Choosing the Right Financing Option for Your Business

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Whether you own a large or small business, getting a loan and financial assistance is common practice among business owners. You may need a loan to pay employees, purchase new equipment or meet other business demands. Some businesses take a loan right off the bat, while others wait until they have achieved some success to seek financial assistance in a bid to expand.

One of the most confusing aspects of getting a business loan is how many options are available. You want to choose the right business loan with the lowest interest rate possible. You can use a business loan to launch your company off the ground or expand on what you already have.

Please continue reading to learn everything you need about business loans and other financing options. You don’t want to walk into these long-term commitments without thorough planning. Choosing the wrong type of loan for your business could lead to years of expenses that you can’t afford.

When to use financing options

In a perfect world, people wouldn’t need business loans to get what they need. Unfortunately, we don’t live in that world. However, you should still be cautious about the loans you take out for your business to ensure that payments remain affordable. Below we will discuss the most common reasons people seek financing options for their companies:

Business start-up

Starting a business requires plenty of resources that many people don’t have. For example, you’ll need to pay for your business location and any employees you add to the payroll. It’s common for startup businesses to take out a loan to fund their dreams.

Business expansions

Businesses that reach a specific level of success need to expand eventually if they wish to continue to grow. Financing options for a business expansion will depend on how you plan to improve your company. For example, some people consider an expansion relocation while others need to increase their product lines. Consider your expansion needs before taking out a business loan.

Equipment costs

Some companies need expensive equipment to succeed. For example, if you own a lawn care company, you’ll need lawn care equipment. Equipment costs usually get roped into business startup expenses and are one of the biggest reasons people seek financial assistance.

Inventory costs

When you start a company, it’s hard to determine how much inventory you’ll need. Businesses that receive more success than they anticipate might need to take out a business loan to cover inventory costs. Constantly being out of inventory that’s in high demand is a bad look for companies, even when they’re starting out.

Business marketing

Although it’s not impossible, it’s difficult to attract customers to your business without marketing. You need to get the word out about your company, and marketing costs aren’t cheap. It’s common for businesses to take out loans to advertise if they think it will increase sales.

The loan approval process

Unfortunately, many people can’t qualify for a business loan due to their debt-to-income ratio or pre-existing credit problems. To determine if your business can qualify for financial assistance, you’ll need to follow the steps below at your chosen financial institution:

Applying for your loan

Your bank or other financial institution will have an application you can use for your business loan. This application will ask for plenty of personal information that you’ll need to have available to complete it.

Credit checks

Prepare yourself for a credit check after you submit your loan application. Banks and other financial institutions use your credit score and previous payment history to determine if you’re a good candidate. If you have bad credit, you may need to work on improving it for a year or two before submitting an application.

Loan approval

After you submit your application, the rest of the process falls into the hands of your financial institution. They will have staff that review your application to determine if you qualify. Having excellent credit and a low debt-to-income ratio will increase your chances for approval.

Bank funding

After the financial institution approves your loan, they will fund the approved amount. Many business owners seek approval for more money to cover extra business expenses during this process. However, it’s possible that your bank will only approve part of the funding you have applied for.

Paying back the loan

Unfortunately, free money doesn’t exist. You need to pay the loan back eventually, and this usually starts the month after your bank funds the amount. However, you can discuss payback options with your financial institution to explore other timetables.

Types of business loans

Fortunately, your financial institution can help you choose the best business loan for your situation, bu having a basic understanding of the different loans available to business owners is crucial. Otherwise, you could agree to a loan that isn’t appropriate for your situation. We will discuss the most popular types of business loans below:

Term loan

These loans are the most popular types that banks offer. They allow you to borrow a set amount of money as a lump sum and pay it back over time. You can choose term loans that require you to provide collateral to the bank, or you may be able to choose an unsecured option depending on your credit situation.

Term loan pros:

• Allows access to large amounts of money.
• Fixed interest rates.
• Long-term repayment options.
• Businesses can choose how they spend it.
• Could reduce business taxes at the end of the year.

Term loan cons:

• Some loans may require collateral.
• There are penalties for paying the loan off early.
• Some businesses aren’t eligible for term loans.

Equipment loan

Equipment loans are popular among business owners as equipment is often one of the biggest expenses they face. Unfortunately, many types of businesses spend thousands of dollars on equipment, even if they’re smaller companies. These loans allow businesses to purchase anything from machinery to a company car.

Equipment loan pros:

• Let business owners access equipment faster.
• Fixed interest rate.
• Flexible repayment options.

Equipment loan cons:

• Uses the equipment as collateral.
• Limited purchase options.

