Category: Financing

Business Loan vs. business credit card how do you decide which is best for you?

When it comes to financing, entrepreneurs and small business owners continuously debate business loans vs. business credit cards. In many cases, the final decision comes down to the state of the business, relevant market conditions and what makes the most sense for the company’s long-term strategic objectives.

Before weighing in on the debate, here’s a brief description of each financing option:

Business loans

Business loans can boost your cash flow on both a short- and long-term basis. Short-term loans are good to cover unexpected expenses. A traditional term loan enables you to take on larger projects, without harming cash flow.

For business owners with great credit, stable revenue, and a solid business plan, a business loan can be a great option.

Credit card

A business credit card gives a small business owner instant access to cash. It doesn’t come in a lump sum as with a loan, but rather as a set amount of funds available when and as needed.

Interest rates with a credit card are generally higher than with a business loan, but by paying each month’s bill in its entirety, this isn’t a concern. Often, the appeal of business credit cards is enhanced by various perks, purchase protections and rewards.

Business loan pros and cons

With business loans, a borrower often has a voice in determining the frequency and flexibility of payment deadlines. Payment frequency may be based on existing cash flow, or you can pay back larger amounts without prepayment penalties.

In general, a business loan works best for companies in need of working capital for investment to in large-scale expansion opportunities, such as equipment purchase, hiring more employees or launching a new location, etc. It’s also useful in refinancing an existing business debt.

On the other hand, with traditional lenders, business loans “can be more difficult to qualify for, and the lending process can take weeks or months,” according to The Ascent at Motley Fool.

Credit card pros and cons

With a business credit card, a sole proprietor or ambitious entrepreneur enjoys rapid availability to money needed to finance operations. It’s also a viable option if you wish to make ongoing purchases or regularly incur significant expenses (though, as noted, it’s best to repay in full each month).

There’s a great deal of psychological comfort in knowing you have access to funds if and when your business needs them.

At the same time, the APR (annual percentage rate) for a credit card can sometimes be as steep as 20%, which adds up. Also, if your business experiences an unforeseen dip in cash flow, you may find yourself facing considerable (and growing) business debts, due to high interest rates. And in some cases, there’s an annual fee to keep a card account open.

Finally, a business that borrows money up to the pre-assigned credit limit and still needs funds can find itself in a tight spot.

Loan options to consider

The good news about business loans is it’s no longer mandatory to go to a bank for a traditional loan. Funding options includes:

• Online loans. Requirements are less strict for these stand-alone cash flow loans. But, revenue stability and a strong business plan are essential for approval.
• SBA loans. In fact, the SBA (Small Business Administration) doesn’t loan money itself, but the government-backed agency does agree to back a certain percent of the loan, which makes it easier to obtain loan approval elsewhere.
• Purchase order financing. This is a short-term loan covering up to 100% of supplier costs. The key factor is whether a big order is just about to close. Following the sale, the lender’s fees are deducted from the proceeds.

Still more alternative types of loans include equipment financing, invoice factoring, and revenue-based financing. A fuller description of these options can be found here.

Taking time to debate a business loan vs. business credit card is important. No business can afford to delay making a final decision. The good news for small businesses is that there’s a wealth of financing opportunities available that help keep the dream of business growth a genuine reality.

The SBA Microloan program can provide small business owners with small-scale, low-interest loans with very good repayment terms to either launch or expand a business. Here is what prospective borrowers need to know.

What Is a Microloan?

The SBA Microloan program offers loans up to $50,000. They help women, low income, veteran and minority entrepreneurs, certain not-for-profit childcare centers and other small businesses startup and expand. The average microloan is approximately $13,000, according to the U.S. Small Business Administration (SBA).

Microloan lending is different from other SBA loan products from traditional financial channels. The SBA microloan program provides funds through nonprofit community-based organizations. These nonprofit organizations act as intermediaries and have knowledge in lending, management and technical assistance. They are also responsible for administering the microloan program for eligible borrowers.

Uses for Microloans

Microloans are applicable for working capital purposes or for purchasing supplies, inventory, furniture, fixtures, machinery and equipment. Ineligible uses include real estate, leasehold improvements and anything not listed as eligible by the SBA.

Microloans are a great option for businesses with smaller capital requirements. If you need additional financial assistance with purchasing real estate or help with refinancing debt, other SBA Loan Programs are available, such as the 7(a) loan or 504 loan.

