Did you know that a staggering 82% of business failures occur due to poor cash flow management? Whether you’re just brainstorming your entrepreneurial dreams or you’re drafting our your business plan, you might be asking yourself, “how do small business loans work?”
As a business owner, it’s critical that you thoroughly understand your funding options. Let’s get into what you need to know.
Term Loans
Term loans are the conventional business loan that many people pursue first when trying to fund their business.
When you qualify for this kind of loan, you receive a specific sum of money with an agreement that you will pay it off in a particular amount of time.
Term loans often provide large loan amounts. It’s not unheard of to receive anywhere from $50,000 to upwards to $500,000 depending on your business needs. Repayment lengths tend to range anywhere from 1 to 5 years.
If you’re going through a traditional bank or credit union, it’s imperative that you have the highest credit score possible. Your score can impact everything from loan approval to interest rates.
Short-Term Loans
Short-term loans are similar to the conventional term loan, but you’ll pay off your amount faster. For this reason, they typically have much higher interest rates.
With that said, they’re designed to be easier (and faster) to pay off. You may make daily or weekly payments.
Loan amounts range from about $2,000 to $250,000 with repayment term lengths ranging from about 3-18 months. The interest rates start at about 10%, although they can go much higher.
Business Credit Cards
Business credit cards work very similarly to personal credit cards. You apply for a line of qualified credit, and you repay what you end up spending.
Business lines of credit can dramatically range in size. Some cards start at $10,000 for a line of credit, whereas others have an unlimited line (known as charge cards). Repayment lengths last anywhere from 6 months to 5 years, although interest rates can go up to 25%.
Business credit cards can simplify your business’s operating costs. Since it’s essential that you separate your business and personal expenses, having this available line of credit makes it easy.
Furthermore, many business cards come with lucrative incentives. This includes air miles, hotel nights, or cash back in addition to extended warranties and price protection.
Equipment Loans
Whether you need heavy machinery, a company vehicle, or specific equipment, these kinds of loans make it affordable to finance the tangible items your business needs.
Equipment loans provide equipment financing. Rather than paying for the product in full, you’ll make monthly payments with a fixed amount of interest.
This makes for a more manageable cash flow, especially if you need the items before opening your business.
The average length of a lone typically varies anywhere between 2-7 years. You can acquire any amount from $10,000 to $500,000 depending on your business’s needs, and you’ll likely need to put down between a 5-20% down payment. Depending on your credit score and other related factors, you should expect to pay between a 5-10% interest rate.
Equipment loans don’t require tremendous paperwork or background checks. In fact, they require far less documentation than other forms of loans, and the processing time tends to be quick (less than a week).
If you plan to keep the equipment long-term or intend to make a return on your investment, using an equipment loan tends to be more advantageous than leasing the products.
To apply for an equipment loan, you’ll need to provide standard business and personal information, any related invoices for the equipment, and at least 3 months worth of business bank statements.
Crowdfunding
Crowdfunding is a fairly new concept, but it’s one that’s garnered significant attention over the recent years. That’s because crowdfunding can appeal both to business owners and potential investors.
If you go this route, you’ll be responsible for creating an enticing campaign designed to generate income. In other words, you’re trying to sell strangers your useful idea in the hopes that they will help invest in it.
Crowdfunding works on various online platforms, such as Kickstarter, Crowdrise, and Indiegogo. Competition on these sites can be fierce, so it’s essential that you have a rock-solid business plan before diving in.
There are a variety of different types of crowdfunding options including:
- investment-based crowdfunding (investing in shares)
- donation-based crowdfunding (may be offered an incentive in return)
- loan-based crowdfunding (known as peer-to-peer business lending)
- reward-based crowdfunding (invest for a reward linked to the project)
- Crowdfunding creates a universal playing field where virtually anyone can act as an angel investor if they believe in a specific idea.
Microloans
Microloans are just like traditional loans, except they are, well, smaller (hence the name). The average amount for this kind of loan ranges between $500 and $50,000 depending on the institution.
Microloans assist budding entrepreneurs launch and expand their small business ideas. The intent is to build and strengthen local communities by supporting families and stimulating job growth. For this reason, most organizations require a set of guidelines when applying for these loans.
The Small Business Association (SBA) is one of the largest microloan providers in the US. They currently specialize in providing funds for nonprofit companies as well as some disadvantaged communities.
Many microloan companies cater to individuals who cannot or do not conventionally qualify for a traditional loan.
Final Thoughts–How Do Small Business Loans Work?
There’s no doubt that funding your business can feel stressful and overwhelming. If you’re still asking, “how do small business loans work?”, keep doing the research to understand your options and weigh the pros and cons.
Interested in learning more about optimizing your business, improving your cash flow, and retaining customer loyalty? We have you covered! Be sure to check out our business blog today.