Why Are Small Businesses Important
Your customers may ask, why are small businesses so important? Statistics show that small businesses generally make up the majority of all the existing US businesses. This equates to about 32.45 million businesses. However, starting your own business definitely comes with challenges. It has been cited that one of the reasons most businesses fail is related to finances. Statistics indicate that about one third of new businesses report failure due to financial constraints. That is why most business owners consider loans for working capital. Taking out new debt may also be cheaper than seller equity in a business you are looking to grow, so you may want to consider all alternatives as well.
If you are a business owner, you might have thought about applying for various working capital business loans as well. Whatever the reason for your application, always remember that this decision should be well-planned and well thought out. Acquiring business capital might be beneficial but they also possess risks when you are not sure what you are getting into.
1. When you may want to consider a Loan?
The first thing you need to determine is when or if you even need to apply for a small business loan. This is a financial responsibility that can affect the course of your business journey and even your personal life. You want to make sure to be prudent when considering this.
So before submitting that application, make sure that your business is really in need of extra funds.
Just because you are a new business doesn't mean you can't expand your operations. There are many promising small businesses that expand their business scale in a just a short period of time.
If you find your business in this situation, you may want to consider applying for small business working capital loans. The financial help from new capital could help with anything from new location to equipment upgrades, inventory stock, and human capital.
Investing in Equipment
In some cases, product quality depends on reliable equipment. If this is the case for you, then you want to also consider the pros and cons of new vs old equipment. However, a cost-benefit analysis is still necessary before finalizing your decision on upgrading or purchasing equipment.
Stocking Up on Inventory
If your business is product-based, inventory will generally be an expense. For example, if your business is selling winter clothing, then the winter season is when you probably have higher demands for that clothing. Keeping your shelves stocked seasonally could be key to keep the business running a vibrant business.
One of the most important resources of a company is its workforce. Regardless of the industry, a reliable workforce could play a crucial role in making sure that your business is up and running.
The need for a bigger workforce usually arises when you are expanding. For instance, you could add this to the equation when you plan to expand business operations.
2. Knowing the Types of Loans Available
Once you have decided to proceed with the application for new credit, it is also important to know some terminology that may help you. New debt types might offer different advantages and disadvantages. Knowing what you need the money for is helpful in choosing which type to apply for.
Term loans are a very common type of loan. After a successful application, you will generally, but not always, get a lump sum of cash upfront. The new debt you just obtained is then usually repayable with interest over an agreed period of time.
Since this type of loan typically offers a lump sum of money, you should manage your money to help ensure you can pay it on time. Term debt can usually be used to fund anything your business needs, from everyday expenses to new equipment.
Working Capital Loan
This type is generally for businesses that need to fund their day-to-day operations. Working capital loans should cover a company’s short-term needs, but not always do. This loan is not meant for long-term assets such as equipment or business expansion.
These needs cover expenses like debt payments, payroll, and rent. Companies who offer seasonal products and services are the ones who usually apply for this kind. There will be times when a seasonal company will have low business activity, thus, a little financial help is needed.
Merchant Cash Advances
This type of business loan avails you a lump sum of cash that you will have to repay. The repayment scheme is usually dependent on your daily credit card and debit card sales. Generally, there is no definite amount of repayment as you will have to commit a percentage of your card sales.
The typical advantage, but not always the case, of this type of business loan is that you should not be forced to shell out cash should you have low daily sales. However, the percentage of the repayment amount stays the same on days you have high sales.
Business Line of Credit
This type of business debt is similar to individual credit cards we know. Borrowers will be provided with a credit limit that can be accessed from an account. This offers more flexibility of how much money to borrow at one time as it is revolving.
Business owners can use the money, repay, and withdraw again when needed. One of its advantages is that the interest should only be applicable to the money you have already withdrawn, but keep in mind to read all the terms of your note as agreements can vary. Business lines of credit loans are usually unsecured, meaning you don't have to offer collateral. However, if you own real estate, you may be able to get a home equity line of credit or other mortgage that can have a line of credit but is secure.
Small Business Administration (SBA) Loans
This type of small business loan is backed by the government, which is why you may want this type of loan by the U.S. Small Business Administration (SBA). The federal government guarantees to pay up to 85% of the loan amount should the borrower default on it.
Repayment methods may be for several years depending on the purpose of the loan. However, since the debt is government backed, this loan usually takes longer to process and the requirements are more extensive.
This type of small business loan is where a business owner uses the unpaid customer invoice as collateral. The invoices are used as proof that this business is expecting a certain amount of money, thus gaining the trust of the lender.
Inventory factoring loans should also be relatively easier to obtain since they are not done through traditional institutions such as banks.
2. Know What to Prepare
Since you already know the technicalities and options available, the next step is knowing what to prepare for the application.
Calculate the Amount You Need
List down all the things that you would be needing the funds for. Then write an estimated amount per expense.
When determining costs, leave a reasonable window for flexibility. Borrowing less than what you need defeats the purpose of the loan, while borrowing an excessive amount may affect your overall cost of the loan.
You can use a business loans calculator to help you visualize the loan you are planning to apply for.
Prepare Your Business Documents
Begin collecting and preparing your business documents. This includes business permits and accounting documents.
This will be your proof that you will be able to pay the loan through a profitable business. The better your numbers look, should give confidence in your ability to repay. Borrowing from traditional institutions such as banks and government-funded agencies, are generally more conservative so showing the ability to pay should be a big plus.
Look for the terms that fit your needs and goals
Traditional loans are typically from banks and government-backed institutions. The pros when it comes to traditional lenders include potentially more competitive interest rates with a repayment that is an amortized loan. Since a lot of lenders are monitored by the government, they should make sure that you have the ability to pay back the debt. However, these institutions usually will ask for more extensive requirements as proof that you are a legitimate business. The process also takes longer as they examine details as thoroughly as possible.
As a business owner, building your company can be nerve-wracking because of numerous initial challenges. There will be various factors which will hinder or slow your growth as a business, and many entrepreneurs have cited finances as one of the factors that affects a business growth. Make sure to be prudent and do your due diligence on anything that could affect your company.
Applying for a working capital has its pros and cons. However, like any other business decision, you should weigh your options and conduct a cost-benefit analysis beforehand, also seek the advice of an attorney and CPA to see if it is helpful for you. Being fully aware and knowledgeable about all the things that could affect your business is a good business practice and will help you maintain a profitable venture.
Before applying for business loans, make sure that you have considered and studied all factors to lessen the risk and maximize the benefits of this decision.