Microloan Stipulations

According to SBA, microloans have certain stipulations. For instance, any borrower receiving more than $20,000 must pass a credit elsewhere test. The analysis from the credit elsewhere test determines whether the borrower is able to obtain some or all of the requested loan funds from alternative sources without causing undue hardship. No business or single borrower may owe more than $50,000 at any one time. Furthermore, proceeds cannot contribute to real estate purchases or pay for existing debts.

Microloan Qualification Requirements

Each microloan intermediary has their own credit and lending requirements. In general, intermediaries require some type of collateral in addition to the personal guarantee of the business owner.

Eligible microloan businesses must certify before closing their loan from the intermediary that their business is a legal, for-profit business. Not-for-profit child care centers are the exception and are eligible to receive SBA microloans. Qualified businesses are in the intermediary’s set area of operations and meet SBA small business size standards. Another requirement is that neither the business nor the owner are prohibited from receiving funds from any Federal department or agency. Furthermore, no owner of more than 50 percent of the business is more than 60 days delinquent in child support payments, according to SBA.

Prospective microborrowers must also complete SBA Form 1624.

Microloan Repayment Terms, Interest Rates and Fees

Microloan loan repayment terms, interest rates and fees will vary depending on your loan amount, planned use of funds, the intermediary lender’s requirements and your needs.

The maximum repayment term allowed for an SBA microloan is six years or 72 months. Loans are fixed-term, fixed-rate with scheduled payments. Interest rates will depend on the intermediary lender and costs to the intermediary from the U.S. Treasury. The maximum interest rates permitted are based on the intermediary’s cost of funds. Normally, these rates will be between 8 and 13 percent.

Microloans aren’t structured as a line of credit nor have a balloon payment. Microloans are malleable if the loan term does not exceed 72 months, but not exclusively for the purpose of delaying off a charge. They allow refinancing. However, any microloan that is more than 120 days delinquent, or in default, must be charged off, according to SBA.

There are certain microloan fees and charges. You might have to pay out-of-pocket for the direct cost for closing your loan. Examples of these costs include Uniform Commercial Code (UCC) filing fees and credit report costs. You may also have to pay an annual contribution of up to $100. This contribution isn’t a fee and can’t be part of the loan. Late fees on microloans are generally not more than 5 percent of the payment due.

How to Apply for a Microloan

To begin the application process, you will need to find an SBA approved intermediary in your area. Approved intermediaries make all credit decisions on SBA microloans. Prospective applicants can also use the SBA’s Lender Match referral tool to connect them with participating SBA-approved lenders. Document requirements and processing times will vary by lender.

You may need to participate in training or planning requirements before the SBA considers your loan. This business training helps individuals launch or expand their business.

For more information, you can contact your local SBA District Office or get in touch with a financing specialist at Kapitus.

How do you find financing for business expansion, when the time is right? No matter how successful a business might be, the decision to proceed with expansion inevitably comes with more spending, not less, and therefore a need to identify funding sources early in the process.

Often, the single best solution is to obtain a small business expansion loan. Traditional lenders (such as a bank) will naturally want to know what you plan to spend the money on, in order to finance your growth plans.

Reasons for financing growth

Typical areas where business leaders focus their expansion efforts include the following:

Opening a new location.

A retail business with a bricks-and-mortar presence may wish to expand to a second or third location. For this and other related goals, it’s important to gauge the anticipated costs.

As Inc. notes, “you’ll need to acquire estimates for leasing space, building out your location, hiring staff and procuring additional inventory.” To make sure the numbers work, conduct a “break-even analysis to determine how long you’ll need to support your new venture before it becomes profitable.”

Hire additional staff.

Your current workforce might not match the needs of expansion. You’ll have to find time, money and other resources to recruit new team members (to pay them, once they’re hired). This is an important area to focus on, so that you and your workforce aren’t stretched too thin by your company’s “growing pains.”

Purchase new equipment.

Technology or other business-related equipment represents another area impacted by expansion. Whether it’s needed to facilitate greater employee productivity, respond to increased fulfillment and delivery demands or other needs, funding for equipment might be a key part of your expansion plans.

Other expansion-related areas include large-scale product upgrades or a new product launch and/or breaking into a new market. All of these objectives require new sources of financing.

Options for financing for business expansion

If attempting to secure a traditional bank loan isn’t your ideal financing strategy, consider these alternative funding options:

Online loans.

These stand-alone cash flow loans are fairly easy to qualify for, because requirements are less strict than for a bank loan. Also, it’s not necessary to secure the loan with future business revenue or other collateral. But stable revenue and a solid business plan are essential factors for approval.

SBA loans.

The Small Business Administration doesn’t actually loan money, but they agree to back a certain percentage of the loan. They guarantee repayment to the lender, which in term facilitates loan approval. Many small businesses opt for this approach.

