How to Choose Business Financing
Compare loans with other types of financing., Get a line of credit from a bank., Obtain a business loan from a bank., Apply for a commercial loan., Request a Small Business Association (SBA) loan., Work with state and local economic development...
Step-by-Step Guide
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Step 1: Compare loans with other types of financing.
Loans are a type of debt financing.
This means that you have to pay the money back, plus interest.
Loans are typically offered by banks, credit unions or other financial institutions.
Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.Lenders are sometimes hesitant to give loans to companies without a lot of equity capital.
Without equity capital, businesses don’t have much collateral to put up for a loan.
Also, revenues earned by the business will go toward repaying the debt instead of growing the business. -
Step 2: Get a line of credit from a bank.
A line of credit is different from a typical loan in that it doesn’t give you a lump sum of cash.
Rather, like a credit card, you withdraw from the available credit any time you need it.
You only withdraw as much as you need.
This gives you control over the amount of interest expense you will have to pay.
A line of credit can help you control your cash flow as your expenses or income ebb and flow.To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit. , A business loan is like any other kind of term loan.
Business loans come with fixed interest rates.
You make monthly payments over a period of years until the loan is paid off.
Unlike a line of credit, a term loan gives you a lump sum of cash up front.
Businesses who are expanding their space or funding other large investments can benefit from a term business loan.Before making a loan, lenders want to know what the loan is for and how you will spend the money.
Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents.
In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses.
They don’t want to do all of the work to underwrite a small loan that won’t make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses. , A commercial loan is similar to a home equity loan.
It is for businesses that own commercial real estate.
You borrow against the equity you have in the commercial real estate you own.
The amount you can borrow depends on the value of your property and how much equity you have.Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky.
Therefore, they tend to charge higher interest rates for them.
Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan., These loans are given by participating banks and are guaranteed by the SBA.
They are for businesses that might have trouble getting a traditional bank loan.
The SBA guarantees a portion of your loan to repay if you default on your payments.
Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100.
Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S.
Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA). , Economic development agencies exist in every state and in some local municipalities.
They provide low-interest loans to businesses that might not qualify for traditional bank loans.
In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance.
You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies.
You can also contact your city or county government office to find out about their economic development programs.Each agency has its own application process.
However many require the same basic documentation.
Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan.
For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements.
You may also be asked to submit projected financial statements.
Be able to demonstrate your business’ current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases. , Online lending services include Kabbage and OnDeck.
These loans are for businesses who want small, short-term loans.
Businesses turn to these lenders to handle short-term cash flow shortfalls.
The application process is quick, and most applicants can complete the application in an hour.
If approved, you get the money within days.Be aware that you will pay for the convenience of the fast processing time.
These loans are expensive.
A typical loan from an online source costs about the same as taking a cash advance from your credit card.
The average interest rate on one of these loans can be as much as twice that of a traditional bank loan. -
Step 3: Obtain a business loan from a bank.
-
Step 4: Apply for a commercial loan.
-
Step 5: Request a Small Business Association (SBA) loan.
-
Step 6: Work with state and local economic development agencies.
-
Step 7: Consider online lending.
Detailed Guide
Loans are a type of debt financing.
This means that you have to pay the money back, plus interest.
Loans are typically offered by banks, credit unions or other financial institutions.
Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.Lenders are sometimes hesitant to give loans to companies without a lot of equity capital.
Without equity capital, businesses don’t have much collateral to put up for a loan.
Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
A line of credit is different from a typical loan in that it doesn’t give you a lump sum of cash.
Rather, like a credit card, you withdraw from the available credit any time you need it.
You only withdraw as much as you need.
This gives you control over the amount of interest expense you will have to pay.
A line of credit can help you control your cash flow as your expenses or income ebb and flow.To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit. , A business loan is like any other kind of term loan.
Business loans come with fixed interest rates.
You make monthly payments over a period of years until the loan is paid off.
Unlike a line of credit, a term loan gives you a lump sum of cash up front.
Businesses who are expanding their space or funding other large investments can benefit from a term business loan.Before making a loan, lenders want to know what the loan is for and how you will spend the money.
Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents.
In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses.
They don’t want to do all of the work to underwrite a small loan that won’t make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses. , A commercial loan is similar to a home equity loan.
It is for businesses that own commercial real estate.
You borrow against the equity you have in the commercial real estate you own.
The amount you can borrow depends on the value of your property and how much equity you have.Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky.
Therefore, they tend to charge higher interest rates for them.
Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan., These loans are given by participating banks and are guaranteed by the SBA.
They are for businesses that might have trouble getting a traditional bank loan.
The SBA guarantees a portion of your loan to repay if you default on your payments.
Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100.
Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S.
Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA). , Economic development agencies exist in every state and in some local municipalities.
They provide low-interest loans to businesses that might not qualify for traditional bank loans.
In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance.
You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies.
You can also contact your city or county government office to find out about their economic development programs.Each agency has its own application process.
However many require the same basic documentation.
Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan.
For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements.
You may also be asked to submit projected financial statements.
Be able to demonstrate your business’ current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases. , Online lending services include Kabbage and OnDeck.
These loans are for businesses who want small, short-term loans.
Businesses turn to these lenders to handle short-term cash flow shortfalls.
The application process is quick, and most applicants can complete the application in an hour.
If approved, you get the money within days.Be aware that you will pay for the convenience of the fast processing time.
These loans are expensive.
A typical loan from an online source costs about the same as taking a cash advance from your credit card.
The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
About the Author
Teresa Armstrong
Enthusiastic about teaching cooking techniques through clear, step-by-step guides.
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