Fun With Finances: What Types of Business Loans Can Best Benefit Startups?

Did you know that nearly 20% of startups fail in the first year due to financial constraints? Even worse, 30% of those that survive the first year don’t make it in the second year.

Most entrepreneurs face financial issues in the first few years in business. Luckily, there are many types of business loans that young entrepreneurs can always turn to whenever they need financial help.

Before you dive in, you should evaluate your financial status and know the available business loan types. This article discusses the best types of business loans available in today’s financial world. Read them so that you can make the right financial decision for your startup.

Small Business Administration (SBA) Loans

The United States government offers small business loans. The government provides these loans to motivate young entrepreneurs to grow amidst the competitive business environment.

SBA loans have government backing; hence, they offer lower rates when compared to the other loans. However, the low rates attract many applicants, making it necessary for the government to scrutinize the applicants.

There are three main types of SBA loans: 504 (a) loans, SBA 7(a) loans, and the microloan SBA loans. SBA 7(a) loans offer the highest loan amount of up to $5 million, while the microloans provide the smallest amount starting from $500.

You can only qualify for the SBA loans if your business has been in operation for more than three years. But if you need capital to start businesses like the 17% of the year 2020 applicants who used the SBA loans to start businesses, then your credit score must be more than 620.

You should also show a well-written plan of how you intend to use the money you get.

People who qualify for SBA loans enjoy a flexible repayment period; plus, they also get advice on using the money well.

Invoice Financing and Invoice Factoring

These two loan options are similar, with only a slight difference. Both are great options for businesses that offer services to slow-paying customers.

For instance, if your clients pay after two or three weeks, you can use their invoices to get a loan to cover a financial emergency before receiving the payments.

In invoice financing, the invoices act as the collateral for the loan. The lender checks the value of the invoices you offer and then gives you a loan whose value is 70 to 90% of your invoices’ value.

The same concept applies in invoice factoring, only that the lender buys the invoices instead of taking them as collateral. When your clients pay, the money is credited directly to the lender’s accounts.

Both invoice financing and factoring are reliable short term financing options. Should you decide to choose them, you should find a reliable lender you can always borrow.

Equipment Financing

Young entrepreneurs often find themselves facing the challenges of securing business equipment. Thanks to equipment financing, young business owners can get the right assets they need to keep their business alive.

As the name implies, equipment financing is a business loan for buying or replacing office work tools. You can use it to get new tools such as tractors, desks, and other income-generating assets.

You may also rely on this loan to replace the old equipment, which no longer fits a modern office setup.

Like in the other loans, you must find a reliable lender. According to financial advisors in Loanpal, the lending terms and rates vary according to the lender. But generally, most lenders require the applicants to provide a 15% down payment of the desired equipment.

One great advantage of equipment financing is that the loans offer 100% financing. The financing caters to the shipping costs, repair and maintenance, and so on. The loan also comes in both short-term and long-term options to allow businesses to choose the right for their needs.

The main avenues for equipment financing include equipment loans and SBA loans.

Personal Loans

A personal loan comes in handy when your business assets cannot allow you to secure the conventional loans, or the business credit score is too low for qualification.

You don’t involve any business name or activity when applying for a personal loan. Instead, you use your name and personal belongings such as your car as security. And when you get the money, you use it for your business purposes.

The only drawback of personal loans is that they can be tempting. You can easily use them for your endeavors and forget about business needs. Also, you can’t hold your business partners liable for the loan in case you default.

Nevertheless, a personal loan is the best if your credit score is excellent. You can get a loan from traditional banks or credit unions.

Business Credit Cards

A recent survey by the Federal Reserve Small businesses found that 53% of small enterprises use credit cards at some point.

Credit cards offer an incredible way of paying for purchases, but you can also use them as a loan to boost your business. The loan comes in the form of unsecured credit lines, whereby the lender deposits an amount to your line.

The only difference between the line of credit and the other loans is that you don’t get the money as a lump sum. Instead, you only withdraw it in small amounts when you need it.

You only pay interest for the amount you have used and not the entire amount deposited on your line unless you have used it all.

A business line of credit can be a significant booster for your new business if you utilize it well. It can also help you learn how to separate your personal and business money. To qualify, you must have excellent personal and business credit scores.

Crowdfunding

A crowd is a group of like-minded people who come together and contribute a pool of financial resources. It is the best option if you don’t want to get a loan from traditional financial institutions.

Here is how it works: you find people with the same ambitions as yours, agree on your contributions, and then offer loans to each other. There are three main types of crowdfunding, which include equity, debt, and rewards Crowdfunds.

Crowdfunding requires proper marketing; plus, you must be picky about the people you add or join a crowd with. After the contributions, you can now agree on the terms of lending and borrowing. If your crowd is large, you may be lucky to borrow up to $5 million for your business.

Angel Investor Loans

Angels are senior entrepreneurs/investors. They are people who have already made it in the business world and are out there looking for young entrepreneurs to help them financially.

There are many angels, although the majority enjoys a private life. You can only find them through referrals or the available social media groups for angel investing.

Unlike traditional banks, angel investors do not consider the credit history of the applicants. They only check your business plan, your determination, integrity, and financial discipline. If you have the potential, angel investors can give you up to $1 million.

Are you wondering what they get in return? This depends on the type of angel investor you get. But mostly, angel investors are like shareholders in the business. They become strategic managers in the firm and occupy the top-level position in your business.

This means that apart from the financial decision, angel investors have the right to make other vital plans for your business.

Merchant Cash Advance

Do you have a considerable amount of stock in your business? Do you need urgent money to take care of your short term needs? You might need to consider the merchant cash advance.

With a high approval rate of 79%, merchant cash advance loans are reliable financial options for all businesses. When you apply, the lender visits your company to check the stock amount on your shelves/business.

The lender uses that stock as the collateral to give you the loan. The loan comes as a lump sum, and in return, the lender gets payments for the store. This means that the lender receives all the money you get from the sales until the loan is fully paid.

A merchant cash advance is a short-term loan, and its interest rates may be high. You should only consider it as your last option when you desperately need an emergency loan. Also, you should compare rates from different lenders to get the best terms.

Expand Your Business With the Best Types of Business Loans

There are many types of business loans, but the above are the most common ones. Don’t watch your business fail again because of financial constraints. While the financial issues will always be there, mostly if you need to expand, the right loan will fix your problems.

Your work is to find the right lender and make sure you meet the qualification criteria and repay in time.

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