Want to start a business, but not quite sure how to finance it? Can’t decide between getting a loan or finding an investor? Does looking at multiple loan options leave you feeling confused or overwhelmed?
The details involved in starting a business can be quite complicated, especially for those who have either never started a business or can’t decide the best option for funding. But it doesn’t have to be a complex process. Read on to learn more about the funding options you have as a business owner and, consequently, how to make the best decision for you.
Loans vs. Investors
While bringing in investors is an option, loans tend to be more popular because they often require less input from outsiders on how to run your business—unsolicited advice can often cause disagreements or arguments that may harm the development of your company. In addition, loans have tax-deductible interest payments with lower rates, which may cause less stress for business owners who aren’t seeing significant growth in the early stages of development. Also, loans give you the benefit of setting your own terms based on expected receivables.
TYPES OF LOANS
Though loans offer multiple advantages, it’s important to be aware of all options in order to make the best possible decision for the growth of your business. There are many types of business loans, one being an SBA (Small Business Administration) loan.
SBA loans include loan programs, microloan programs, real estate and equipment loans, and disaster loans. You can learn more about the specifics of these SBA loans here.
In addition to SBA loans, banks and alternative lenders offer some similar loans, as well as funding opportunities the SBA doesn’t offer. These viable options include working-capital loans, equipment loans, merchant cash advances, lines of credit, professional practice loans, and franchise startup loans.
Working Capital Loans
Working capital loans are designed as short-term solutions for businesses in need of money to help run their operation. These funds can be used to pay bills, make payroll, purchase inventory, etc. The advantage of a working-capital loan is that it gives small businesses the ability to keep their operations running while they search for other ways to increase revenue. Some downsides of a working-capital loan are that they often come with higher interest rates and have short repayment terms.
Merchant Cash Advance
A merchant cash advance is a loan made to a business based on the volume of its monthly credit card transactions. Businesses can typically receive an advance of up to 125 percent of their monthly transaction volume. The terms for repaying a merchant cash advance vary by lender. Some take a fixed amount of money out of a business’s merchant account every day until the advance is repaid with the agreed-upon interest, while others take a percentage of the daily credit card sales.
The best candidates for merchant cash advances are businesses with strong credit card sales, such as retail merchants, restaurants and service businesses. The advantages of merchant cash advances are that they are relatively easy to obtain, funding can be received as quickly as in a few days and the loan is paid back directly from credit card sales. The biggest downside of a merchant cash advance is that it is expensive. Interest on these loans can run as high as 30 percent a month, depending on the lender and how much money is being borrowed.
Line of Credit
Lines of credit are similar to working-capital loans in that they provide small businesses money for day-to-day cash-flow needs. Lines of credit are not recommended for larger purchases, and are available for as short as 90 days to as long as several years. One benefit of a small business line of credit is that you pay interest only on the amount you use. This gives you the ability to take only what you need and pay interest only on what you use. These loans are usually unsecured and don’t require any collateral. They also have longer repayment terms and give you the ability to build up your credit rating if you make the interest payments on time. The downsides of lines of credit are the additional fees charged and the possibility of building up a large amount of debt.
Specialized Business Loans
Other more specialized types of business loans include equipment loans, professional practice loans, and franchise startup loans. In fact, certain companies, such as Mulligan Funding, are now offering loans specifically for women. These include working capital loans, merchant cash advances, and business lines of credit. Placing emphasis on female entrepreneurs is a great way to encourage more women to build the business of their dreams.
In a Nutshell
As you can see, there are a variety of options out there to suit a potential business owner’s needs. The important part is finding what works best with your current financial situation, type of business, and the specific goals you have for your company’s future. After all, the success of your business is largely dependent on the amount of time and thought you put into the financial backing of your venture. So take some time, choose the right loan for you, and watch your new business flourish!