If you aren’t leveraging small business loans to build and grow your business you can bet that your competitors are – and they are going to skyrocket right past you while doing so.
Thankfully, there are more small business loans and small business lending opportunities available today than ever before as well.
Traditional lenders (legacy institutions like banks, credit unions, and the Small Business Administration) as well as nontraditional lending approaches provide entrepreneurs today almost unlimited access to the cash and capital they need when they need it most.
Finding the right small business loans for your specific needs, however, can prove to be a bit of a challenge. With so many different options to pick and choose from settling on the perfect one for your needs can be a bit of an uphill battle at first.
This quick guide aims to clear some of those challenges away.
Financing Your Business – The Basics of Small Business Loans
According to the Small Business Administration (SBA), the second biggest reason that businesses fail in America today – the reason behind 30% of ALL businesses failing in the US – is because the owner or owners are no longer able to come up with money to keep that business afloat.
Think about that for a minute.
Three out of every ten businesses are going to go belly up eventually because they flat out run out of money.
On top of that, 45% of all business owners in the United States do not know that they have a “business credit score”. Worse, 82% of the entrepreneurs that understand they have a business credit score have a tough time interpreting or leveraging that score – and that means that they aren’t making the most of the financing options they have available.
Combine all this with the fact that 60% of all small business owners in the US self-report that they aren’t knowledgeable in accounting or finance and you’re dealing with a perfect storm of nightmare conditions that set entrepreneurs up for failure more often than not.
Thankfully, small business loans today are more accessible and a lot easier to understand than ever before. The credit crunch of The Great Recession in the middle 2000s has finally started to pass by, and traditional lenders are starting to get back in the game (26.9% of all small business loans are approved by institutional/big bank style lenders) alongside nontraditional lenders.
Finding the right loans remains critical, though.
Financing Your Business by Taking on Debt
Financing your business by agreeing to take on debt is the simplest and most straightforward of all the difference small business loan types you might choose to take advantage of. We break down some of the more popular types of these loans below.
At the end of the day, all of the loan types that we break down below can be distilled down to borrowing money from a lender and then paying it back – plus interest – later down the line.
Term Loans
Perhaps the most ancient of all the small business loans, the basic gist here is that you are approved for a lump sum amount of money and are then given a specific amount of time to repay back that lump sum (plus interest). Traditional lenders as well as nontraditional lenders offer term loans.
SBA Loans
The US Small Business Administration isn’t “technically” a lending institution but it certainly helps you gain access to funding you wouldn’t have been able to leverage before.
The SBA guarantees a significant portion of these types of loans that you get from a traditional lender, promising the lender that they will repay most if not all of the loan you have been approved even if you (for any reason at all) default.
These kinds of loans are obviously in demand and approval can be challenging, but if you get an SBA loan the leverage you have is fantastic.
Business Line of Credit
Think of this like an “credit card” for your business, just in the form of a lending package from a traditional or nontraditional lender. You might be given a line of credit (LOC) from a lender for $250,000, but if you only draw $50,000 from that line of credit that’s all that you will have to repay back – and that’s all that you will be paying interest on.
These kinds of loans are fantastic for those that want to keep cash flow rolling, especially in unpredictable industries or businesses where seasonality can really hurt cash flow consistency.
Equipment Financing
This form of debt focused small business loan essentially puts up the equipment that you own as collateral, guaranteeing your loan and opening up financing packages that might not have been available for. It introduces a lot of extra flexibility to your funding resources, too.
Invoice Financing
With this approach, you basically “selloff” your outstanding invoices and your accounts receivable and in return receive a cash advance valued at (usually) 85% of that total value – a cash advance you receive upfront rather than having to wait for your customers to pay you when they get around to it.
After the invoices have been paid (directly to those that you sold your invoices to) you receive the remaining 15% of the total value, less the fees charged for this financing package.
Financing Your Business More Creatively
It wasn’t all that long ago that small business loan opportunities were quite limited to what the traditional big banks, local banks, and credit unions were willing to offer.
Sure, you could go with outside investment and give up some equity or work with really fringe lenders that may or may not have been legitimate – but for the most part up small business owners have always felt that their options were limited when it came to securing financing.
Today, however, nothing good be further from the truth.
Traditional and nontraditional lenders are more available right now than ever before, are offering more cash and capital than ever before, and are working with entrepreneurs that probably wouldn’t have ever been able to get credit or small business loans in the past more frequently than ever before.
It’s an exciting time to be an entrepreneur.
The internet and modern technology have leveled the playing fields completely, giving everyone a chance to build a truly global business, and the financing options that small business owners have a chance to take advantage of today are helping make these entrepreneurial dreams come true!
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