In 2017, the average business loan was $663,000 in the United States. However, averages for these loans can be from as small as $13,000 to as large as $1.2 million. Every business needs some capital to get started. And if you don’t have any savings or angel investors, you can take out a loan to fund your business.
If you’re hoping to fund your business, you may need to take out a loan. If this sounds complicated, this post is for you. Read on to learn everything you need to know about finding capital for your business.
Ready? Let’s get started.
It Takes Money to Make Money
Do you have a product or service that you know will be helpful for people everywhere? Maybe you’ve made a few sales but you desperately need some capital so you can focus on growing your business?
You’ve probably heard the saying “It takes money to make money,” and this couldn’t be more true for many business owners.
For startups and businesses in the idea stage, getting funding can be challenging. Many entrepreneurs are encouraged to approach friends and family members for seed funding.
However, this can be problematic for a number of reasons. Not only are you risking your loved ones’ hard-earned money, but these relationships can be damaged if the business fails.
Not to mention, people who contribute to your funding will often want to give input into how your business is run. Unless they have specific experience in your industry, this may be more trouble than its worth. For this reason, it’s often a good idea to apply for a business loan instead.
How to Take out a Loan to fund Your Business
A business loan can help you grow your business, expand into new markets, and fund new research and product development. It can also help you hire new people and enhance your marketing efforts.
Here are the steps you can take to get your funding sorted:
1. Understand the Loans Available
There are many different types of loans available for businesses of all sizes. The options will vary depending on what you need, the specific terms of the loan, and how long it is for.
Here are a few different options:
Line of Credit
An unsecured business line of credit allows you to access money as you need it. This will have a cap, but it’s useful when it comes to managing your cash flow and paying for any unexpected expenses.
While you’ll usually have to pay a set-up fee, you won’t pay interest until you’re actually using the money.
Working Capital Loan
This is used to finance your daily operations. If you have fluctuations in expenses and revenue due to seasonality or another circumstance, a working capital loan can help you manage it.
These can be unsecured, but if your business doesn’t have much of a credit history, you’ll usually either pay a personal guarantee or pledge collateral. These loans are usually short-term and will range from 30 days to a year. Typically, they’ll be between $5,000 and $100,000.
Accounts Receivable Financing
This is another line of credit, but your accounts receivable will store it. This means that you can immediately get the cash you need, depending on what’s outstanding in your accounts receivable.
As your customers pay you, your AR line is also paid down.
Term Loans
These are usually for a set amount (e.g $100,000). They’re used for capital expenditures, operations, or expansion. You’ll pay interest on the loan monthly, while the principal needs to be repaid within anywhere from 6 months to 3 years.
If you need capital for a large expenditure like purchasing your first products to sell or growing your business, these are a good option.
SBA Small Business Loans
The U.S Small Business Administration backs and guarantees some low-interest loans for small businesses. These are still offered by the bank, but because of the backing by the SBA, the repayment terms and interest rates are much more favorable.
You can borrow anywhere from $30,000 to $5 million, although there are strict eligibility requirements and the process is time-consuming.
Be sure to look for more information about the above options before you make your decision.
2. Research Your Lenders
Not only are there many different types of loans to choose from, but there is a huge variety of lenders available too. Here are some of the main types:
Direct Online Lenders
The great thing about choosing an online lender? It’s easy and quick. There are plenty of reputable companies, and you can borrow up to $500,000.
Large Banks
Traditional lenders include banks like Citibank, JP Morgan, and Wells Fargo. This process is generally a lot slower compared to online lenders.
Local banks
Community banks are often a great option for small business loans and are keen to support local businesses.
Peer-to-Peer
There are many different lending sites that are middlemen between institutional and individual lenders and small borrowers.
SBA Bank Lenders
As noted above, banks issuing these loans will offer more attractive terms.
3. Know Your Circumstances
Lenders will look at your risk profile and credit before they decide to lend you money. Now is the time to look at your credit report, previous loans, and credit score. Check if everything is correct and fix anything that’s incorrect.
They will also check your current cash flow and any outstanding loans or debt. They want to see that you’ll have enough money to pay your current obligations along with the new loan.
Expect to have your business assets reviewed. This includes your accounts receivable and any cash. Lenders want to see that if you default on your loan, they can use your assets.
The longer you’ve been in business, the greater your chance of getting a loan. The same is true if you have investors.
Make Your Case
Now, you’ll need to specify exactly how much you plan to borrow, and how you’ll use the money. Will it be for hiring? Better marketing? Purchasing inventory? Product development?
It’s a good idea to borrow a little extra in case you have a couple of bad months. But avoid borrowing more than you need.
Wrapping up
As you can see, there are plenty of options if you need to take out a loan. Be sure to analyze the terms from all lenders and compare them to ensure you get the best deal.
By following the above tips, you’ll be well on the way to getting funding for your business.
Need to learn more about business finance? Check out some of these blog posts today.
