Small Business Loans Continued
It is important to know just how special your business is, not just to you, but the country. It seems a little odd that one small business could affect a community and a nation. Sure, one business might not make an impact, but a collection of business can! In fact, small businesses added 14 million new jobs in 2014, and still has a lasting effect on the national employment rate. From 2009 to 2013, 60 percent of jobs were created by small businesses.
Bottom line, businesses are important for the economy and the employment of the United States. The US is a big proponent of this type of commerce, despite the large corporate institutions that we continually support. It might be difficult to believe, but almost all business conducted in America is by small businesses. Recently, there is a trend moving forward supporting local businesses. By buying locally from “mom and pop shops” customers will be able to support their communities and support their fellow neighbors. Many people who own small businesses are dependent on their profits to continue their business, as well as supporting themselves. Because the small business market is so large (99.7 percent of all businesses in America are small businesses), competition is at an all time high. Due to the growing innovations of online shopping, small businesses aren’t just competing between other local businesses, they could be up against any small business in the world!
The expanse of the digital world has both helped and hindered small businesses. For one, a large client base means that owners have more opportunities to sell their products. However, this added competition means that small businesses have to work twice as hard to make a sale. Larger businesses can rely on large sums of revenue from donors, but small business owners are commonly from middle-class families. So, what are you to do if you want to start a business and need cash? You get a loan!
Loans are beautiful things because they allow owners to boost their “baby businesses” so that they can begin production. Small business loans are also useful for matured businesses that need extra money to maintain a healthy cash flow.
Borrow and Pay Back Tomorrow = Better Businesses
Loans for small businesses use a continual cycle: you are approved for a loan, you use the loan, then you must pay back the loan. This borrowing can be immensely important for a business, especially if money is running dry in the till. A loan can be the difference between keeping a business or closing your doors. The best part about loans is that you have a choice on how fast you pay back your loan. For instance, you can choose two, four, or even six-year plans to pay back your loan. Also, the amount of time you need to pay back the bank or firm is contingent on the sum that you borrow. For instance, there are several different types of loans that are available to banks. Yes, that’s right. Loans can range based on what your need them for.
Types of Loans
Just as there are different types of people and businesses, there are alternative forms of small business loans. Ultimately, what type of business you own will determine the best business loans you should take out.
Term Loans
Term loans are issued as a lump sum that can be repaid over a fixed period of time. For example, if you are opening a skateboard shop, you will get the full amount of your loan all at once. Hypothetically, let’s say you ask for $20,000. Before you are able to receive your money, your lender will discuss your payment plan. In the payment plan, the lender will go over how much money you must pay monthly in order to pay off your loan.
SBA
Small Business Loans (SBA) are loans backed by the U.S Small Business Administration. Today, there are nearly 28.8 million small businesses supported under this particular institution. What is particularly enticing about these types of loans is that they typically incorporate low interest rates. Because of this, many small business flock to apply for this type of loan every day.
Line of Credit
A “line of credit” loan is the same thing as an asset-based loan. It is a loan that uses flexible cash and is typically utilized for short-term expenses. In a business example, this type of loan would be used if your business is going through a rough patch and needs a little “TLC.” In asset-based financing you will need to post up enough collateral to cover your loan. Lenders will not give you a loan if the loan-to-value ratio is not balanced. This ratio is used to make sure that the institution you are borrowing money from is getting their fair share of money back from you. Also, some lenders might deny you a loan if your income-to-debt ratio is not balanced. This means that you must first make enough money to receive a loan, especially if you business is not making enough revenue.
Business Credit Card
If you are used to using a credit card, you will be able to use a business credit card with ease. A business card uses the same principles as a regular credit card; you spend money on it, and then you are responsible to pay back whatever sum you owe by the end of the month. Another reason why business credit cards are beneficial is because they are small, compact, and easily monitorable. With a credit card, you will be able to track where your money is being spent and control where you spend.
Personal Loan
A personal loan is reserved for start-up businesses or “baby businesses.” It is rare that a business can start without any extra cash being pumped into the business. Personal loans are particularly useful for buying up materials for your products. A major drawback with this type of loan is that they are pricey, and require more collateral than most loans.
Merchant Cash Advance
Merchant cash advances are an excellent source of money, as you’re given an advance on your credit and debit card sales. This means that when a customers pays with a debit or credit card, a small sum of taxed money is given back to your business from your customer.
Microloan
Microloans are small sums of loanable income that are given to businesses. Often, microlenders are nonprofits that typically lend very small loans (up to $35,000). Though this may seem like a large sum of money, in business, this is a microscopic amount. Annual percentage rates (APR) are much higher than with regular bank loans. With receiving a loan of this size, lenders may need convincing to give you the money. Because of this, you will need to fully prepare for the application with a solid business plan.
Steps of a Loan
In the first part of this series, we discussed the stages of applying for a loan. Specifically, we have discussed what you would have to do in order to gain a sizeable loan. Using the following steps you will be able to ready yourself for meeting with your lender:
- Self-Preparation
- Lender-Preparation
- Loan-Preparation
Through all of these stages you will be able to give your lender the information they need to determine if your business is worth the risk of a loan. Even in asset-based financing, businesses are a risk. If you default on payments, it is up to the firm to seize your assets — which takes time, money, and damages a reputation.
The first thing you will want to do upon meeting with your lender is set up an Executive Summary. In simple terms, this summary is a fast pitch of what you wish to accomplish with your business and a loan (if you receive one). Your answer should be precise, and involve hard numbers and statistics. Lenders respond well to someone who has their business information put together. If you are curious about what having your “business information put together” means, visit our other blogs on the subject. Hopefully, they will be able to let you know exactly what you should prepare for.
The Commercial Financial Group
At Commercial Financial Group, we are here to help your business thrive. If you are interested in joining the other 250,000 businesses in the Los Angeles area, contact us today. We will be able to give you a competitive edge and allow your business to grow. Entrust a lender who cares as much for your business, as you do. Contact us!
