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In theory, starting your own business seems easy. You have an amazing idea that you want to turn into a lucrative business. Unfortunately, it’s not all as simple as it appears.
Research is the most important thing to do when starting your own business. In case you don’t have the means to self-fund, you’ll need to secure a loan. But to secure the right kind of loan, you’ll need to research all types of loans that exist and how to choose the right one for your business.
There are certain things that you need to take into consideration before deciding on a loan. Some of those things include employee costs, growth and expansion, unexpected expenses, seasonal business volume, and outstanding invoices, to name a few. Once you have all this figured out, you can move to loan research. And this is where we can help.
Check out the most common types of business loans and their pros and cons.
1. Small Business Administration (SBA) loans
The Small Business Administration is a government-backed agency designed to help you find the funding you need. They offer different types of secured loans. Secured loans are protected by an asset, which means that your company or assets like your car, for example, must be offered as collateral. SBA loan has many popular program types, but the most basic and sought after is the 7(a) loan program.
7(a) loan program
This type of SBA loan program is one of the most popular loans and for a good reason. This loan can be used for different kinds of purposes from buying an estate to refinancing the existing debt. And if you’re going to seek less than $25,000, you may not have to offer collateral.
The pros of this loan program include, among other things, long repayment time. The repayment time may go up to 10 years including a term out period where no additional funds can be drawn. As mentioned, no collateral requirements in some cases and lower than average interest rates.
The negative part of this loan is the qualification process which is difficult and requires very specific documentation. Of course, this is a secured loan, which means that you’ll need to sign an SBA loan personal guarantee. With this guarantee, you authorize the lender to seize all your assets in case you can’t repay the loan.
2. The business line of credit
The business line of credit is a more traditional type of loan because let’s face it, not everyone will qualify for SBA loans. This type of loan offers a predetermined amount of money you can borrow and payback later. The line of credit is ideal for business that needs money now but may not need it next month.
This loan is amazing because you return only the amount that you used. Apart from that, it’s super convenient for those months when the business is slower and there is no money flow. The loan is very flexible and it works like a credit card.
The cons of this type of loan include high interest rates and additional fees. On top of that, the application process for this loan is very time-consuming. Not to mention that a business line of credit loans have low borrowing limits and can be easily misused if used extensively.
3. Business credit cards
Did you know that you can finance your startup with a business credit card? In some cases, a business credit card can be used to fund your business. But just like with personal credit cards, business ones also require a lot of self-control since they carry a significant amount of risk.
The pros of credit card loans are similar to those of line of credit. You only pay back the amount you use. Additionally, the qualification process is easy and simple and you get many benefits and rewards for using a credit card.
The greatest disadvantage of credit card funding is the high-interest rates and minimal purchase protection.
4. Accounts receivable financing
Accounts receivable financing, also known as receivable factoring, is the type of loan used when you need money but have unpaid invoices. This loan program allows you to receive money by selling your existing and uncollected invoices to a third party. This third party will either give you the whole amount or part of it and then collect on the sale from your clients or customers.
One of the biggest benefits of this loan program is immediate access to cash without dealing with a lot of paperwork usually associated with loans. In addition to that, you won’t have to track down clients and customers who owe you money because the lender will do that part of the job.
The disadvantage of this loan program is that it can be more expensive than if done through traditional lenders. And on top of that your business may lose more money on the spread paid for accounts receivables in the sale of the asset because the interest expense may be high.
Since running a business is expensive, you must take into consideration many things and even plan way ahead than you usually would. Before making any move, make sure you have thoroughly researched all potential business loans.
Hopefully, we helped you discover a bit more about some of the most popular small business loans.