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SBA Loans vs. Bank Loans: How to Choose

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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.

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Finance & Accounting

Small Business Funding: Exploring Options and Strategies

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Small businesses recognize the key role of funding in propelling their growth, as every dollar invested paves the way for opportunities and prosperity. That said, securing funding is often a critical step for small businesses to start, expand, or sustain their operations.

While funding options may vary depending on the business’s stage and needs, it’s essential for small business owners to explore the available options and develop effective funding strategies. Read on to explore various funding options and strategies that can help small businesses obtain the necessary capital for success.

1. Self-Funding and Bootstrapping

Self-funding, also known as bootstrapping, involves using personal savings or assets to finance your small business. This option allows you to retain full control over your business and avoid debt. However, it may limit the initial capital available and may require personal financial sacrifices to invest in your business’s growth.

2. Friends and Family

Seeking financial support from friends and family members is a common option for small business owners. It involves borrowing money or receiving investments from people you have personal relationships with. While this option may offer flexibility and lenient terms, it’s essential to approach such arrangements professionally and have clear agreements in place to avoid potential conflicts.

3. Small Business Loans

Small business loans are a traditional funding option offered by banks, credit unions, and other financial institutions. These loans provide capital with a defined repayment schedule and interest rate. Small business owners need to present a solid business plan, financial records, and collateral to qualify for a loan.

It’s crucial to carefully review terms and interest rates to ensure the loan is manageable for your business.

4. Crowdfunding

Crowdfunding platforms allow businesses to raise funds from a large number of individuals who contribute varying amounts. This option leverages the power of the crowd and can provide not only financial support but also help validate your business idea and build a community around your brand.

Effective crowdfunding campaigns require compelling pitches, engaging rewards, and strong marketing efforts to attract backers.

5. Grants and Government Programs

Various grants and government programs are available to support small businesses in specific industries or locations. These funding options often have specific eligibility criteria and application processes. Research local, regional, and national grant programs relevant to your business’s industry or specific needs.

Applying for grants may require significant effort, but it can provide non-repayable funds to support your business’s growth.

Meeting with Venture Capitalist investors

6. Angel Investors and Venture Capital

Angel investors and venture capital firms are sources of funding for small businesses with high growth potential. Angel investors are individuals who provide capital in exchange for equity or ownership in the company. Venture capital firms, on the other hand, invest larger amounts of capital in exchange for equity stakes.

These funding options often come with expertise and mentorship from experienced investors, but they also involve giving up partial ownership and decision-making control.

7. Business Incubators and Accelerators

Business incubators and accelerators are programs designed to support early-stage startups by providing funding, mentorship, and resources. These programs often require entrepreneurs to go through a competitive application process. In addition to financial support, incubators and accelerators offer guidance, networking opportunities, and access to a supportive community of fellow entrepreneurs.

8. Alternative Financing Options

In addition to traditional funding methods, small businesses can explore alternative financing options. These may include invoice financing, where you sell your outstanding invoices to a third party for immediate cash, or merchant cash advances, where you receive a lump sum in exchange for a portion of future sales.

While these options can provide quick access to capital, it’s important to carefully assess the terms and potential impact on your cash flow.

9. Business Credit Cards

Business credit cards can be a convenient and flexible funding option for small businesses. They allow you to access a revolving line of credit that you can use for various expenses.

It’s important to choose a credit card with favorable terms, such as low interest rates and rewards programs that align with your business needs. However, it’s crucial to use business credit cards responsibly and avoid accumulating excessive debt.

Small business loans

Takeaway

Exploring funding options and developing effective strategies is essential for small businesses to secure the necessary capital for success. Whether through self-funding, seeking support from friends and family, obtaining small business loans, utilizing crowdfunding, accessing grants and government programs, seeking angel investors or venture capital, participating in business incubators and accelerators, or exploring alternative financing options and business credit cards, small business owners have a range of options to consider.

You need to carefully evaluate each option, consider the associated terms and risks, and choose the funding approach that best supports your business’s growth and long-term financial stability.

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Finance & Accounting

Comparing Business Loans

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Starting a business can be costly. Whether it is for a start-up business or a new and exciting idea in your business, a loan is an example of a funding option. The choice of funding can determine the structure of the business, and therefore, it is essential to make the right choice.

photo credit: Towfiqu Barbhuiya / Unsplash

Why Use a Comparison Site?

There are different types of funding. Self-funding and investors are two types of funding, the last being loans. If a loan is the right choice, it is important to compare different options to find one that best fits your business.

You can compare loans on creddio.com with factors like interest rates and repayment options is the way to secure the most stable and suitable loan. Otherwise, you may end up with a loan that can be difficult to repay. The comparison site gathers all the necessary information such as fees, loan terms and even special features like whether or not the loan comes with a discount.

Eligibility for a Business Loan

If you are starting up a business, the bank may not be willing to finance your loan. As such, the eligibility for a loan often depends on the financial situation of your business. This can include your credit history and income. But certain requirements depend on who is providing the loan.