Purchase order financing.

These short-term loans cover up to 100% of supplier costs, as long as it’s determined a big order is just about to close. After the sale, the lender deducts their fees from the proceeds.

Invoice factoring.

With this approach, you transfer over an unpaid invoice to a financing company (the “factor”), and receive an advance on payment. The factor takes over collecting payment from the clients. After deducting their fee (which can be as low as 1.5% of the invoice amount), you receive the rest of the invoice amount. Under this arrangement, you’re not obliged to wait 30-90 days for payment on your products or services.

Revenue based financing.

This type of loan involves a quick, simplified application process. Lenders approve financing after reviewing historic revenue and use this to forecast future cash flow. You receive a lump sum of cash. The lender collects a specified percentage of future sales, either on a daily or weekly basis.

Crowdfunding.

Financing business expansion through crowdfunding has become more popular in recent years. Online platforms like Kickstarter enable interested micro-investors to put up funding for your expansion plans, with numbers that can significantly boost your chances for successful growth.

Repayment, or debt crowdfunding, follows a similar approach to traditional small business loans. Here, the business owes money back to the individual lenders at a set (agreed-upon) interest rate for these deals.

Angel Investing.

It’s worth exploring ways to secure venture capital financing, or enlisting the services of an angel investor to help grow your business. Some investors seek to play an active role in a business’s next steps. A business owner must relinquish some equity in order to obtain investor funding.

Financing business expansion can be stressful, but knowing you have options can lessen the anxiety involved. Your expansion plans may or may not meet traditional lending requirements, but with the range of lending alternatives available these days, a growing business is likely to find the financing it needs elsewhere.

Any small business owner who spends time searching for small business loans–both through banks and online–has likely come across the SBA 7(a) loan program. It’s one of the more popular small business lending options out there. With that, many small business owners look to the Small Business Administration (SBA) to help with financing.

One way the SBA helps small business owners is through their Loan Guarantee Program. Here, you’ll learn what you need to know about the SBA 7(a) loan program and the requirements for approval.

What is the SBA loan program?

SBA loans don’t actually go through the government. Instead, the SBA offers guarantees to participating lenders, including traditional banks, credit unions, online lenders and private lenders.

The goal is to make small business loans less risky for these lenders. This means that more business owners can secure funding to help grow their businesses.

Guarantees typically cover anywhere from 50 to 85 percent of the total loan amount, depending on the loan. The SBA has a variety of loan options, including the 7(a) program, the 504 program, microloans and disaster loans.

However, the SBA 7(a) program is the focus here.

What is a 7a loan?

SBA 7(a) loans are some of the most popular options available for small business owners. In the 2019 fiscal year, over $23 billion in loans saw approval. An average loan was for just under $450,000.

The flexibility of the 7(a) loan program makes it popular among small business owners. 7(a) loans are guaranteed up to $5 million. For loans up to $150,000, the SBA guarantees 85 percent. The SBA guarantees 75 percent for loans over $150,000, up to $3.75 million on the $5 million maximum loan amount.

If you default, the SBA will pay out the guaranteed amount. It’s one way the administration removes some of the default risks from lenders. This allows them to offer more attractive repayment terms.

Many small business owners would likely struggle to secure financing from traditional financial institutions without the SBA Loan Guarantee Program.

What are the SBA 7a loan terms and interest rates?

SBA loan terms are set with the long-term goals of small business owners in mind. Repayment terms are often based on your particular financial situation. However, most of these are paid back via monthly installments.

The set terms are as follows:

• Real estate: up to 25 years
• Equipment: up to 10 years
• Working capital and inventory: up to 10 years

Another benefit of an SBA loan is that it sets a maximum with lenders on interest rates. Base rates are tied to Prime Rates, benchmark interest rates and additional spread rates.

The spread rate varies depending on the loan amount and the term. Typically, higher loan amounts with shorter terms have slightly lower spread rates.

The SBA has specific spread rates they use. But, the rates can change as the market rates do over time.

Are there fees involved with the SBA 7(a) loan program?

While you typically won’t find origination, application and processing fees with SBA loans, there still are fees to consider.

These fees can include:

• SBA loan guarantee fees (which vary depending on the size of the loan; but they only apply to the guaranteed amount)
• Credit authorization fees
• Packaging fees and closing costs
• Appraisal fees for real estate related loans
• Late payment penalties
• Prepayment penalties which apply to loans longer than 15 years that are prepaid within the first three years

The guarantee fee is the highest of all associated SBA loan fees. Keep these fees in mind as you figure your total payment amount.

