funding, and the qualifications you’ll need to secure a short-term loan are much less stringent.
Short-Term Loan Example
Say, for instance, you’ve taken on $100,000 of business funding in the form of a short-term loan. After you go through underwriting, the lender came back to you with an offer of a six-month repayment schedule with an interest rate of 20%. You’ll repay this loan, plus interest, with weekly repayments (though some short-term loans come with daily repayments) and you’ll be completely debt-free in six months.
Look to lenders like Quarterspot or OnDeck for small business funding in the form of short-term loans.
The common link among these products? All lenders charge some form of interest and have repayment terms. As the borrower, you are responsible for repaying the loan, plus interest on top.
These are the seven main kinds of debt financing you might consider to fund your small business:
Traditional Term Loans
A traditional term loan is the easiest type of debt financing to understand. It’s probably what you already think of when you think of a business loan, so if you’re looking for simple business funding, then this could be your best option.
Best For
Owners of mature businesses who want to borrow money for a long period of time (more than 2 years) and want a predictable monthly payment. Term loans are great for financing business expansions, working capital needs, or refinancing other debt.
How Term Loans Work
This type of small business loan is pretty straightforward: You borrow a fixed amount of money, usually for a specifically-stated business purpose, and pay back the loan over a fixed term and at a fixed interest rate.
Since these loans have low interest rates, owners need to have strong credit to qualify, and their businesses should be financially strong.
Term Loan Example
Say you need $25,000 worth of small business funding to purchase some new equipment for your business. Maybe it’s a few new computers, an vehicle, or an updated piece of machinery.
Whatever it is you’re buying, you’ve done the research—and you know you’ll be able to pay back a loan, plus interest, with the extra revenue your purchase will bring to your business.
You’ve managed to qualify for a $25,000 loan at a 12% interest rate, lasting 5 years. Nice job!
Because your repayment is slightly on the longer side—some loans can get repaid within a year, while others can take 10 years—you can expect a monthly repayment schedule. And for $25,000 at 12% interest over 60 months, you’re looking at monthly payments of $556. With a traditional amortizing loan, the initial several payments will go primarily towards interest, and successive payments will primarily pay down principal.
To access a term loan, we’d suggest you either apply for funding from your bank or look to online lenders like Fundation or Funding Circle.
SBA Loans
The Small Business Administration (SBA) helps entrepreneurs get long-term, low-cost business loans that are often the most desirable types of business funding for business owners. The SBA is a federal agency dedicated to helping entrepreneurs improve their businesses, take advantage of contracting opportunities, and access affordable small business funding.
The SBA itself doesn’t directly loan money to businesses, the agency incentivizes lenders to approve small businesses for borrowing by guaranteeing all or part of their loans. For lenders, that means lower risk, higher reward.
Best For
Borrowers with strong credit who are looking for funding for a small business in the form of long-term loans, low-interest loans.
How SBA Loans Work
There are three main SBA loan programs that help a wide variety of small businesses get debt financing: the 7(a) Loan Program, microloans, and 504/CDC loans.
The 7(a) loan program is the most common out of the SBA’s various programs for one simple reason: It’s the most flexible SBA loan available. Through this program, borrowers can access up to $5 million in small business funding for working capital, equipment purchases, real estate buys, basic startup costs, or even debt refinancing.
Microloans are just what they sound like—loans under $50,000 for business owners who need just a little bit of business funding to take the next major step in their business. Entrepreneurs struggle with getting access to smaller loans from banks because these loan sizes just aren’t profitable for banks, so SBA Microloans fill this need.
The third type of SBA loan is the 504/CDC loan for financing the purchase of real estate or other major fixed assets—like large equipment, land improvements, or the purchase of improvement of an existing building.
Remember, for all these loans, individual, SBA-approved lenders and banks will determine your eligibility. Generally speaking, you should have good credit, and your company should be profitable or have a compelling business plan with positive projections. If the lender approves you, they’ll also determine your loan’s interest rate and repayment term—within certain boundaries set by the SBA.
SBA Loan Example
SBA loans are similar to traditional term loans, but with better interest rates and longer repayment terms. The SBA sets interest rate caps depending on the type and size of the loan. For example, you might get a 10-year $100,000 SBA 7(a) loan, which would have a maximum interest rate of 7.75% at current market rates.
Look to SBA lenders like Celtic Bank or SBA marketplaces like SmartBiz to access this type of small business funding.
Business Lines of Credit
Probably the most versatile small business funding solution available, a business line of credit gives you capital to draw upon to meet a variety of business needs.
Best For
Businesses that have unpredictable or seasonal capital needs and want the flexibility to draw business funding on an “as needed” basis.
How Business Lines of Credit Work
A business line of credit essentially acts like a credit card: You have a certain amount of capital that you can draw on whenever you need—and you’ll only pay interest on what you use. Plus, once you pay back the funds you withdrew, you’ll have access to all that cash again. That’s why lines of credit are also called rotating or revolving credit lines.
With a line of credit, you can get more working capital, buy inventory, handle seasonal cash flows, pay off other debts, or address almost any other business need. It’s also great to have a business line of credit on hand to pay for unexpected business emergencies. Business lines of credit are slightly more difficult to qualify for than a loan because they are constant sources of small business funding, but if you’re able to qualify for one, the peace of mind is more than worth it.
Business Line of Credit Example
Let’s say you’ve qualified for a $60,000 line of credit. You withdraw $40,000 of business funding for a big expense—your available credit goes down to $20,000. But once you pay off that $40,000 you took out, plus interest, your line of credit available moves back up to $60,000.
