The beginnings are always hard, and if you own a small business, you know that better than anyone. Getting funds for your business seems another added complication. But it is convenient to do a thorough investigation and analysis to determine if you need a loan and if that loan is the most suitable for you.
According to a survey conducted by the Electronic Transaction Association (ETA), small businesses ask for an average of three loans over five years. 54% of small business owners interviewed said they used the loan to buy work equipment, while 51% used it to buy inventory. But the truth is that there may be many other reasons why you might need a commercial loan and similarly, there are different types of loans that can be adapted to your needs.
You can get loans in various entities: government, banks, credit unions and something that is increasingly popular for its efficiency: online lenders.
There are different types of commercial loans, but in this article we will consider only the ones we believe are most relevant for a small business:
Types of loans
A delivery loan consists of a contract signed by the lender and the borrower, where the borrower receives an amount of money and pays each month until the established deadline. Interest is calculated from the date the money is received until the day the loan ends. If the loan is paid before the deadline, the interest is reduced.
The duration of this type of loan can vary from one to seven years, depending on the amount required and the time established between the lender and the borrower.
Credit line loan
This type of loan can be processed in banks. It is perfect for emergencies and when cash flow is needed. A credit line loan can be similar to a credit card: it is money that you have available at the time you need it. It has a low interest rate, interest is paid every month, and the principal payment is made at your convenience. But each bank has its own requirements, so it is better to check which one suits you best.
Short term loan
It is similar to the delivery loan. The amount and the payment deadline are agreed between the lender and the borrower. The difference is that this loan is paid in full by the deadline: no monthly payment is required. It can be very useful when you are waiting for money from a customer but first you have to buy materials. Once your client pays you, you can pay the loan, plus the interest rate included.
Commercial loans online
This type of commercial loan is increasingly popular. Although they basically work like delivery loans, there are several key differences. The application process is usually shorter and simpler than in a traditional bank, with less time and paperwork. A great advantage is that the funds may be available in a very short time. However, make sure that you are satisfied with all the terms and with the interest rates when you sign the loan contract, since the interests may be higher than those offered by a bank. Ferlies Financial specializes in small business loans. To help you have a clear picture of the terms of a loan and interest, they put at your disposal a very easy to use commercial loan calculator. You can see here how their commercial loans work and what are the best options for you.
With this information you may already have some type of loan in mind, or perhaps you are still trying to decide. Whatever your option, be sure to consider the following points before signing a contract. You could end up getting a loan that you don’t really need, or that can harm you instead of growing your business:
Things you should take into account
The reason for the loan
Identifying the reason why you need a commercial loan is key. Knowing it, in addition, will help you realize how much money you need and under what conditions. Like anything else, getting a loan is something you should plan carefully, taking into account the financial situation of your business and the planned growth. In the early stages of the business, a loan can be very useful, but it is not the best time to ask because your company is still in a delicate situation and a loan could make things worse.
Time and money
These two factors go hand in hand. After defining the reason for your commercial loan, you should also consider the time. In time we refer to the following: when do you need the loan? It is urgent? Knowing when exactly you need the money can help you decide what type of business loan you need and what type of lender. Remember that everyone has different processes and requires different types of documentation: some may take longer than you have planned. Online lenders are a popular option because they are fast and loans are accessible.
Eligibility of your business
All lenders have different requirements for a commercial loan. The most common is your personal credit history and that of your business. It is important that you know the difference between them. Your lender needs this information to make sure that in the past you have paid all your debts without any problem. They will also want to know how long your business has been active: many times, when the business is very new, it is very difficult to get a loan. If your company has been running for at least two years, getting a loan is easier. A third requirement that lenders are going to pay attention to is the amount of business income, since they need to know if your business can pay the debt.
As we have already seen, all loans include interest, which can be paid during or at the end of the loan deadline. You need to know exactly how much you are going to pay in interest and if that fits your business. Make the total sum of the price of your loan with interest. For example, if you get a loan of $ 15,000 and by the end of the loan you have to pay $ 17,300, this means that the cost of the loan is $ 2,300. Depending on the size and profits of your business, you can decide if that figure suits you.
Just as lenders can be demanding when establishing requirements for a loan, you should also be careful and make sure you choose the right lender. Getting a commercial loan is a very sensitive matter and should be treated with caution. Gather information about the lenders you are considering, for example, if they support the type of company you have, or if they meet your needs. You can also talk to recent clients or review their reviews and ratings. All that will help you determine if the lender is the most suitable for your business.
Now that you have this information, you can take stock of the advantages and disadvantages of a commercial loan and come to a conclusion that benefits your business.
To get inspired, read here the advantages that a commercial loan has for your business.
In Ferlies Financial we are here to help you. If you are ready to apply for a commercial loan, ask for a fee to find out the cost of your loan. Or just get in touch with us. We want to hear from you!