What’s the Best Type of Small Business Funding For Your Business?
[ Article was originally posted on www.nav.com ]
Opportunities for growth arise, equipment breaks, inventory goes on sale, business slows, and operational expenses grow. Sometimes, all of those things happen at once in a small business. Regardless of what circumstance matches your experience, chances are you’ll need working capital to take care of it.
While the ideal solution may be to tap into reserve funds to manage costs, that’s not always possible. For many small businesses, money is tight once those expenses and payroll are covered, and there’s not a lot left over for unexpected expenses.
If you’re thinking about or in the process of securing small business funding, there are numerous options to consider, including small business loans, lines of credit, and business credit cards. Selecting the right funding will require you to take into consideration each option and decide which best meets your financial needs and credit profile, among other things.
Small Business Funding Options
Not sure where to start? Here are a few of the most common funding types for small businesses:
A term loan is what most people think about when they hear the word “loan.” When you take out a term loan, you receive a lump sum of money, which you’re obligated to repay within a certain amount of time, or the term.
Term small business loans come in a wide range of amounts and repayment terms. For instance, short-term loans are typically repaid within six to twelve months, while long-term loans may have repayment terms as long as ten or twenty years.
Both traditional lenders (like banks and credit unions) and alternative lenders (like peer-to-peer lending or online lenders) offer term loans to businesses. Rates, repayment terms, and fees (e.g., origination, application, etc.) will vary from lender to lender. However, most lenders will base each of those factors on a number of variables like your credit score, loan amount, and annual revenue.
That doesn’t suggest that you necessarily need to have good or excellent credit to secure a term loan. There are term loans designed to accommodate borrowers with poor credit, though many of these will be secured loans. In that case, the lender requires you to put up collateral (e.g., real estate property, equipment, automobiles) that can be seized to cover the balance in the event you fail to pay off the loan. And certain types of term loans can help you build business credit.
Though there are many types of small business loans, many with their own set of requirements and restrictions, they are typically considered to be quite flexible and can help you manage a variety of business costs. This includes things like inventory or equipment purchases, payroll, debt consolidation, or simply a working capital boost.
Small Business Administration (SBA) loans, which can be approved for up to $5 million, are guaranteed by the United States SBA and originated by approved lenders. Unlike bank loans, SBA loans are federally backed, so they often have lower rates and more flexible terms, making them a prime solution for eligible small businesses.
The SBA offers numerous loan programs, some of which have loan terms as long as 10 or 25 years. The 7(a) loan and the 504 loan are two of the most popular options.
Funds from a 7(a) loan can be used to manage a variety of business-related expenses, including working capital, debt consolidation, inventory, and equipment.
The 504 loan, on the other hand, is limited to project costs associated with the purchase, construction, modernization, or remodeling of real estate property, or to consolidate debt accrued from those activities.
To qualify for most SBA loans, including the two above, you must have what’s considered good credit, typically a 680 FICO score or higher, and meet any additional requirements as they apply to the SBA or the lender you go through. This includes size of business, industry, and revenue. You may be required to provide collateral, depending on the loan program.
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