Connect with us

Finance & Accounting

SBA Loans vs. Bank Loans: How to Choose

Published

on

When deciding between a business bank loan and an SBA loan, the right fit will depend on the number of years your business has been in operation, your annual revenue, your credit history and a handful of other factors.

Generally, bank loans offer the lowest interest rates and best terms on business loans, which make them the first stop for many borrowers seeking financing. However, if a borrower doesn’t qualify for a bank loan, a Small Business Administration loan with competitive interest rates and terms can be a good alternative. Take a closer look at bank loans and SBA loans to understand how each works.

Overview of bank loans

Banks, credit unions and other financial institutions offer small-business loans. The amounts, interest rates, fees, eligibility requirements and other terms of these loans vary depending on the bank and its guidelines. The repayment period for these loans may be as short as 12 months or as long as 20 years.

General eligibility requirements

Bank loans can be hard for many small businesses to qualify for because the lender takes on the full risk from nonpayment of the loan. Each bank sets its own qualification standards for the loans it offers. However, some general requirements include the following:

  • At least two years in business.

  • Minimum annual revenue amount.

  • Strong credit history.

Types of small-business loans offered by banks

While they may be branded with specific names, the following are some common types of small-business bank loans:

  • Business lines of credit.

  • Term loans.

  • Equipment loans.

  • Commercial real estate loans.

Uses of bank loans

Bank loans can be used for a number of purposes including, but not limited to, the following:

  • Purchase of land or commercial property.

  • Expansion or remodel of an existing business.

  • Working capital to improve business cash flow.

  • Purchase of equipment and machines.

  • Funds to consolidate debt.

Interest rates

Business loan interest rates vary by lender, but a range from 2.5% to 7% is common for small-business loans from banks. Typically, your lender will base your interest rate on factors such as the following:

  • Loan amount.

  • Loan term.

  • Your creditworthiness including credit score.

  • Business relationship with the lender.

When a traditional bank loan may be a good fit

Some situations where a bank loan may be a good option for your business include:

  • Established business: You’ve been in business for more than two years and have a proven track record.

  • Strong annual revenue: An annual revenue amount of over $100,000 can meet the qualification requirements of some bank loans.

Overview of SBA loans

If you’ve been turned down by a bank for its loan program, you may still qualify for an SBA loan. These loans are not offered directly through the SBA, but are instead handled by approved lending partners. Some of these lending partners may even be the same lenders that you looked at for a bank loan. Qualification for an SBA loan can be easier for borrowers because SBA loans are guaranteed by the Small Business Administration, meaning there’s less risk to the lender in the case of nonpayment of the loan.

The SBA’s Lender Match tool can help you find a lender in your area. After answering some questions about your business, you’ll receive a list of lenders that are interested in your loan. This gives you the opportunity to compare rates, fees and terms for lenders before submitting your application.

General eligibility requirements

Eligibility requirements are determined by the loan program and the lender. A complete list of requirements will be given to you by the lender, but some general eligibility requirements for SBA loans include:

  • The size of your business must meet SBA standards.

  • Your business needs to be for profit and officially registered.

  • Your business should be located and operating in the U.S. or its territories.

  • You’ve invested time and money in your business.

  • You can’t get financing from other lenders.

Types of SBA loans

SBA loans can be used to start or expand your business. There are three main types of SBA loans available to borrowers:

  • SBA 7(a) loans including standard 7(a) loan, 7(a) Small Loan, SBA Express, Export Working Capital, International Trade, Preferred Lenders, Veterans Advantage and CAPLines.

  • 504 loans.

  • Microloans.

Uses of SBA loans

How you use the funds from your SBA loan can depend on the type of loan you get. For example, SBA 7(a) loans can be used for working capital, while 504 loans cannot. Here are some common uses of SBA loans:

  • Working capital or revolving funds.

  • Real estate, equipment, machinery, furniture, supplies and materials purchases.

  • Construction or renovation of buildings.

  • Establishing a new business; acquiring or expanding an existing business.

  • Refinancing existing business debt.

  • Improvements to existing facilities including land, streets, parking lots, landscaping and utilities.

Interest rates

Depending on the type of SBA loan you get, the interest rate could be tied to the prime interest rate, the Libor rate, U.S. Treasury issues or something else. For example, the interest rate for a $60,000 fixed-rate 7(a) loan would be the prime rate plus 6%, while the interest rate on a microloan depends on the lender. The SBA sets maximum interest rates and you can negotiate with your lender on the interest rate you pay.

When an SBA loan may be a good fit

Situations that make an SBA loan a good option for business financing include the following:

  • Startup financing: The SBA’s 7(a) loan can be used to establish a new business.

  • Credit flexibility: There’s the potential that you can qualify even with poor credit ratings.