For example, the U.S. government requires a business to be registered, and that the business is located within the country. Generally, taking a loan out depends on the state of your finances. Therefore, it is a good idea to understand your business’s financial situation before applying for a loan.

Loan for Your Business

When considering a loan, one of the first things to discover is what you need the funding for. Is it to start up a business? Is it to hire more people? Or do you need more capital for a big project? The amount of money you can secure in a loan will depend on your loan proposal.

When applying for a loan, you need to state things like personal finances and how long the business has been running. After that, the financial institution will get in contact, and you will be able to see their loan offer.

Unsecured business loan

Types of Loans

When loaning money for a business, there are two types of loans: Secured and unsecured business loans. A secured loan is a loan where you as the borrower give an asset to secure the loan. This can be anything from your car to your home. The lender then has a claim over the asset, the personal possession, until the loan is repaid.

An unsecured business loan does not require an asset and includes loans like quick loans, personal loans and credit cards. However, the interest rates are also higher with unsecured loans.

Regardless of which type of loan you plan on receiving, it is paramount that you research all your options and have a good understanding of your business’s financial situation before applying for funding.

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Take Note: 9 Financial Management Tips to Keep your Small Biz on Track

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Sound financial management is vital for the success and sustainability of small businesses. It involves effectively managing cash flow, budgeting, monitoring financial performance, and making informed decisions based on financial data.

Read on to explore key financial management tips that can help small business owners navigate the financial aspects of their operations. You can use these tips as a guide or a reminder to keep your small business on track.

1. Implement a Budget

A well-planned budget helps control spending, allocate resources efficiently, and identify areas for cost savings. Create a budget that outlines anticipated revenue and expenses for each month or quarter. Regularly compare actual financial performance against the budget and make adjustments as necessary. This allows you to proactively manage your finances and make informed decisions to improve profitability.

2. Seek Professional Financial Advice

Consider consulting with a financial advisor or accountant who specializes in small business finance. They can provide valuable insights, assist with tax planning, help optimize your financial processes, and ensure compliance with relevant regulations. Their expertise can guide you in making informed financial decisions and navigating complex financial situations.

3. Leverage Technology

Take advantage of financial management software and tools to streamline your processes and gain better visibility into your business’s financial health. Use accounting software to track income and expenses, generate financial reports, and simplify tax preparation. Additionally, consider using online payment systems and digital invoicing to improve cash flow management and enhance efficiency.

4. Separate Business and Personal Finances

It is crucial to separate your personal and business finances to maintain accurate financial records and facilitate tax preparation. Open a separate bank account and credit card exclusively for your business transactions. This separation ensures that personal expenses do not mix with business expenses, making financial management and reporting much more straightforward.

5. Regularly Review and Analyze Financial Data

Consistently review and analyze your financial data to gain insights into your business’s performance. Look for trends, identify areas of strength and weakness, and make data-driven decisions. Regular financial analysis will help you identify opportunities for growth, optimize your expenses, and make adjustments to your strategies as needed.

Learn finances

6. Continuously Educate Yourself

Financial management practices and regulations evolve over time, so it’s essential to stay updated and continuously educate yourself. Take advantage of educational resources, attend workshops or webinars, and stay informed about changes in tax laws, accounting practices, and financial tools. By enhancing your financial knowledge, you can make more informed decisions and effectively adapt to new financial challenges.

7. Create a Comprehensive Business Plan

A well-crafted business plan serves as a roadmap for your small business and provides a clear direction for financial decision-making. It should outline your business goals, financial projections, pricing strategy, and anticipated expenses. By developing a solid business plan, you can set realistic financial targets and track your progress towards achieving them.

8. Monitor Cash Flow Regularly

Cash flow management is critical for small businesses to ensure there is enough money available to cover day-to-day operations, pay suppliers, and meet financial obligations. Monitor cash flow on a regular basis by tracking income and expenses, managing accounts receivable and payable, and maintaining a cash reserve for unexpected expenses or economic downturns.

9. Plan for Contingencies

Small businesses are susceptible to unexpected events that can impact their financial stability. Develop contingency plans and establish an emergency fund to handle unforeseen circumstances such as economic downturns, natural disasters, or changes in the market. Being prepared for contingencies can mitigate financial risks and provide a safety net for your business.

Startup financial management

Conclusion

Effective financial management is crucial for the success and long-term sustainability of small businesses. By creating a comprehensive business plan, monitoring cash flow, implementing a budget, separating personal and business finances, seeking professional financial advice, implementing internal controls, continuously educating yourself, leveraging technology, regularly reviewing and analyzing financial data, and planning for contingencies, small business owners can make informed decisions, maximize profitability, and position their businesses for growth.

Prioritizing financial management and staying proactive in monitoring and adjusting financial strategies can lead to a strong financial foundation for small business success.

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