This is a pretty simple example, but it illustrates the “revolving” aspect of a business line of credit.
Business lines of credit are available to small businesses through lenders like Kabbage and Headway Capital.
Business Credit Cards
Many small business owners overlook credit cards as a way to finance their businesses, but the best business credit cards are one of the easiest and most affordable business funding solutions.
Best For
Business owners who don’t need too much business capital funding and don’t need access to cash, but want the ease of having regular access to business funding in the form of credit.
How Business Credit Cards Work
Business credit cards work just like personal credit cards, but you can only use them for business purchases. There are an additional few differences as well. They typically have higher spending limits than personal credit cards, as well as lower interest rates and better introductory offers than personal credit cards.
Although you do need good credit to qualify for the best business credit cards, there are options for business owners who are rebuilding credit as well. Even startups can qualify for business credit cards. That being said, if you need a large amount of capital (over $50K), a term loan or SBA loan will be a stronger option than a business credit card.
Business Credit Card Example
Introductory offers can go a long way to helping you save money. Some business credit cards offer 0% introductory APR for as long as 15 months after account opening—that’s like being able to borrow money for free for 15 months! After the introductory period, the APR changes to a rate that varies depending the market and your creditworthiness. The average interest rate on business credit cards is 13% to 14%.
Check out business credit cards from issuers like AMEX, Chase, and Capital One to see what they have to offer.
Equipment Financing
Applying for an equipment loan can be a quick, streamlined way to access funds to purchase computers, machinery, vehicles, or virtually any other equipment for your business.
Best For
Businesses that need small business capital funding to purchase or lease a vehicle, computer, tractor, or other specialized machinery or equipment for their business.
How Equipment Financing Works
An equipment loan is asset-based financing, which means lenders rely on the equipment to collateralize the loan.
Term loans, SBA loans, and lines of credit depend more on your credit history and business financials. However, equipment financing is more like a car loan. Since the equipment itself acts as collateral and backs up your loan, the lender is more likely to approve it even if you don’t have stellar credit or financials.
Equipment financing can be structured in one of two ways: a lease or loan. With a lease, you are not the owner of the equipment, but are instead paying to rent it. You pay monthly payments and sometimes have the option to purchase the equipment at the end of the least. Equipment loans are more like traditional term loans with a fixed repayment schedule and interest.
Equipment Financing Example
Let’s say you’re looking for business funding to purchase a vehicle that’s worth $30,000. You could get a two-year lease with a 20% interest rate and pay $1,500 per month. Alternatively, you might get a five-year equipment loan with a 10% interest rate and pay just $550 per month.
Consider applying for lenders like Balboa Capital or eLease for equipment financing to fund your business’s infrastructural needs.
Invoice Financing
If delayed payments from clients are seriously endangering your cash flow, invoice financing could be a great small business funding option to get your receivables back on track.
Best For
B2B companies that have money tied up in unpaid invoices.
How Invoice Financing Works
Also known as accounts receivables financing, invoice financing is a form of small business funding through which companies advance accounts receivable through a quick cash advance of about 85% of the value of your invoices. Later on, when your client pays the invoice, you’ll receive most of the additional 15% (minus fees). Invoice financing companies charge a small weekly percentage on the amount of your invoice.
If your business relies on customers paying their invoices, then you’ve probably encountered this problem before: A slow-paying customer could seriously endanger your cash flow. With invoice financing, you’re essentially paying a small fee to get your invoices paid immediately instead of some undetermined time down the road. Depending on how your business’s cash flow works, it might be well worth the cost.
The nice thing about invoice factoring is that the provider won’t check your credit. They care more about your customers’ repayment behaviors.
Invoice Financing Example
Let’s say you have a $5,000 invoice that’s due in 8 weeks, but you need the money now. An invoice factor will invoice you 85% of that invoice—$4,250—immediately. They might charge a fee of 1% each week that the invoice goes unpaid—that’s $50 per week in this example. If the customer pays you back after the full 8 weeks, that’s $400 in fees. You’ll pocket $4,600 of the invoice.
Look to lenders like Fundbox and BlueVine for invoice financing to fund your business.
Short-Term Loans
The more quickly you need small business funding, the more you’ll usually have to pay. And short-term loans offer up a happy medium between affordable and quick small business funding.
Best For
Those that need quick funding for small businesses and can’t wait (or aren’t able to qualify) for other types of lower-cost financing.
How Short-Term Loans Work
Short-term loans work like condensed versions of traditional term loans. You’ll receive a lump sum of business funding that you’ll pay down, plus interest, according to an agreed-upon remittance schedule. With short-term loans, though, you’ll have to pay down your debt much quicker than you would with traditional term loans—typically within a year. As a result, short-term loans will be much smaller, be much more expensive, and come with much more frequent payments than their longer-term counterparts.
That said, short-term loans will be one of the most accessible types of small business funding a business owner can get their hands on. Short-term lenders often provide same day business funding, and the qualifications you’ll need to secure a short-term loan are much less stringent.
Short-Term Loan Example
Say, for instance, you’ve taken on $100,000 of business funding in the form of a short-term loan. After you go through underwriting, the lender came back to you with an offer of a six-month repayment schedule with an interest rate of 20%. You’ll repay this loan, plus interest, with weekly repayments (though some short-term loans come with daily repayments) and you’ll be completely debt-free in six months.
Look to lenders like Quarterspot or OnDeck for small business funding in the form of short-term loans.
0 Komentar The Top 7 Debt Financing Small Business Funding Solutions
Post a Comment