Which Financing Option is Best for Your Business?

March 18, 2020 (Investorideas.com Newswire) Newcomers to business often underestimate how likely it will be that they need external financing. Whether you are expanding or just trying to get through a stressful few months before a big product launch, seeking out some funding for your business is always a smart idea. Here are some of the options you could consider if you feel like your business needs some help with financing.

Secured Loans

Secured loans are one of the most common types of loans you will find when you search for commercial loans. They are simple enough; you apply for a loan with either a bank of another major financial institution. They will usually decide whether they are going to grant the loan by looking at your credit history and your business plan.

However, you will need to provide some sort of collateral as part of your application. With some loans, this collateral might even be something in your personal life, such as your car or your house. This is to ensure that you make your repayments on time and to protect the lender should you fail to pay back the loan.

Unsecured Loans

You might also be able to secure an unsecured loan. However, the nature of these tends to mean that they are slightly rarer. Unsecured loans do not make use of collateral like secured loans do. This makes them a greater risk to lenders as they will have a harder time getting their money back if you can't make repayments.

Therefore, unsecured loans tend to only be offered to companies with a proven good financial history. You will need to demonstrate that you have had financial success for at least two years. With a good credit history and clear balance sheets dated back beyond this period, you should have all you need to convince the lenders that you will be a sound investment.

SBA Loans

Running a small business? You are the perfect applicant for a Small Business Administration loan, otherwise known as an SBA loan. These are great as they tend to have flexible payment options and interest rates which are more manageable than other types of loans.

They have been constructed specifically for small businesses. One of the disadvantages of secured and unsecured loans is that any size of company can access them. One application might be on behalf of a multimillion company whilst the next in the pile is from a small company with less than 10 employees. This can be quite difficult for a smaller company to navigate, but an SBA loan can offer them exactly the right support they need. There are many types of SBA loan which all come under the general bracket so it is incredibly important that you find the right one for you. You can read more here if you wish to know which SBA loan might suit your business the most.

Investors

Another popular way of securing financing for your business is to use investors. The process for attracting investors can be laborious but it can also net you some key contacts within your industry. Investors can also take on the role of a mentor if you are new to the business world. They usually have lots of experience they are willing to share and their influence could elevate your business to a level you never thought you could achieve.

The downside to investors is that you may have to release a share of equity to them. Depending on their role in the business, this could be anywhere between 10-40%. Unless you are going into business with them directly, you need to make sure that you always retain the majority control of the company. If you are releasing equity to them in exchange for financial help and mentorship, expect them to take a major interest in how the business is run.

Equipment Financing

If you simply need to expand your business with new equipment, perhaps to accommodate a surge in interest from customers, then you might simply need equipment financing. An equipment financing loan is more akin to a line of credit than an actual loan. You will be given an amount to spend on new equipment and you are free to acquire what you need. It can often be used for hiring equipment instead of buying it outright; a feature which might be useful if you only need the equipment for one specific job.

The asset itself often forms the collateral for this type of loan. This can be good for many businesses who need a financing solution which will be low-risk and cost-effective for them. If you only need a certain piece of equipment but do not yet have the means to secure it for yourself, this might be the right option for your business.

Choosing the Right Loan for You

With so many financing options out there for your business to use, it can be difficult to determine which one will be right for you. The very first thing you should always do is sit down with your business plan. Take a look at your projections and where you wish to move. This should give you an indication of what you might need in terms of financing.

Make a list of everything you need to use the financing for and don't forget to leave some room for a small contingency fund. Your needs might dictate precisely what type of loan you can apply for. For example, you can't use an equipment financing loan to pay your staff.

It might be an easy decision to determine where your financing will come from or it might take some thought. Make sure you get all your business affairs in order. It might be worthwhile sorting out your personal financial situation too as some lenders will want to see that too. Securing financing for your business can be an arduous process but it can also open doors for you. Start making a plan to acquire the right loan for your business today.

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