Understanding Business Loans
The phrase “loan terms” usually refers to the term length of your loan. For example, loan terms can range from 6 months, 12 months, 24 months, 4 years, 5 years, 10 years, or longer—depending upon the nature of the loan.
A personal guarantee gives your lender the right to pursue your personal assets if your business defaults on a business loan. It is also known as having collateral on a loan.
Qualifying for a small business loan is difficult during the 10 years the bankruptcy appears on your credit report. Some lenders will work with your business if the bankruptcy has been discharged for at least two years.
A short-term loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics with no consideration of the borrowers ability to manage the debt. A different lender is able to see the UCC filing for your first loan and will contacts you to inform you that you now qualify for an additional loan. If not careful, loan stacking could put a business at risk of default and bankruptcy.
Business loan interest may be considered a legitimate business expense and tax deductible by the IRS. You should consult with a trusted tax adviser to discuss how this applies to your business.
Different Business Loan Options
A bank statement loan is based, among other things, on the past 3-24 months of bank statements. This allows lenders to see that the average monthly deposits, withdrawals/expenses and average balances will be able to support the business loan payments.
ACH stands for Automated Clearing House. The repayment process of an ACH loan is similar to that of a utility bill. The loan is automatically withdrawn on a set date – which can be daily, weekly or monthly. The repayment plan is contingent on the terms and conditions of the loan agreement The amount is fixed and predictable, which means that you will not experience any unexpected and unwelcome surprises when you manage your cash flow.
A type of asset-based loan secured by property. This type of loan is usually issued by private investors or companies, and are usually used as an alternative to the more traditional financing. Types of borrowers who tend to get hard money loans include: Property flippers. Borrowers who don’t qualify for traditional loans. Homeowners facing foreclosure with substantial equity in their home.
Factoring is not considered a loan. A third party, known as a factor, will purchase a company’s invoices or purchase orders at a discount. Instead of waiting for the invoice or purchase order to be paid, business owners now have access to a portion of that invoice. The balance, minus the agreed upon fees, is then paid to the business owner once the factor has collected payment from the customer(s).
Accounts receivable financing allows companies to receive early payment on their outstanding invoices. A company using accounts receivable financing commits some, or all, of its outstanding invoices to a funder for early payment, in return for a fee. The process is a quick and efficient way for a business to secure working capital without going through the hassle of obtaining a bank loan.
A specific type of asset-based loan secured by real property. This type of loan is often issued by private investors or companies, and are used as a bridge to more traditional financing.
A short term loan is a type of business capital loan that provides a company with quick working capital. Like most other bank loans, you will receive a lump sum of cash which is then repaid over a set period of time, usually under 12 months. Among other things, short term loans are used to raise working capital to cover temporary deficiencies in funds so you can meet payrolls and other expenses.
When deciding to make large investments or expand your business, a long-term business loan is right for you. This type of loan gives you the more time to repay and a come with very low monthly payments It may be harder to qualify if you have a fairly new business because you’ll need an established business and strong finances.
Federal, state, and local governments, as well as some private groups sometimes offer grants to small business owners. Government grants are not available for: starting a business, paying off debt, or covering operating expenses. Grants are not loans and typically do not require repayment.
non-bank lenders offer a legitimate alternative to traditional banks and have created a competitive environment to the advantage of borrowers who have realized the benefits of shopping around. Non-bank lenders typically have a big margin to work with and can often provide lower interest rates than the banks.
Finding The Right Business Loan
There are many options available for most small businesses. The first questions to ask yourself while looking through business loans is 1) What is my loan purpose? 2) How much capital do I need to meet that need? 3) What type of loan can I likely qualify for? At Dynamic Capital, our Loan Specialists will guide you in the right direction.
There are some non-profit micro-lenders that offer low-to-zero interest loans for qualifying business owners. They are typically in the form of micro-loans, $50,000 or less. Aside from micro-lenders, bank loans with strong collateral will typically be the next cheapest option.
A line of credit is a revolving loan that provides a set amount of capital which is accessed as needed, repaid, and then used again. A business loan is a fixed amount of capital given in a lump sum that is repaid over the term of the loan.
When there is an equipment lease, the equipment is owned by the leasing company during the term of agreement. With an equipment loan, business owners are able to purchase the equipment rather that lease it.
Business Lines of Credit
Some lenders often require specific collateral to secure a business line of credit, while other lenders may apply a general lien to all the business assets. There are two types of business lines of credit available to business borrowers: 1.) A secured line and 2.) An unsecured line.
This depends on the lender and their system of application and approval. It could take several days or weeks when applying with a traditional lender or as little as a few minutes with many online lenders.
A business line of credit is a revolving loan that provides a set capital limit that can be accessed when needed. All or part of the line can be accessed at any time up to the pre-determined limit, then repaid and used again. Interest is only paid on the amount actually used not on the whole limit.