Starting a limited company is a great step towards financial freedom. There are lots of benefits to owning your own company, but in the early days, raising enough funds can be challenging. Getting a loan may be the only way to kick-start your business by giving it an injection of cash.
Bank loans are a good way to fund your llc, but you have to meet a set of criteria to qualify. It’s useful to bear in mind that most banks will want to see that you've been trading for at least two years. However, if you have an excellent credit history to date, some banks will consider giving you a loan if you’ve just started your business.
Getting a business loan isn't a quick option for accessing money. It’s a lengthy process, so be prepared to provide a plethora of documentation. So, what are the best loans available ?
Term loans are useful for businesses that need money to invest in specific areas of their business and to build some capital. For example, you may want to use the money to purchase real estate, buy or refurbish a commercial building or invest in another business.
A term loan allows you to borrow a specific amount and then pay back over an agreed time with a pre-arranged interest rate. Bank loans will have better terms and rates than other sources of finance, so it’s worth investigating and comparing what each bank has to offer, even if you have to wait a while for the result.
SBA (U.S. small business administration) loans are the most affordable loan type for small businesses. They don’t provide loans directly, but have a hand in guaranteeing them, so lenders are more confident in approving them.
New business can apply for an SBA loan and there are different programs depending on business needs.
The most popular loan, the SBA 7 is a good option for businesses that want to expand and need capital. You will apply to a lender and the SBA will guarantee a portion of the loan. Once you’ve found an SBA approved lender, you are required to fill in an application and provide all financial documentation.
Most businesses will be entitled to apply for an SBA loan, but there are some exceptions such as gambling, stamp/coin collection and any charitable companies or religious sects.
The loans usually take 7-10 days to be approved, but the SBA offers an express service to speed up the process.
The standard loan offers up to 5 million dollars and the SBA usually guarantees 85% of applications up to $150,000 and 75% of anything over that. There are several available SBA 7 loans, so it’s useful to research beforehand, so you can apply for a loan that suits your specific needs.
Business Lines Of Credit
If you have an emergency or cash flow issue, then a business line of credit loan is just what you need. A lender will give you an agreed amount of money that you are able to use whenever needed. There are options for fixed or revolving credit.
The advantage of revolving credit is that businesses only use what they need from the pool of funds and you pay interest only on what you use. Once the funds are used up, the credit limit resets and you can use it once again. It works similar to a credit card, except that cash is transferred into your account when requested.
If you choose a non-revolving credit option, once you have used up the funds it doesn’t automatically replenish. If you need more, you will need to make another application.
Banks offer the lowest interest rates for business lines of credit, as well as secured and unsecured loan options.
An asset based loan is ideal if you need to buy equipment specially for your business. This is a good option for those with lower credit ratings as the equipment is used to secure the loan rather than past borrowing behavior.
Interest rates on equipment loans are usually set at 8-30%, making them an affordable option. Equipment finance is a great way to purchase computers, vehicles, and office furniture that’s vital for the business to perform successfully.
Commercial Property Financing
This is similar to equipment financing, as any purchased property becomes collateral for the loan. Securing a loan from the bank for these types of transactions is by far the best choice, as banks will offer lower interest rates and longer repayment terms.
Lenders will use a loan-to value factor to establish how much they will lend. They do this by comparing the value of the property with the loan amount requested.
If you need a loan to cover a small part of your business, a microloan is ideal. The qualifying criteria isn’t so strict and is useful if you are a startup business or just need a small injection of cash to advance the business.
Banks don’t provide micro loans, they come from private lenders who want to assist entrepreneurial business owners to contribute to the economy. These private lenders often specialize in offering loans to minority groups and female applicants.
We mentioned SBA loans above, and there are some SBA programs available with a microloan. Microloans usually offer a 6-year repayment plan and are popular amongst sole traders and small freelance businesses. Interest rates are higher than other types of loans, but still reasonable at 10-16%.
Of course, another option is to apply for a personal loan and use it for business purposes. If you have excellent credit, then you should have little trouble applying for a personal loan.
Generally you can only borrow up to $35,000, but interest rates are still relatively low compared with credit cards or other forms of credit. You can also use equity from your home to release cash for business use.
Running a business is challenging and in recent times small businesses have suffered due to the global pandemic, but rest assured there are options available to get businesses thriving again.