All businesses need loans. When it comes to buying new equipment, improving services, or innovating new products, proper financing is the key to unlocking increased profits.
Fortunately, small businesses looking for a quick capital injection can access a wide range of financing options. On the flip side, this problem of plenty can be overwhelming for entrepreneurs who set out to identify and secure favorable loans.
Those who make smart decisions benefit from lower interest rates, quick access to working capital, and improved credit scores. Those who don’t do their due diligence are left with high costs.
How do you become one of the former?
Let’s take a closer look.
Understanding Your Business Needs
No two businesses are alike — neither in scope nor in requirements. So, it makes sense to take various factors into account when assessing the different types of loans.
Financial Health and Business Goals
Every business owner must have a general understanding of the company’s finances — how much money is in the bank, and how much is being spent.
But to secure favorable loans, you need to dig deeper. Business owners must study their company’s historical financial data, analyze operations based on key performance indicators, and draft accurate cash flow projections.
Simultaneously, it’s crucial to assess how the funds will help achieve business goals.
For instance, will it help support expansion by enabling the purchase of new equipment or enterprise resource planning systems? Or will it help bridge a crucial working capital gap?
Answering these questions will help compare the various commercial loans for small businesses.
How Financial Projections Influence Loan Selection
Similarly, future financial projections play a big part in helping secure favorable business loans. In this case, it’s crucial to conduct comprehensive analyses of income statements, balance sheets, and cash flow statements to create accurate financial projections. This information will help you evaluate the funds you need and quantify how much the loan will help increase revenue over time.
Overview of Different Types of Business Loans
Businesses have access to various types of financing, each with its own pros and cons.
Term Loans
Term loans are disbursed as lump sums of cash, and repaid over a fixed duration. They can be provided by a bank, a credit union, or an online lender.
One of the biggest benefits of a term loan is that it is relatively inexpensive. On the other hand, it is harder to qualify for, especially when going through a bank or credit union. Usually, to earn favorable rates, businesses need strong financial statements and credit scores. That said, online vendors are more lenient with their requirements.
Short term business loans are often used to fund one-time projects or to fill working capital and cash flow gaps. Long term loans, on the other hand, support business expansion, whether through upgraded equipment, new staff, or increased office space.
Small Business Financing Loan
This government-sponsored program offers businesses in Canada financing of up to $1 million. The funds can be used to purchase land, improve buildings and infrastructure, or access new equipment. Up to $150,000 line of credit can also be used to fund intangible assets and cover day-to-day expenses.
Much like Small Business Administration loans in the U.S., CSBFL loans are provided by private lenders but guaranteed by the government up to 85%. These loans are known for lower rates and flexible repayment options. They are available to all small businesses and startups with annual revenues of $10 million or less, barring farming businesses.
However, to be eligible, business owners must have solid financials and may be expected to put up collateral of up to 25% of the loan amount. They must also submit an extensive proposal detailing what they plan to do with the funds and how they plan to repay.
Business Line of Credit
A business line of credit, like a credit card, allows businesses to draw as much as they need from a fixed credit line. Businesses can draw and repay as many times as they see fit, and interest is only charged on the money drawn. There is also a small fee.
This is an especially useful type of loan for businesses looking to increase marketing budgets, expand to new locations, or upgrade equipment. However, the biggest beneficiaries are seasonal businesses, as it allows them to purchase inventory in bulk, stabilize cash flow during slowdowns, and manage budgets throughout the year.
With that said, there are some limitations to revolving credit. For starters, it may require extensive documentation and — depending on your risk assessment— have higher than average factor rates. Moreover, easy access to credit may tempt businesses to overspend.
Merchant Cash Advance
A popular option for businesses seeking fast funding, merchant cash advances have proven to be critical for organizations with bad credit scores that process a large number of credit and debit card transactions.
MCA providers offer cash in exchange for a percentage of future revenue, with the funds offered determined by the lender based on daily credit card sales. Alternatively, payments can be made daily, weekly, or monthly from a checking account.
There are some risks associated with MCAs. Depending on the provider, the factor rate may be higher than the average interest rate of a term loan. Furthermore, the frequency of payments may also place some strain on a business’s cash flow.
But, for those looking for almost immediate access to cash, fewer restrictions on how they can use the funds, and have low credit scores — these loans are necessary.
Invoice Factoring
Some businesses can trade unpaid invoices to a provider in exchange for 70-90% of their value. The factoring company then takes the client payments directly, charges a small fee, and returns the remainder with
This is called invoice factoring and is one of the easiest ways to access fast funds. This form of financing can be used to maintain working capital, cover payroll or inventory expenses, or even reduce the burden of having to collect unpaid invoices.
While it is one of the most convenient financing options, businesses should account for the costs. Fees are typically between 1-5% of the invoice’s total for every 30 days that the invoice remains unpaid. As a result, it’s best suited for businesses with reliable clients.
Factors Impacting Choice of Business Financing Options
With so many types of financing to choose between and factors to weigh, it can be tricky for businesses to know exactly how to secure funding that works for them. Here’s how to get a small business loan with favorable rates.
Compare Interest Rates and Terms
Loan terms can be drastically different — not just for the various types of commercial loans, but also for various providers. When making a decision, compare interest rates, study the expected repayment schedules, and consider all fees to arrive at an annual percentage rate. Study your finances to ensure that you can make payments on time.
Account for Credit History
It’s no surprise that a good credit history unlocks favorable loan terms and opens you up to more options. But, even businesses with low credit scores have access to several types of loans that allow them to access funds within a day. These alternative commercial loans products are crucial in helping small businesses grow.
Lender’s Reputation
Another crucial factor to evaluate when you compare business loans is the vendor’s past customer experiences. Loan providers must be known to operate with transparency, communicate terms clearly, and have efficient customer service to boot. Look out for hidden charges in the fine print when you apply for a small business loan.
Speed of Funding
For many businesses, especially seasonal operations, getting access to quick working capital could be more crucial than securing a more favorable loan after a drawn-out application process. With the right provider, lines of credit, merchant cash advances, and invoice factoring payouts can be processed in as little as 24 hours.
How to Prepare Business Loan Applications
Regardless of the business financing option in question, there are certain documents and records that all businesses should keep ready to cover their bases and ensure that the application goes as smoothly as possible. This crucial paperwork includes the following:
- Financial statements
- Tax returns
- Budgets
- Business plans
- Legal documents (such as a business license)
Some of the most common mistakes businesses make when applying for financing include failing to account for potential delays, not having all necessary documentation in order, and insufficient research on the vendor’s reputation.
The Bottom Line
Favorable business loans can go a long way in helping small businesses soar to new heights. But that doesn’t make them easy to attain. In order to make the most of the options, entrepreneurs should carefully consider their financial status, compare the various types of business loans, and maintain appropriate documentation.
For any additional assistance, don’t hesitate to consult with a financial advisor — a single good decision can have a massive impact on your bottom line, after all.
Sources
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