The basics of qualifying for SBA 7(a) loans

The SBA has several eligibility requirements you must meet to qualify for any of their loans, including the 7(a). Since these are popular loans, you should understand the different requirements before you apply.

First, your business must be for-profit and based within the United States or its territories. Also, the SBA has size standards they use to ensure that the definition of small business gets met–since it varies across industries. This standard is generally a combination of employee size and annual average receipts.

Second, the SBA wants you, as the small business owner, to have a stake too. So, they require that you invest your own time and money into your small business. Also, eligibility rules state that you need to have been in business for a sufficient amount of time, typically a few years.

Finally, your business must be eligible for a loan. Some are not including real estate investment firms, rare coin dealers, companies involved in speculative activities, and companies where gambling is the primary activity, among others.

What are the SBA 7(a) loan program requirements?

Your job isn’t over yet, even once your business is eligible for a loan application. You need to meet the loan requirements, too. The SBA requires you to submit information on your “personal background and character”. This includes criminal history (if any), your citizenship status, work history in the form of a resume, past addresses, and other items as well.

You also need to provide a business plan. A solidified business plan goes a long way towards showcasing the strength of your business and your plans for the future. Don’t forget to include detailed information on how you’ll use your loan.

Other documents required are your business financial statements. You need to show your revenue and profitability. The SBA typically approves businesses with at least $100,000 in revenue each year. You should also provide a listing of any debts and your debt schedule, which can help highlight your expected cash flow.

Your personal credit score is important. The SBA and lenders will typically look for a FICO credit score above 650.

Finally, there is some personal risk involved with 7(a) loans too. The SBA requires anyone who owns over 20 percent of the business signs a personal guarantee on the loan.

While each lender is different and requirements vary depending on your situation, keep these requirements in mind as you move through the process.

Types of loans in the 7(a) program

Within the 7(a) loan program, there are different loan options beyond the 7(a) standard loan you can explore.

The 7(a) Small Loan program has all the requirements of the standard 7(a) loan with one significant difference: it offers a maximum loan amount of $350,000.

SBA Express loans are designed with quick turnarounds in mind. They have a maximum loan limit of $350,000. Note that the SBA guarantees 50 percent of the loan amount.

SBA Export Express loans are directed at exporters for lines of credit up to $500,000. The SBA guarantees 90 percent for loans up to $350,000 and 75 percent for amounts beyond that. It’s yet another option with quick turnaround times.

An Export Working Capital loan is for a revolving line of credit up to $5 million with a 90 percent SBA guarantee. This loan often has short terms of up to 12 months.

International Trade loans are set to meet the long-term financing needs of export businesses. The maximum amount is for $5 million, with the SBA guaranteeing 90 percent of the loan.

How can you use a 7(a) loan?

The SBA sets guidelines for both the general loan terms and how funds get used.

These include:

• Expansion and or renovation needs
• New construction
• Purchasing land or buildings
• Purchasing equipment, fixtures, or lease-hold improvements
• Working capital
• Refinancing debt (the SBA cites it must be for “compelling reasons”)
• Seasonal lines of credit
• Inventory costs
• Business startup costs

Understandably so, it’s essential to know this information before you apply. Otherwise, you could lose your funding if you’re using it for unapproved reasons.

The Bottom Line

It’s easy to see why SBA 7(a) loans are so popular with small business owners. They provide funding with flexibility and attractive terms. If you meet the qualifications and requirements for an SBA loan, it just could be what you and your small business need to achieve your long-term goals. To learn more about SBA loans, click here.

Every day, business owners across America need small loans to help keep their business running. Sometimes these are short term loans, just to get the company through cash flow troubles for a few months. Conversely, some need small personal loans or auto loans to help improve the business and take things to the next level.

If you’re a small business owner and you’ve been thinking about securing a small loan, there are plenty of places where you can turn to for help.

Why Might Your Business Need Small Loans?

Before looking at short term loans, you need a clear understanding of your needs and financial situation. Borrowing money is a normal part of running a business. However, to get the short term loan you need is often based on your credit, collateral and financial statements.

Depending on your situation – including the length of time your business has been in operation and your cash flow – some funding sources might not be feasible. That’s why, when it comes to finding the right funding situation for your needs, it is essential that you consider all options.

It helps to have your financials, credit history, business plan and reasoning as to why you need the loan on hand, so that you can get a full idea of all of your options. Also, as you do your research, be aware of added costs including origination fees, interest rates, and late fees on installment loans so you have the full picture as you move forward.

Financial Institutions

Many small business owners turn to banks and credit unions to secure small loans. Often times, one of the first places to look is where you currently have business banking and checking accounts.

