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Understanding Loan Options

There may come a point in your business that you need to borrow money. Perhaps you have a big project on the horizon, need new equipment, or simply need cash to carry you through slow times. It’s a big borrowing world out there! It can be overwhelming trying to decide what option will work for you. Listed below are some options of different style loans. Investigate all of your options as there are other varieties that may not be listed here.


SBA (Small Business Administration):

If you are a new business or an existing business that is expanding but may have difficulty getting a traditional loan, you may be able to take advantage of this type of loan. This style of term loan U.S. government-backed. There are several programs within the SBA structure. Because they have government backing, banks are more comfortable offering these loans. The terms can be longer and the rates can be lower. Approvals can be tougher and there may be some red tape and more paperwork. Stop into your local bank to seek more information and to see if they participate in SBA loan programs.


Traditional Bank:

This will likely be where you look first since they offer the best rates and terms. This is why they are the toughest to acquire. More than 70% of business owners get turned down since they require stronger credit scores. If you need the money quickly, you should know the turnaround time is anywhere between one and three months. If approved, and time is not an issue, you can expect fixed monthly payments and interest and low payments.


Lines of credit:

A line of credit is a great option for business owners. These basically allow you to take cash as needed from an approved amount you are eligible for. There are two types of credit lines: traditional and non-traditional. Traditional lines of credit require more in the way of documentation. Once approved, you’ll probably be required to have an annual financial review in order to maintain the line. One of the benefits are that you can write checks on the account.

Non-Traditional business credit card lines of credit are unsecured and are based on your FICO. You get your money faster and you won’t have to have yearly reviews. Furthermore, you won’t need to provide as much documentation. Your payments are more flexible but this can also be a drawback. Not having fixed payments makes it easier to run up your limit causing the account to become out of control. This also means your interest will add up and this can create a downward spiral.


Alternative lending/cash advance:

Alternative lending has become a popular method of borrowing for those that either need money faster than a traditional option offers or if your credit is an issue. This style loan is typically short term and can be more expensive due to being unsecured and receiving your money faster than other methods of borrowing. Companies (like us) require little paperwork (depending on the program) and you usually have an answer within a few hours and funds deposited within 1 business day, if not same day. Be sure to check out our earlier articles; “Cash Advance…Is It Right for You?” as well as “Considerations when applying for a Cash Advance” for additional information.


Merchant cash advance:

If your business is heavy on credit card sales, this may be something you’ll consider. A MCA provider will give you money up front. A percentage of the monies granted, along with fess, come out of your of your credit/debit card sales until the debt is paid off. The factor rate is usually between 1.2-1.5, depending on your risk factor. The higher that rate is, the higher the fees are. Again, because of a payment that is never the same, it makes it tough to gauge when you will have the loan paid off. This also makes it difficult to assess profits and budget money. Do your homework on this (and any other) style loan before making a decision.


Account receivable/factoring:

You’ve probably looked into this option if you are a business owner that doesn’t get paid till a job is completed. How accounts receivable financing works is like this: the lending/factoring company uses your outstanding invoices as collateral. Typically, you can expect to receive 70-90% of what your customers owe you. Once your client pays you, the factoring company collects their debt along with a fee.


After figuring out what you need money for and how much you will require, look at your options. Your credit, how fast you need the money, as well as the other factors I mentioned above are things you want to take into account when shopping around. If you’re going to turn a profit and move your business forward from borrowing this money, it is worth it. Don’t take money you don’t need and be diligent in paying it back on time. Not only is this the responsible thing to do, but it’ll give you better terms and rates in the future as a good risk.

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