  • Continued support: Some SBA loans offer counseling and education to help you get your business off the ground and continue to operate it.

Advertisement

This post was originally published on this site

Continue Reading

Finance & Accounting

Business Loan vs. Line of Credit: Which Is Right for You?

Published

on

Business loans and business lines of credit are different forms of business financing. With a business loan, you’ll receive a lump sum of money and pay it back over time. A line of credit is a pool of money that you can keep dipping into, up to a limit.

In general, business loans are the better choice when you need a significant amount of financing for a major purchase or expansion. Business lines of credit are better suited for evening out gaps in your cash flow or floating your finances through an emergency.

What is a business loan?

A business loan is a lump sum that you receive from a small-business lender and then pay back over time with interest. Business loans are best when you need financing for a specific project, investment or acquisition that will help grow your business.

  • You can usually borrow more with a loan than you can with a line of credit.

  • In most cases, you’ll receive all your loan funds in one upfront payment.

  • You’ll typically need to secure a loan with collateral like real estate, inventory or cash savings.

  • Some types of business loans can only be used for specific purposes — for instance, if you take out an equipment loan, you can’t use it to pay your employees during a lean month.

What is a business line of credit?

A business line of credit can help you get access to working capital whenever you need it. Lines of credit work in a similar way to credit cards — you can borrow as much money as you need up to your credit limit, and then pay it back over time. Lines of credit are best for businesses who want ongoing access to financing to even out their cash flow or to tap in emergencies.

  • Lines of credit can be used for any business expense.

  • Some lines of credit are unsecured, meaning you won’t have to provide physical collateral.

  • Lines of credit tend to be smaller than business loans.

Business line of credit vs. loan: How to choose

In general, business loans are best suited for financing specific projects. Lines of credit are more like business credit cards, making them useful if you want to tap into working capital on an as-needed basis.

The best choice for your business depends on how much financing you need, what you want to use it for and what you can qualify for.

Business loan

Business line of credit

How much financing do you need?

Varies widely, but loans usually offer more financing than lines of credit.

Varies widely, but lines of credit are usually smaller than loans.

What do you need financing for?

A specific purpose. In your loan application, you’ll have to explain what you plan to do with your loan funds.

Can be used for any purpose.

How do repayments work?

Installment credit — you receive a lump sum and pay it back in regular installments over time.

Revolving credit — you can carry a balance that accrues interest and pay it back as you’re able, then borrow more.

Do you have collateral?

Almost always requires collateral.

Unsecured lines of credit do not require collateral.

What product can you qualify for?

Tends to require good credit, multiple years in business and more annual revenue.

Usually easier to qualify for than business loans.

Where to get a business loan or line of credit

Many banks and online lenders offer both business loans and business lines of credit.

Bank business loans and lines of credit

In general, bank loans are the hardest to qualify for, but they also tend to offer the lowest interest rates and most favorable terms. If you have multiple years in business and good or excellent credit, seek bank financing.

National banks offering business loans and lines of credit include:

  • Bank of America: Business loans and lines of credit. Bank of America offers a wide variety of business loan products with competitive interest rates, but they can be difficult to qualify for, and the application process requires a meeting with a lending specialist. Read NerdWallet’s Bank of America business loan review.

  • Chase: Business loans and lines of credit. Chase offers small loans — business loans of as little as $5,000 and lines of credit with limits as low as $10,000 — which can be easier to qualify for than large loans and help you build business credit.

  • Wells Fargo: Business loans and lines of credit. You can get a secured or unsecured line of credit from Wells Fargo. The bank has discontinued many of its term loan products but still offers SBA loans.

Online business loans and lines of credit

Online lenders can be a good resource for newer companies or business owners with fair or bad credit. They also tend to fund loans more quickly than banks can, sometimes within a day. But their interest rates tend to be higher than those offered by banks.

Online lenders offering business loans and lines of credit include:

  • OnDeck: Business loans and lines of credit. Business owners with fair to good credit may be able to qualify for OnDeck loan products, but their interest rates can be high. Read NerdWallet’s OnDeck review.

  • Kabbage: Lines of credit only. Kabbage lines of credit are a good fit for business owners with fair credit who want fast access to capital, but their fee structure is complex. Read NerdWallet’s Kabbage review.

  • Funding Circle: Business loans only. Funding Circle tends to offer lower interest rates than other online lenders, but loans are more difficult to qualify for and take slightly longer to fund. Read NerdWallet’s Funding Circle review.

  • Bluevine: Lines of credit only. Bluevine lines of credit are available to business owners with as little as six months in business, but you may need to make frequent repayments. Read NerdWallet’s Bluevine review.

Advertisement

This post was originally published on this site

Continue Reading

Finance & Accounting

5 financial tips for millennial business owners

Published

on

Get up to 30%* off! Get going with GoDaddy!