Banks also offer a variety of financing options, from short term loans to auto loans and small personal loans to lines of credit. The issue many small business owners run into with financial institutions, is meeting their strict lending standards.

Typically, banks will require you have good credit and collateral – at the minimum – as well as a demonstrated source of cash flow from the products and services your business offers. Any problems there and you’ll likely be denied.

Time can also be a factor. Securing small business loans from banks and credit unions can take anywhere from approximately two to six months. If your business has more immediate cash flow needs, you’ll want to take that timeframe into account. Another thing to take into account is that many banks will not provide loans below a certain threshold, as the return for much small loans is not enough of a profit for them.

Small Business Association

The Small Business Association (SBA) is a department run by the Federal Government specifically there to help small business owners throughout the country.

There are a few popular SBA loan options. The most common is the SBA 7(a) loan program. In this case, the SBA doesn’t provide funding for entire loan amounts, but does agree to guarantee a percentage of it. That guarantee encourages lenders to accept your application.

Also, the SBA has options for short-term microloans, which offer funding up to $50,000 and have slightly more flexible terms. These are often run through Community Development Financial Institutions (CDFIs), as well as some local non-profit organizations.

One thing to note about SBA loans is, like traditional bank loans, they tend to take longer to process. These loans also have specific terms and conditions to pay attention to as well. So, if you’re in need of quick cash, take that into consideration if you apply.

Online Lenders

Today, banks aren’t the only alternative when it comes to lending for small loans. Online lenders also provide funding for cash flow and other small business loans.

Often, online lender guidelines aren’t as strict when compared to traditional financial institutions. This can benefit small business owners, especially if the business is still growing, you lack a lot of collateral, or your business has a shorter credit history.

In terms of loan options, online lenders sometimes offer traditional small business and SBA loans, as well as lines of credit. For a lot of small business owners, a line of credit is an attractive alternative. Some of the issues that usually slow down an application process – including poor credit – are not typically used as a final deciding factor with online lenders. Plus with a line of credit, cash is often quickly accessible.

Online lenders also offer a bit more flexibility, especially when it comes to loan sizes (some will provide financing in amounts as little as $5,000), terms, timing, and repayment options. Most small business loans can be approved in a few days versus a few months. Plus, monthly payments or installments can be based on your business’ existing cash flow.

Microlenders

If your business is in need of a small short-term loan, microlenders could be an option. As mentioned above, many banks tend to believe loaning such small amounts unworthy of their bottom line. Microlenders often provide loans up to around $35,000 for small businesses that’re in particular areas or serving specific community needs.

Even though microlenders loan smaller amounts, they generally require detailed information about your business. That can include financials, credit history, cash flow, and business plans. The loan application process is based on the amount of information required, so it’s usually not an option for fast funding.

For business owners who are in the process of upgrading or lack collateral and only need a small amount of cash, this is another alternative.

Crowdfunding and Peer to Peer Lenders

Alternative funding has grown in popularity over the years. Two of these alternatives are crowdfunding and Peer to Peer (P2P) lenders. Although the terms are often used interchangeably, there are differences.

Crowdfunding is a way for a small business to raise money by asking people to provide funds in exchange for equity or future repayment. Equity crowdfunding is when a business sells a share or percentage of the business to investors. This type of crowdfunding is often used by businesses that grow quickly. Repayment, or debt crowdfunding, follows a similar approach to traditional small business loans. Here, the business owes money back to the individual lenders at a set (agreed-upon) interest rate for these deals.

P2P lending most closely follows the debt crowdfunding model. It’s a way for investors to provide cash flow. The business will pay the funds back, with interest, over a set time frame.

More established businesses with a steady cash flow to repay the debts monthly can consider these alternatives.

Business Credit Cards

While it’s not exactly a traditional-style loan, you might also consider getting a credit card for your small business. If you need only a small amount of cash relatively quickly and have the cash flow to pay your card’s balance down, it’s another option.

Many cards offer low introductory rates or balance transfers from other cards for a set period – usually up to 18 or 24 months. Sometimes, these cards have special perks or membership benefits and discounts that you can apply to your business.

Using a business credit card is another way to help separate your personal finances from your business finances. Additionally, it could help build up positive credit reports for your company. After all, having a strong business credit score can be the deciding factor when it comes to loan approvals.

You Have Options

Securing a small loan (or any size loan for that matter) is usually stressful for a business owner. However, it’s important that you understand there are a variety of options out there. Just because you might not fit the traditional requirements for lending, doesn’t mean it’s not possible to get the funding you need to help your business grow.