Growing Your Business through Small Business Loans
There are many reasons that a small business would want to obtain instant funds at the cost of higher interest rate. When an opportunity presents itself, an astute business owner will not allow lack of funds to stand in the way of a good deal. That’s where small business loans come in handy.
Small business financing is not just for short term use or quick requirements. It can be used for long term purposes like starting a new venture or operations, buying into an existing business, or funding present or future projects.
Traditional and alternative sources of financing are widely available for business owners who plan to expand their business, perform major overhaul, or simply get the business past the tough start up year. Choosing the best resource for small business loans can be very challenging, and there are no hard-and-fast rules for deciding on the type of financing that will work best for a business or for a current loan requirement.
Different small business loans
Traditional small business loans are those provided by banks and government institutions.
Banks usually offer the lowest interest rates among lenders, and they are the most credible lenders. In particular, credit unions and community banks offer the sweetest terms as they try to outdo one another to win a client over. The only drawback is the bank’s stringent criteria in granting small business loans. It can be extremely difficult for small businesses to qualify for a bank loan when it is on the lower end of financial spectrum, which is why it is looking for financing in the first place.
Patience and tenacity are virtues that you should possess in looking for a bank that will grant a loan to your business. Theoretically, banks are not really into financing small business needs, or those whose loan requirements are under $200,000, and business owners may best be looking at alternative sources if they need funds faster.
The Small Business Administration (SBA) offers low interest financing to small business owners with or without adequate credit record. The downsides include the rigorous paperwork and the long waiting time for the loans to be processed. SBA loans are normally long-term, and are not recommended for financing quick projects or requirements that will only last for a few years or months.
When used properly, personal credit cards offer cost-effective ways to fund small business operations. Personal credit cards have lower interest rates and fees than merchant lending facilities, and offer better protection than corporate credit cards. When using personal credit cards for business transactions, business owners must be careful about the paper trail for every usage. All purchases using the card should be properly accounted for as business expense.
While the financial crisis have limited the traditional types of financing for small businesses, alternative financing have surfaced to provide broader funding options.
Commercial or merchant lenders provide alternative small business loans to business owners who need faster access to funds. The relative ease by which a business may obtain financing from these alternative lenders comes at a hefty price tag in the form of higher interest rates. Some micro lending non-profit organizations offer more affordable interest to small business owners.
Business owners should look carefully into the terms and conditions of loan contract being proffered by commercial lenders before deciding on a loan agreement. The Annual Percentage of Return (APR) can be used in making a side-by-side comparison of loan offers.
Alternative lenders charge higher fees over banks because they are using money borrowed from banks and are, in essence, acting as intermediary between the bank and the borrower. They are also taking the risk in case of default by virtue of the guarantee that they have issued for the amount loaned.
Alternative financing sources
Alternative financing sources can be very useful for other business purposes that may suddenly come up such as buying out a partner to gain full control of the business, moving to a new and better location, and buying inventory or raw materials at unbelievably marked down prices.
It can be used in adverse situations like forced operational shutdown due to bad weather conditions or other natural calamities, unexpected events like major equipment bogging down, or extreme economic upheavals.
Business owners may also tap personal sources like standby funds or assets that are invested somewhere and are generating very low returns. Loans from family and friends typically have flexible arrangements, but may not be what the small business owners have in mind. The awkwardness in transacting among relatives or friends has given rise to alternative loan platforms like Trustleaf where a business owner can borrow from relatives without having to ask personally.
Alternative financing offers flexibility and some degree of creativity in repayment terms. You can align payment schedule with your operating cycle or arrange for convenient daily remittance to spread the monthly payment.
Advice for business owners
A business owner should always put financing in proper perspective. A loan taken to finance expansion has potential long term benefits to business and may be considered a wise investment. The same goes for loans taken out to start a new and promising business venture. These are capital expenditures that have future value for the business.
Recurring loans to cover overhead and operating expenses can be signs that the business is failing. The business owner should think through his options and decide whether it’s time to cut his losses.
In general, small business loans are essential tools that can be used to grow a business or get it through temporary financial setbacks.