If you thought financing for a small business was easy, think again. It can be a tricky process for some potential small business owners. While there are some loans that are great for startups, others can be better for more established businesses. So what you need to do is understand the different types of loans to determine the best fit for your business.
If you are considering a bank loan, you must understand that this type has drastically diminished over the years. For the business owner that has strong credit history and good amount of cash flow, a bank loan might be a great option because of the lower lending rates as compared to other lending types. So if you want to go this route be prepared to show detailed financial information, a solid business plan and worthy collateral.
The smaller, local banks usually have an easier underwriting for small business loans, but the well known larger banks tend to have the better interest rates. You´ll also have to consider the processing times, too. From start to finish, a business loan can take several weeks to be approved. But, if you are in a position where you have time to wait financially, then this option is good.
An alternative to a business loan can include the utilization of personal credit cards. There have been several small businesses started using these because of the readily available cash. Plus, credit cards can sometimes be much easier to obtain than a traditional small business loan. But that does not mean it can be the best option for funding your business. If you consider all of the benefits of the different types of loans, the interest rate needs to be considered. Because credit cards tend to have much higher interest rates. Not only are the interest rates higher, but using personal credit cards to fund a business can be tricky. If your business fails, your credit will be severely damaged and this could result in your inability to purchase any other big items in the future.
So, beware that credit cards should not be really thought as a business loan but rather as a backup for financing for business needs.
If a small business loan or using your personal credit cards are not for you then securing a line of credit through a bank might sound good. Lines of credit are very flexible and gives you a supplemental cash flow when any business opportunity comes up or if you want to fund a business expenditure.
Most banks offer lines of credit ranging from $10,000 to $100,000, and are usually accessed through a bank credit card. A good benefit of a line of credit is that you are able to separate personal spending and business spending and keeping track of accounting.
If you have a very supportive circle of friends and family, obtaining a loan from them can be a great option for small business owners. This type of loan offers the quick availability of cash once the terms have been established. Plus, the interest rates are typically lower if not existent as compared to bank loans.
So if you are in the market for starting a new small business, you now know of the different types of loans available as well as the risks and benefits of each. By knowing this you’ll be better prepared when choosing your funding option for your small business loan.