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Five Loans To Know About When Starting A New Business

Starting a new business in any industry can be scary and challenging. Where do you start? Who do you call? How do you take an idea and make it reality? A lot of these questions are what new business owners ask themselves and may struggle to answer. However, I believe the best thing you could do is start—start somewhere and see where it takes you.

While a lot of things are important when you are first venturing out to start this new business, one of the key components to keeping a small business afloat is money. Every company, no matter how small or big, needs some amount of capital to help fuel and build the business. The funds may not always be so accessible and on hand, so this is when loans can become the best option for small businesses looking to grow.

In the past, asking for a loan was seen as weak or an indication that a company was not financially stable enough to operate and continue as a business. However, in the age of startups, I believe loans are one of the things helping companies get off the ground and succeed. So yes, it’s okay to ask for help. Sometimes, it may even be better to get financing for a new or small business.

Here are some loan types that can help you.

Term Loan

A term loan sounds exactly like it is—a lump sum of cash given to a business that must be paid back with interest over a predetermined amount of time. I believe this is the simplest type of loan and great because the business can use the money how they see fit. However, getting a term loan can make it hard to get a second loan because the first loan must be repaid first. These loans are generally given through the banks or institutional lenders.

SBA Loan

An SBA loan is a loan for small businesses that is partially backed by the government through the Small Business Administration. Many times, traditional banks will not lend to small businesses, so an SBA loan is a good alternative for businesses looking to get a loan for their business. These loans are given by banks or large private lenders, with the government guaranteeing 75% of the loan, making it less risky for lenders. Although the application process can be long, between 1 to 3 months, it requires a lot of documentation and can be easy to qualify for due to government backing.

Lines Of Credit

Lines of credit can help finance a business on a need-by-need basis. This loan gives a business access to capital, up to a certain limit, with interest payments required on the money drawn. This can be a good option for businesses that are more seasonal and need flexibility when it comes to loans. Lines of credit can be unsecured or secured by collateral, which may limit how much money the business can borrow. One drawback of this type of loan is that lenders generally want your time-in-business to be a minimum of 2 to 3 years, making it not ideal for a brand-new business.

Equipment Leasing

No matter what industry you are starting in, equipment leasing can help businesses buy new equipment or used equipment necessary to operate. Equipment can be very expensive, so I find leasing them with no down payment is a great solution. Through leasing, businesses can also decide whether they want to keep or return the equipment at the end of the term. The type of equipment ranges from anything like heavy machinery to office computers and copiers. In addition, the government gives tax incentives to lease equipment. But with equipment leasing, there are no early prepayments. The business is responsible for paying for the full term and cannot pay it off early to get a benefit.

Invoice Factoring

Invoice factoring can help get financing and is probably the most requested type of financing. In my experience, this type of loan is ideal for businesses that are waiting to get payment on invoices, which can sometimes take up to 90 days to get paid, causing a large cash crunch in the company. Lenders will advance between 80% to 90% of the invoice value to the company, and the remainder will be paid when the invoice is paid less the interest. This is ideal for businesses that need cash on hand to pay for day-to-day operations, salary, rent, etc., and cannot wait until the invoices are paid. This type of loan is ideal for a business owner shipping out merchandise or providing a service because as soon as they invoice, cash can be made available for business needs. Although invoice factoring is quicker to set up and has fewer credit restrictions, this type of loan is higher priced than accounts receivables, making it not ideal for businesses tight on cash.

These are just five of the many different loans you can get for your business. Depending on what industry you’re in or what stage of growth you’re in, the type of financing you need or want will vary. Some loans make more sense than others, it all comes down to what your business needs.

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