One of the signs of an improving economy is the wave of new entrepreneurs and start-up businesses. Each has different leveraging techniques to boot, which is either a trending idea, a huge capital, or a lending solution. Most small businesses don’t see any problem with the stream of ideas, but putting everything in action without sufficient funding is but a chase in the wind.
Usually, there are two things that any start-up business will initially focus on, and these are nailing that extraordinary business plan and securing sufficient capital. Most companies are products of brilliant ideas, but many met its demise because of the lack of sustainable funding. While the market for lending and bank financing may be robust, it is the long process and the varying eligibility requirements that limit the heights that small businesses reach. Even though you are spoilt with choices, you must still have the skills to assess which one will give you the leverage.
The Conventional Way
A bank is the first thing that crosses the mind of a financially strapped entrepreneur. The reasons vary but can be trimmed down because of the following five advantages:
- Accessibility and Convenience
This is maybe the most fundamental reason why small business owners opt to turn to bank financing. Almost all working class people have either an ATM or a credit card that provided them enough familiarity and level of comfort in dealing with banks. Credit card loans, for example, can be processed online and without the need for additional documents. The loan can also be deposited in the borrower’s account after it has been approved.
- Lower Interest Rates
The rewards of your patience in securing proper documentation, in building your credit score, in wise asset acquisition, and in the long waiting process is a significantly lower interest than most alternative funding.
- Multiple Loan Options
Banks have flexible and varied options for each need. They vary the services for them to encourage more entrepreneurs to take advantage of their offers, thus maximizing their profits. In utilizing a loan that exactly fits the needs and capacity to pay off the borrower increases the chances of repaying it back on time, and consequently for the banks to recover their investments.
- Non-profit Sharing
Other alternative lending solutions like angel investing and venture capitalism will require a percentage of your gross revenue in exchange for the funding. Banks don’t do this and will just earn out of a fixed interest that is already spread in the monthly payments.
- Tax Implications
A portion or percentage of the profits of the small business that goes to the loan payment is exempt from tax, which could be a form of relief for entrepreneurs.
Initially, any business that seeks additional funding support would go to the nearest bank and apply for a loan. This is where the real struggle begins – from securing all the paperwork and interviews, only to find out that the whole process will take an uncertain “few weeks” without guaranteeing anything. The blow of rejection is sometimes inconsolable, especially for an entrepreneur that is already exhausted from running his business, only to know that his loan got rejected because he couldn’t prove enough that he will pay it back.
A large percentage of small businesses that seek conventional bank loans are declined mainly because of its stricter terms and requirements that most of them cannot comply with. But nowadays, banks are seeing a growing potential in the small business sector, which as of the moment, comprise the majority of businesses running in the USA. It is time to come up with a tailored solution that small businesses can easily fit its needs in, which is small business loan programs. Continue reading to know what are the different types of small business loan that the market is now offering.
Innovative Funding Solutions
Banks and other financial institutions are getting more innovative with their ways of attracting more small businesses getting a small business loan. The void left by conventional bank loans is enough to hold these top small business loan programs.
- US Small Business Administration Loans (SBA Loans)
These are aimed at providing funding solutions for American small business owners. SBA loans can cater to a wide variety of loan types and is also capable of giving counsel, network connections, and even opportunities to further help small business owners to thrive in their markets, thus earning the attribute “solution.”
Being backed up by the US government, it partners with both public and private financial institutions to implement its own terms when it comes to eligibility and requirements. The SBA serves part of the guarantee for both the borrower and the lender to minimize the risks for both. It grabs about 25% of the loaned amount as a guarantee, which lessens the risk of the lender. As for the borrower, it extends the government’s Federal Reserve rules and implications of non-compliance to protect his or her interest.
Advantages: SBA loans are one of the most accessible small business loan programs today, and there are many banks and financial lending firms that partner with the SBA. It offers different loan types that can suit the varied needs of a small business. Its best asset would have to be the fact that it is a government regulated loan, which is like a seal of guarantee to its credibility and reliability.
Disadvantages: Even though SBA loans cater to a variety of needs, it is not the best option for startups. Much like with traditional bank loans, it requires a substantial period of operation (2 years), a collateral, and a stellar credit score. The process can also be quite tedious and long, which cannot cater to emergency funding. SBA loans also require stricter documentation and eligibility, which makes it harder for some to qualify.
- Business Credit Cards
If you want it fast and convenient, business credit card loans are one of the hardest to beat. Credit card companies can even process an application online and may not even require additional documents for loans less than $25,000.
Advantages: Credit card loans are fast and reliable, with just a few clicks of the button. It can also offer promotional rates for both cash advances and installment purchases. Most credit cards are bundled with reward cards, which can introduce greater savings for the small business.
Disadvantages: If not managed well, credit card loans can lead you to more financial burden, as interest rates are computed and may bombard you with penalties and charges. You’re expenditure or loan eligibility is somehow limited to the credit limit that the merchant bank has given you.
- Marketplace Lenders
They are industry or purpose specific lenders that aim at matching with the right borrower.
Advantages: Marketplace lenders usually process loans online, which makes the approval fast and the process convenient for borrowers. It can also lower its interest rates depending on the borrower’s credit rating. It may not also require securities and collaterals unlike with other loan providers.
Disadvantages: Marketplace lenders offer shorter term loans and vary with its documents and eligibility to require, which ultimately depends on a lot of factors like revenue, credit rating, and business nature.
- Invoice Factoring
A type of funding solution where a company sells its accounts receivables (invoices) to a third party at a discount. It is mostly availed as a form of immediate cash in exchange for some future receivables or assets. Invoice factoring is a kind of B2B transaction.
Advantages: Invoice factoring can immediately fill cash flow gaps brought about by slow paying customers. It can be an affordable solution provided the loan will be repaid shorter than 60–90 days (interest rates are lower within this period). It is also convenient to process. The lender can easily connect to your accounting software to collect the invoices.
Disadvantages: The problem is when the customer is unable to pay the invoice because you have to fill in the payment yourself.
- Merchant Cash Advances
This is similar with invoice factoring where a company can advance in cash a portion of its credit card or debit card receivables from the merchant that processes it. The merchant, in turn, gets a percentage of the daily credit transaction sales until the full loan amount and interest charges have been repaid. This is also a type of small business loan without collateral.
Advantages: Payments are flexible and won’t hurt your existing cash flow because only a percentage of the credit sales will go to it. There are also no fixed due dates because the repayment is percentage based. The credit score is also not considered here.
Disadvantages: It cannot guarantee a big amount because the approval is tied to the average credit sales history of the company. Basically, a merchant cash advance is not a lending solution but a financial product, so practically, there will be more limits when it comes to the amount and payment terms.
- Alternative Lenders
Small businesses can avail from a number of online loan alternatives, especially when the need calls for immediate cash.
Advantages: Online loans are basically fast, easy, and reliable because the entire process is staged online. It is also easier to qualify because it doesn’t require very high credit scores and a collateral.
Disadvantages: It is definitely the interest rates, which can be anywhere from 20 to 80 percent APR or even higher.
It is best to inquire directly to the different funding solution providers, so you can gauge the kind of small business loan you need. For a detailed small business loan program reviews, see it from CrowdReviews.com.
John Tovar
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