What are My Borrowing Options?
Today there are a wide variety of borrowing options for small to medium sized enterprises (SME) that need capital. Typically, these funds are used for working capital, buying equipment, funding inventory, renovation and expansion, and marketing and advertising.
The type of loan that is best suited for your business needs depends on:
Understanding the basics of various types of loans will help you determine what type of loan is best for you.
Let’s Get Personal: Some Advantages
Major and local banks, credit unions and other financial institutions all offer personal loans to business owners as do non-traditional lenders. Generally, personal loans are easier to qualify for than business loans and require less paperwork.
Typically, these loans are unsecured, and don’t require a guarantor, though lenders will usually require some form of income verification, along with proof of other assets worth at least as much as the individual is borrowing.
The application process is generally far easier for personal loans and decisions are often made more quickly. Lenders also tend to disburse personal loans more quickly once the approval is obtained.
Personal loans typically offer significantly lower payments because repayment is spread over a longer time period than business loans. Also, once the money has been delivered, there’s generally no further follow-up on the part of the lender as long as payments are made as agreed upon.
Downsides? Lower Lending Limits and Rating Risk
There are some downsides for business owners. First lending limits tend to be much lower for personal loans compared to their business counterparts, and they also tend to have higher interest rates. As a result, you might not be able to secure all the money you need with a personal loan, and higher interest payments can impact your profits.
By taking a personal loan, business owners deny their business the opportunity to build its own credit rating. And in the event you get behind in payments or default on the loan, your personal credit score would likely be impacted making it harder to get approved for other forms of credit.
Even if you make all your payments on time, a personal loan raises your debt-to-income ratio, making it harder to qualify for a mortgage, car loan, or new credit card.
Getting Down To Business
Banks, credit unions and other financial institutions typically have dedicated departments that make commercial and business loans to small and medium sized businesses. The U.S. Small Business Administration (SBA) also offers several loan programs designed to meet specific financing needs of small businesses through partners, which include banks, community development organizations and microlending institutions.
One of the advantages of obtaining a business loan from a bank is that they generally offer lower interest rates than personal loans. In addition, there are sometimes additional fees such as an application or origination fee.
Business loans also tend to have much higher lending limits, though repayment periods are usually shorter but sometimes include balloon payments. Some bank loans also include a “call” feature, where the bank is allowed to call in the loan at a specific time; when this occurs, the business must pay the entire outstanding amount of the loan.
Major banks typically require collateral for business loans, such as inventory, receivables or real estate. In addition, owners usually have to sign as guarantors, which should be carefully considered as business owners are putting both personal and business assets at risk if the loan is not repaid.
Watch Out For The Paperwork
Though interest rates are often lower, standard business loans have some caveats. First, the process can be long and detailed and requires an extensive application.
Unlike personal loans, once approved, businesses that obtain standard loans are typically required to supply lenders with quarterly and or annual financial reports that could alert the institution to potential issues that could impact the repayment of the loan.
Consider the Lending Alternatives
Though traditional business loans can be attractive, they can be hard to obtain. That’s one reason why business loans funded by alternative lenders have dramatically increased in recent years. Typically, alternative lenders are able to approve loans as soon as 24-481 hours and fund them immediately. They regularly make loans to businesses with imperfect credit that may not qualify for a standard loan, and generally offer a much more manageable application process.
Many alternative lenders base approvals on a business’s average gross monthly sales volumes. BFS Capital, for example, funds loans ranging from $5,000 to $500,000 to businesses that have been in operation for more than two years with at least $15,000 monthly sales. Payment arrangements can be tailored to your company’s cash flow.
Note that in exchange for expedited service and accepting greater risk, alternative lenders may charge higher effective interest rates.
What do you need to apply for a business loan? It depends on the lender and the type of loan that you are seeking. Applying for a SBA 7(a) loan has stricter rules, for example, than merchant cash advances.
BFS takes a holistic approach to the application review process not offered by other lenders so you can focus on growing your business.
1Subject to receipt of required documentation, underwriting guidelines, and processing time by merchant’s bank. Financing for more than $100,000 may require additional underwriting review time. Funds are deposited into your business checking account as soon as the next business day after approval and acceptance of terms.