Money matters

This content should not be construed as financial advice. Always consult a financial professional regarding your specific financial situation.

In 2017, I wrote an article about financial tips for millennial business owners. Five years later and two years into the ongoing COVID-19 pandemic, I was surprised to find that most of the original advice still holds true today. However, some changes are worth noting that will better empower millennials to succeed personally and professionally with their finances.

Five financial tips for millennial business owners

Here are five things today’s millennial business owners should consider. We will look at each tip in more detail.

  1. Pay down and pay off outstanding debt.
  2. Work alongside a financial adviser.
  3. Observe the money moves of Gen Z.
  4. Build an emergency fund.
  5. Establish Plan B.

1. Pay down and pay off outstanding debt

My original article emphasized the importance of getting out of student loan debt. I mentioned suggestions for managing that debt, like lowering student loan bills through better repayment or refinancing plans and making loan payments on time. Hopefully, doing these things would make it easier for millennial business owners to financially plan to start a business.

However, according to Bank of America’s Better Money Habits Millennial Report, student loans now only account for 25% of millennials’ debt. The Winter 2020 report examines the precarious balancing act that millennials have with outstanding debt. And this debt is no longer limited to student loans.

The reason? Millennials are no longer twentysomethings. Millennials began turning 40 in 2021. The report shares the various types of debt that millennials carry in middle age, including auto loans (40%), credit card debt (37%) and mortgages (36%). Each makes up a higher percentage of debt than student loans.

Further, the report addresses the worries that millennials have surrounding their debt. Those surveyed say that having debt keeps them from reaching professional and personal milestones. Millennials today feel like they can’t or can’t yet fulfill the following goals:

  • Buy a first or nicer home (42%).
  • Save for the future (40%).
  • Welcome children or grow their family (21%).
  • Get married (21%).
  • Start their own business (19%).

Despite these grim percentages, millennials are not giving up.

The COVID-19 pandemic has impacted the American workforce with the Great Resignation. Millions of workers are quitting their jobs, with a January 2022 study from Cengage Group citing 38 million workers who resigned in 2021.

Quitting does not mean millennials do not plan to work again. Instead, they are taking back their power. Ninety-one percent quit their jobs to make more money, 82% are reconsidering priorities amid the pandemic and 81% wish to pursue another passion or career path and are reskilling appropriately.

For many millennial business owners, relying on traditional financial tips like refinancing, budgeting, and making on-time payments isn’t enough to get entirely out of debt. Resigning from a job where you feel stagnant, or experience stagnating wages is a critically important next step for paying off debt and revitalizing your career trajectory.

2. Work alongside a financial adviser

Couple holding hands with a contract and pen on table in front of them

No matter your stage in running a business, every small business benefits from working with a reliable financial adviser.

What can a financial adviser do for you? These advisers assist millennial business owners in making sound financial decisions. An adviser is well-versed in financial literacy and understands planning in certain and uncertain times of economic stability. Many also work with niche-based entrepreneurs, like those within the FIRE (financial independence, retire early) and HENRY (high earner, not rich yet) communities.

Best of all, millennials can even work alongside a millennial financial adviser if they choose.

If you’re currently on the hunt for one, check out this roundup on Business Insider of the 23 most influential financial advisers for millennials.

3. Observe the money moves of Gen Z

Millennials and Gen Z “allegedly” don’t like one another very much. Something about a TikTok dance? I digress. Millennials can learn from individuals at all stages of entrepreneurship, including the class of creators that makes up Gen Z.

How exactly does watching the entrepreneurial moves of Gen Z translate to financial advice?

Gen Z came up in a world where many cheaper tools are at their disposal. They are natural social natives that utilize digital platforms to build their brand.

Watch which tools they use to build their business and how they save money through using them. A good example is observing the platforms they use, like Square to accept payments and Etsy for creating an ecommerce presence. These tools are cost-effective and allow Gen Z to focus on their business. Take a few notes if you haven’t started already, millennials.

4. Build an emergency fund

If business owners have learned anything from the COVID-19 pandemic, it is the importance of having and maintaining an emergency fund.

Emergency funds are exactly what they sound like: three to six months’ worth of expenses set aside to be used in the event of an emergency. This emergency can be anything from a pandemic to a natural disaster. Having an emergency fund means having the ability to cover an unexpected expense without taking out a loan or using a credit card with a high-interest rate.

Three additional pro tips I have for building an emergency fund are below:

  1. If you withdraw a certain amount from your emergency fund, remember to pay it back. Ideally, do this as quickly as possible.
  2. Use this fund only in the event of an actual emergency.
  3. Add to an emergency fund regularly. Treat it as you might a retirement fund. Strategize with the help of a financial adviser as to what this fund’s maximum contributions might look like every year. Then, add to the fund accordingly. Too often, emergency funds are viewed through a one-time lens. Business owners should set up the fund in a safe space like a high-yield savings account and keep contributing funds to it over time.

