Your Guide To Choosing The Right Small Business Loan
A major concern for a lot of small businesses and startups is capital. Startups and small businesses differ when you look at their objectives. Startups are mainly driven by growth, while small businesses are driven by profitability. But regardless of their differences, a startup is almost always a small business.
Financing in the Small Business Scene
There are many ways to finance a small business. However, before you jump into looking at your options, the first thing you have to do is to look at your business and ask the following questions:
- What is the goal of your company?
- Where will you be using the money?
- How much will you need?
- Given the revenues and expenses, by when will you be able to give the money back?
- What is your credit standing?
- What are the collaterals you’ll be using?
Asking these questions will help you hit two birds with one stone. With these questions, you will have an idea of the financial state of your business. If you don’t have a proper financial statement yet, then you’ll be forced to make one so that you will understand your financial standing. To add to that, it will also give you a clear picture of how much money you will need to make the right impact in your company. Most small businesses need the capital to fund their operations, while some need to fund the technology that they need.
Types of Business Loans for Small Business
Once you’ve determined how much money you’ll need, you can then decide what kind of loan you will get. Here are a few options.
- Line-of-credit loans
When you need funds for your inventory and for your operating expenses, the best option is the line-of-credit loan. This type of loan allows you to use up to the limit of your contract to fund operations and inventory. The bank loans you the money that is up to the limit of your credit card while you pay for the loan monthly with interest rates.
- Installment loans
Installment loans are your usual loans where you pay the same amount monthly. This means that you have taken the loan from the start and the monthly includes the part of the principal amount plus the interest.
- Invoice Financing
Invoice financing is also a good way to fund your small business. This works by using the outstanding invoices you have as collateral.
Invoice financing usually works when one party gets a percentage of the amount of your invoice and uses this as collateral, securing the loan. Usually, this is around 15%. The other 85% is given to you and this payment is used to fund business operations. When your customer pays, the other party will give you a percentage as fee which you pay when they give back the 15% they held the first time.
- Equipment Loans
Equipment loans are helpful for new business especially when they plan on buying equipment. This type of loan is asset-based as compared to creating debts firsthand. Remember needing collateral for a loan? With equipment loans, the equipment you will be purchasing or leasing serves as the collateral of your loan.
There are many types of loans available and some can be secured or unsecured. The best way to know the best option for you is to be aware of your company’s financial status and capacity to pay.