Lines of credit

Some businesses choose to use a credit card to handle their financial needs; however, you can get a loan that works similarly instead. This is called a line of credit, and it provides you with flexible spending options. Some company owners choose a line of credit loan as a way to ensure that emergency funds are available for their company.

Lines of credit pros:

• Purchase whatever you need for your business.
• Can be repaid immediately or over time in minimum payments.
• Access money whenever it is required.
• Improve your credit score with long-term use.
• Lower interest rates than your average credit card.

Lines of credit cons:

• You may be allowed to borrow more than you can afford.
• Some of these loans require collateral.
• Interest rates can be higher than other types of loans.

Invoice financing

This financing option works by selling unpaid invoices to third-party financing companies. The third-party company will provide a cash advance to the business as a percentage of the invoice. The third party will collect what they can from customers with these outstanding invoices and return a percentage of the money to the business.

Invoice financing pros:

• Allows business owners to collect unpaid debts.
• A quick way for businesses to gain and access money.
• Businesses can purchase what they want with this income.
• Businesses don’t need to cough up collateral for this financing option.

Invoice financing cons:

• Typically costs more than other financing options.
• May sacrifice customer relationships.
• Hands control over to the third-party financial institution.
• Strict eligibility requirements.

Merchant cash advance

A merchant cash advance allows a financial institution to purchase a percentage of the business’s future success in exchange for immediate cash. This is a great option for businesses that need a booster to achieve the success they expect. The financial institution bases the payment amount on how much the merchant receives in credit card sales.

Merchant cash advance pros:

• Very fast way for businesses to access cash.
• Unsecured loan so businesses don’t need to supply any collateral.
• A credit check is not required in most situations.
• The repayment schedule depends on credit card sales.
• This is one of the easiest loans to apply for.

Merchant cash advance cons:

• One of the most expensive financing options available to businesses due to fees and interest.
• Paying back this loan could interrupt your business cash flow as it depends on credit card sales.
• Some business owners are not eligible for this type of financing option.
• The business’s credit score could be hurt if credit card sales aren’t high enough to support the repayment plan.

Understanding the digital economy

The economy continues to change due to increasing activity online. Our economy is more connected to the rest of the world than ever because you can connect with anyone if you have a secure internet connection. The digital economy is constantly adapting, and business owners need to adapt too in order to stay ahead of the game, even if they don’t own an online business.

Earning an MSc digital economy, from a respected institution such as Aston University Online, is an excellent way to learn how to control your digital assets. This program is fairly recent but provides up-to-date information on how to gauge the digital market. It’s important for businesses to have a firm grasp on the digital economy before seeking financial assistance through a bank or other financial institution.

Financial institutions use software to keep track of the digital economy because it’s difficult to do so without these tools. When the digital economy thrives, businesses are more likely to receive loan approval. However, when the digital economy goes through financial hardships, it’s difficult to achieve approval for business loans or other financial assistance.

Can you get business loans for an online business?

Years ago, getting a business loan for an online company was nearly impossible. This is no longer the case. Online businesses have an easy time getting loans now because financial institutions pay attention to the digital economy. You should have just as easy a time getting an online business loan as you would an in-person business loan. Applying for a business loan can help support and grow your business because:

• Online businesses can use financial assistance for marketing.
• Online businesses may need loan flexibility depending on their business structure.
• Getting a business loan for your online shop can help you stay ahead of the competition.
• Internet businesses need to focus on long-term goals just like other businesses.

Remember, getting a business loan is common for any type of business. Whenever an expansion or startup is necessary, financial institutions expect loan applications. You will need to apply for a business loan for your online business the same way you would for any other business loan.

How online business loans work?

People who own an online shop need to be mindful before taking out a loan. Consider the following before you apply for a business loan or other financial assistance:

• Multiple repayment options are available for online businesses depending on the loan or financing option chosen, choose an option which can be easily repaid.
• Ensure that you choose a reliable lender for your online business loan as scammers are common online.
• An online business loan affects your credit the same way other business loans would, so it must be paid back promptly.
• Businesses that apply for a loan online are more likely to receive their funds quicker than an in-person institution.

There are plenty of online financial institutions that can help you borrow funds for your business, no matter where your business operates. However, a reliable financial institution will look into your credit history and consider other aspects before approval. Business owners may need to work on their financial situation and improve their credit scores before a financial institution approves their application.

Final thoughts

Now that you understand the crucial aspects of business ownership and funding your business, you have the tools to choose the type of assistance that works for you. We’ve covered the basics of the most popular business loans and financing options that companies consider. You need to consider the loan’s interest rate, the business’s needs and particular situation before submitting a loan application.