5. Establish Plan B

Plan B was in the original version of this article, and I’m using it to conclude this updated list of financial tips for millennial business owners.

Having a Plan B is essentially creating a backup plan for your life. The phrase is often used negatively as if to say that because a particular business venture didn’t work out, you can’t be an entrepreneur again. That’s not true. Having a Plan B means having a safety net for every good and bad “what if?” scenario.

If something doesn’t work out now, you have options, and Plan B will help you find and pursue them.

This content should not be construed as financial advice. Always consult a financial professional regarding your specific financial situation.



Get Hosting for $1.00*/mo with GoDaddy!

This post was originally published on this site

Continue Reading

Banking

Are Small-Business Loans Installment or Revolving?

Published

on

A small-business loan provides funds to purchase supplies, expand your business and more. This type of funding can be either installment or revolving. Reviewing the credit terms of your loan offer will help you determine whether you’re being offered an installment loan or revolving credit.

Both types of loans can be found in the Small Business Administration, or SBA, loan program and at banks, credit unions and online lenders. While each can provide much-needed funding for your business, there are some key differences to keep in mind.

Installment loans vs. revolving credit

Installment loans provide a lump sum of money

An installment loan is a credit agreement where the borrower receives a specific amount of money at one time and then repays the lender a set amount at regular intervals over a fixed period of time. Typically, each payment includes a portion for interest and another amount to pay down the principal balance.

Business term loan is another common name for this type of loan. After the loan is paid off, the borrower typically must apply for a new loan if additional funds are needed.

Revolving credit provides flexible funds

A revolving loan is a credit agreement where the borrower can withdraw money as needed up to a preset limit and then repays the lender a portion of the balance at regular intervals. Each payment is based on the current balance, interest charges and applicable fees, if any. You pay interest only on the funds that you use — not the maximum limit.

A business line of credit is a common type of revolving credit. Revolving credit gives the borrower flexibility in determining when to withdraw money and how much. As long as the credit balance remains within the preset limit and you continue to make timely payments, you can continue to draw from the line again and again.

Differences between installment loans and revolving credit

The terms of a loan can vary depending on the type of loan, lender and your business’s credentials. Your loan may be a unique combination of terms. However, the following are some common differences between installment and revolving loan programs.

Installment loan

Revolving credit

Loan amount

Fixed amount.

Maximum limit.

Withdraw as needed.

Payment amount

Fixed amount.

Minimum amount based on balance and interest with option to pay more.

Interest calculation

Based on loan amount.

Based on current balance, not maximum loan limit.

Ability to renew

Not renewable, typically.

Renewable, typically.

  • SBA loans.

  • Business term loans.

  • Commercial real estate loans.

  • Equipment loans.

  • Microloans.

  • SBA lines of credit.

  • Business lines of credit.

  • Business credit cards.

When to use an installment loan

Set loan amount is needed

If you’re confident in the loan amount you need, then an installment loan may be the right fit, especially if you need the money in a lump sum. For example, if you’re using the funds to make a one-time purchase, you’ll likely want an installment loan.

Long-term financing needs

Some term loans can offer you more time for repayment when compared with revolving credit. When you stretch your payments out over a longer period of time, it can mean a lower monthly payment. However, that trade-off typically means you’ll pay more in interest costs over the life of the loan.

Larger funding needs

If you’re looking to purchase property, equipment or other large-ticket items, there are a number of installment loans that can be used for this purpose. Revolving credit limits are often less than term loan maximums.

Preference for predictable payments

With a set monthly payment amount, it can be easier to budget for an installment loan compared with a revolving loan, where the payment varies depending on how much of the credit line you use.

When to use a revolving loan

Short-term financing needs

Revolving credit can be good to handle short-term cash shortages or to cover unexpected expenses. Some businesses use lines of credit as an emergency fund of sorts since they’ll pay interest only on the funds they use.

Fluctuations in cash flow

Businesses that experience major fluctuations in their cash flows may benefit from revolving credit. For example, seasonal businesses that don’t have consistent revenue throughout the year can use lines of credit to cover operational costs during their slow season.

Preference for flexible loan amount and payments

If you don’t know exactly how much money you need, then revolving credit will give you the option to qualify for a maximum amount but only withdraw funds as you need them. This way, you’ll pay interest only on the current amount owed.

Compare small-business loans

To see and compare loan options, check out NerdWallet’s list of best small-business loans. Our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.

Advertisement

This post was originally published on this site

Continue Reading

Trending

SmallBiz Newsletter

Join our newsletter for the latest information, news and products that are vital to running a successful SmallBiz.