By Kelly Sullivan, Capital Coordinator at The Biz Foundry, here to help you understand business loans without the financial jargon headache.
Starting a business is a big step, and it often takes money to get your idea off the ground. If you’re considering a business loan, you might be feeling a bit overwhelmed by the options out there. Don’t worry — we’re here to break it down and help you make a smart choice on how to fund your business.
Do You Really Need a Loan?
Before jumping into loan options, it’s important to figure out if a loan is the best choice for you. Business loans can help if:
- You need money to buy equipment or inventory.
- You want to expand your business.
- You need cash flow to handle daily expenses.
However, if you’re just starting out and don’t have a clear plan to repay the loan, it might be best to explore other options.
Types of Businesses That Are a Good Fit for Loans
Traditional loans typically work well for businesses that:
- Have been around for a while and show steady revenue.
- Have a solid credit history.
- Can provide collateral (like property or equipment) to secure the loan.
- Start Up Businesses with a good business plan and reasonable thought out projections for the next 12-36 months. Your funding partner will also want to know you have outside income from this business to help until the income starts coming in.
If you’re a brand-new business, some loan types may still work for you, but they might be smaller, like microloans.
What Do Lenders Look For?
Lenders usually consider a few key factors when deciding whether to approve a loan:
- Credit Score: A higher score makes it easier to get approved. If you do not have a good credit score it does not automatically disqualify you, but it is a hurdle you have to overcome.
- Revenue: Lenders want to see that your business can make enough money to pay back the loan. This is shown with well thought out projections that shows you have thought about the income streams of the business.
- Collateral: Most loans will require something valuable (like real estate) that the lender can take if you can’t pay. Examples are equipment, inventory, a second on your home etc.
Pros and Cons of Different Loan Types
- Bank Loans: Usually offer lower interest rates but can be tough to qualify for. If you have a start up business you will not be able to get a bank loan unless you have outside income to support the debt.
- SBA Loans: These are backed by the government, making them easier to get. However, the application process can take a while. They also require very detailed information.
- Microloans: Great for startups needing smaller amounts, but interest rates can be higher.
Are There Alternatives to Loans?
Loans aren’t the only way to fund your business. You could consider:
- Crowdfunding: Raising money from a group of people who believe in your idea. However very few businesses start this way!
- Personal Savings: Using your own money to avoid debt.
- Investors: Giving up a share of your business in exchange for funds. Not all businesses are investable.
- Family, Friends and Fools – Those that will help you get off your feet but still want payment back.
Making the Right Choice
Choosing the right way to fund your business depends on your goals, your ability to repay, and your comfort with risk. Take your time to explore your options and make the choice that feels right for your business.
If you need more guidance, reach out to me at [email protected] and lets have a chat about your needs!
By Kelly Sullivan, Capital Coordinator at The Biz Foundry, here to help you understand business loans without the financial jargon headache.
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