What do you need a small business loan for?
The first step of any business loan search is to determine what you need the financing for.
From bank loans, to inventory financing, to merchant cash advances... There are a lot of different types of small business loans on the market. Each loan out there serves a different set of business goals.
From bank loans, to inventory financing, to MCAs… There are a lot of different types of small business loans on the market. Each loan out there serves a different set of business goals.
Need working capital to finance regular business expenses? A traditional business line of credit could be a good option. Need to finance past due invoices? Invoice financing is the perfect loan for your business.
Some common business financing needs are:
To start your business
To quickly take advantage of a new business opportunity
To expand your business
To keep a cushion on your cash flow
To manage your daily expenses
To finance some equipment or inventory purchases
To purchase commercial real estate
Pinpoint why you need the capital, and filter your search for the best small business loans to fit that goal.
What type of business loan could be best for you?
A business owner’s access to small business loans has changed a lot in the last 10 years. Traditional banks and credit unions aren’t the only lenders in the small business lending industry anymore, and loan types have diversified beyond just term loans and lines of credit. From 2015 to 2017, online lenders funded nearly $10 billion in small business loans, and show no signs of slowing down.
These days, these online lenders offer are many different types of business financing methods. Here are some of the most common you’ll find:
Some common business financing needs are:
Business term loans
Business lines of credit
Invoice financing and factoring
Merchant cash advances
Purchase order financing
Commercial real estate loans
Personal loans for business
Business credit cards
It’s important to note that one loan type could better fit your business financing needs than another could. For instance, if you invoice your customers and find yourself frequently running into cash flow issues, bridging the gap between when you provide your services and when you get paid with invoice financing or factoring could be the perfect small business loan option for you.
On the other hand, if you’re making a fixed investment that you know will pay off for your business, a lump sum loan (like a business term loan or short-term loan) could be the best type of business financing for you.
In the end, it comes down to knowing what options are available. Bank loans often offer the most competitive business loan interest rates, but a different loan product from online lenders could be more conducive to your needs.
What can you actually afford?
Once you’ve determined why you need the small business loan and what types are available, the next step is to think through how much financing you need—and most importantly, how much small business loan you can realistically afford.
One of the first questions online lenders will ask you when you start your search for small business loans is “How much are you looking for?”
Yes, every business owner would love a cool $5 million. But instead of thinking of this question as how much you want or need, think along the lines of what you can actually afford. You don’t want to take on more debt than your business can handle. If you don’t know the answer to that question, follow these steps.
Calculate Your Debt Service Coverage Ratio
Debt-Service Coverage Ratio Calculator
The best way to determine the small business loan payments you can afford is to calculate your debt service coverage ratio. This is the number lenders will use to see how much cash you have to service your debt. This is also a number you can use to make sure you are comfortable with any potential debt payment. Your debt service coverage ratio is simply:
Cash Flow / Loan Payment = DSCR
You can calculate this on a monthly or annual basis. Here’s how it works.
On average, how much cash flow (sales minus expenditures) do you have coming into your business each month? Let’s say it’s $3,000. And how much do you project your monthly loan payment will be (both principal and interest)? Let’s say $1,000. This means you would have a debt service coverage ratio of 3, which is healthy!
All lenders are going to want to see that you have a DSCR of at least 1. Anything lower than 1 shows that you don’t have the cash flow on hand to make your loan payments.
However, most lenders will require that you have a DSCR of at least 1.5 or greater. But, don’t forget, you should use this ratio for yourself too! What number are you comfortable with? Decide now. Let’s say it’s 2. Now, take your current monthly cash flow, divide it by 2, and use that number as you shop. Aim to find a loan that will allow your total monthly loan payment to be equivalent to that amount.
Perform a Small Business Loan Performance Analysis
It is important to remember that the reason you are taking out a small business loan is to invest in your business.
Before taking on the debt, you need to make sure that you will in fact have a return on this investment. Even the best business loan on the market isn’t valuable to you if it doesn’t bring some sort of return to your business.
Can you safely say that this debt will grow your business?
It’s not an easy question to answer, so a great thing to do before committing to a loan is forecasting loan performance. By running a loan performance analysis, you can see how this small business loan will financially impact your business. It is also a great way to ensure you aren’t taking out too large (or too small!) of a loan.
Write Down Your Ideal Loan Payment
Now that you’ve taken a look at how small business loans can financially impact your business, and how to calculate your debt coverage ratio, decide on a rough estimate of a total monthly loan payment you’d be comfortable with. Keep this number close as you start your search.
How Does Equipment Financing Work?
It takes money to make money—every small business owner knows that.
Sometimes you just need that new piece of equipment or machinery to rev up your business growth and start bringing in more revenue… But how can you afford it?
Fortunately, this is a problem that we’re able to help a lot of small businesses solve.
Here’s how equipment financing loans can get you on track to grow your business.
Equipment Financing: The Fundamentals
When your business needs a certain piece of equipment to get started or reach the next level, a small business equipment loan could be the right move—especially when you don’t have cash on hand to purchase the piece of equipment upfront.
You can use the proceeds of business equipment financing loans to purchase almost any kind of business equipment, from computers to cars—and everything in between.
How much you can borrow through a business equipment loan depends on the type of equipment you’re buying and whether that equipment is new or used, since this very equipment ultimately serves as collateral to secure your loan.
If you’ve ever had a car loan, you’re already pretty familiar with the structure of a business equipment loan:
The price of that equipment dictates the amount and terms of your equipment financing, and you won’t need to put up any extra collateral.
This is because a business equipment loan is a self-secured loan, which means that the equipment itself acts as collateral for the loan. The self-collateralized nature of equipment financing can make these loans slightly easier for some business owners to qualify for.
Why? Because the equipment provides security for the lender. If you can’t afford to pay back your business equipment loan, the lender can simply seize the piece of equipment and liquidize it for cash to recoup their losses.
And here’s another good thing to know:
Most small business equipment loans are made at fixed interest rates—usually between 8% and 30%—with set term lengths, so you can expect the same payment each and every month.
How Long Does Equipment Financing Last?
How long you can extend the term of your equipment loan depends on the sort of equipment you’re financing, as well as this equipment’s anticipated lifetime.
Understandably, not too many lenders want to extend their equipment loan repayment terms beyond when that piece of equipment is expected to be useful…
After all, the whole point is that they’re financing a tangible asset—your equipment—on the basis that it will be worth something should they have to liquidate.
Some equipment lenders will set terms for the expected lifetime of the equipment. But most lenders will set a maximum repayment term of 10 years on a business equipment loan.
Equipment Financing vs. Equipment Leasing: What’s the Difference?
Of course, there are other options besides equipment financing.
Some business owners choose to lease instead of getting an equipment loan, for example. There are definite advantages to leasing, but with a small business equipment loan, you’ll own that equipment after your loan gets paid off.
On the other hand, with a lease, your business will only be able to use that equipment while you’re paying for it.
So, if you know you’ll need that equipment for awhile, equipment financing could be the right move. But if you’re looking for a more temporary solution, leasing equipment might make more sense.