Comprehensive Guide: Understanding The Different Types Of Business Loans
You have likely faced a common conundrum as a business owner. You need to invest money in your business to grow it, but it is also necessary to set aside enough money to cover operational costs. Expenses such as equipment, property, advertising and marketing are essential for growth and they do not come cheap. Further compounding matters are the significant ongoing costs of running your business like payroll, utility bills and rent.Fortunately, you have the option to take out a business loan to cover these expenses. Businesses take out loans to pay for expenses associated with equipment, inventory, cash flow, expansion, and to improve terms on a larger loan. There are many different types of business loans that can be used for a variety of expenses. Keep reading to find out which type of financing may be best for yourSBA 7(A)
This is the basic loan program available from the Small Business Administration and among the most popular. You can take out SBA 7(A) loans in the maximum amount of $5 million. The terms of these loans are seven years for working capital and equipment and 25 years for real estate. Funds from the loan can be used for equipment purchases, working capital, construction, rehabilitation, debt consolidation, or refinancing existing loans and acquisitions.SBA 504
If you are looking for financing that is small business-friendly, an SBA 504 loan is a great option. It offers low-interest rates, an appealing 10% to 20% down payment and 10- to 25-year terms. The funds, which have a $20 million cap, can be used for machinery, equipment and real estate. The majority of 504 loans are approved for established businesses. Borrowers must have a good credit history – meaning a credit score above 650 and no red flags in their recent financial history.USDA – B&I
This financing is geared specifically toward credit-worthy rural businesses. The purpose of this loan program is to assist credit-worthy rural businesses in securing credit for necessary business expenses. B&I loans offer better terms and pricing than most conventional loans. Interest rates can be variable or fixed depending on the outcome of negotiations. The terms of each loan depend on how the borrower is planning to use the money. Refinancing, construction and acquisitions are all permitted uses.Unsecured Commercial Line Of Credit
The beauty of an unsecured commercial line of credit is, it provides a revolving credit limit without requiring the borrower to offer up collateral to secure it. The trade-off is that many of these lines of credit have lower credit limits, shorter repayment terms and higher rates. In addition, borrowers must have an outstanding credit score and not have a high utilization rate of their existing credit.Revenue-Based Small Dollar Loan
Borrowers who get a revenue-based small-dollar loan must contend with a fixed repayment target reached over a period of several months or years. The advantage to this type is borrowers do not have to relinquish control or sell equity. Revenue-based small-dollar loans impose a repayment amount of 1.5 to 2.5 times the principal loan. This financing may be used for inventory, growth and working capital.Small Loan APR
Strictly reserved for organizations that have been in business for a minimum of two years, the small loan APR program is designed for established businesses that are in need of additional equipment, inventory, growth capital and working capital.Accounts Receivable Factoring
With accounts receivable factoring, companies can finance their accounts receivable from clients they offer terms to. One of the major benefits of this financing is the dependable cash flow it provides. Funds are typically available immediately. Accounts receivable factoring advances are determined by the borrower’s transaction risk level and industry. The factoring rate is based on your factored volume, transaction risk, and the creditworthiness of your invoices.Purchase Order Financing
Businesses that struggle with the cash flow necessary to pay for the supplies or delivery means necessary to fulfill a customer’s purchase order can possibly access purchase order financing. Instead of transferring funds into the company’s bank account, the lender sends an advance directly to the company’s supplier or suppliers for the materials the company needs to fulfill the order.Asset-Based Lending
The amount of these loans is determined by assets – typically inventory and accounts receivable are used as collateral. Lenders and borrowers agree on a percentage of the secured assets’ value. In most cases, the percentage is 50% of the finished inventory and 70% to 80% of eligible receivables.Leasing
Businesses that need equipment to grow their business, but lack the funds to purchase it, have the option of leasing it for an agreed-upon period of time. Once the contract is up, the lessee has the option to buy the equipment.Transitional Loan Financing
This type of financing is ideal for businesses that have a significant amount of equipment and machinery, and are seeking refinancing, working capital, discounted loan payoffs and debtor-in-possession financing.Private Equity Medical ABL
Medical professionals who need to obtain a revolving line of credit instead of factoring their receivable are a good fit for private equity medical ABL.
Q & A For Selling Your Business
Selling your business is a significant decision. You’ve invested considerable time, money, and effort into building and running it—perhaps it even represents your life’s work. Now that you’ve decided it’s time to sell, getting the best professional advice is crucial. This is where working with a professional business broker can be the key to not just selling your business, but selling it at the best price and terms possible.Here are some common questions sellers often ask, along with answers based on experience and expertise. If you have additional questions, don’t hesitate to consult your business broker.What Can Business Brokers Do, and What Can’t They Do?Business brokers are specialists who facilitate the smooth sale of businesses. It’s important to understand their capabilities as well as their limitations. A professional broker helps sellers price the business and structure the sale in a way that benefits both the buyer and seller. They can locate potential buyers, guide negotiations, and assist in completing the transaction.However, a business broker isn’t a miracle worker who can sell an overpriced business. For a business to sell, it must be priced and structured appropriately. The market ultimately dictates what a business will sell for. The seller’s flexibility with terms and down payment options can also influence the selling price and the likelihood of a successful sale.How Long Will It Take to Sell My Business?On average, it takes about five to six months to sell most businesses. However, this is just an average—some businesses may take longer to sell, while others may sell more quickly. The quicker the broker has all the necessary information to market your business, the shorter the process is likely to be. Pricing the business right from the beginning also plays a major role. Some sellers overprice their businesses, thinking they can always lower the price later. Unfortunately, this strategy often backfires because buyers may avoid an overpriced listing entirely.What Happens When There’s a Buyer?When a buyer is seriously interested in your business, the broker will assist in preparing an offer. This offer may come with contingencies, such as a review of financial records, lease agreements, franchise agreements, or other important business details. The buyer’s offer will be presented for your consideration. You can accept the terms, make a counteroffer, or decline it altogether. Keep in mind, though, that the buyer can withdraw their offer at any time if negotiations don’t move forward.Your broker will present all offers to you for consideration. The first offer might not be perfect, but it’s essential to review it carefully. Sometimes, the first offer can be the best one you’ll receive. While you shouldn’t accept just any offer, all offers deserve close examination.Once you and the buyer agree on terms, the broker will help with satisfying any contingencies. It’s crucial to cooperate fully with the buyer during this stage to avoid any perceptions that you’re withholding information. Buyers may bring in outside advisors to review your business, and once all conditions are met, the final paperwork will be prepared and signed. After the sale is finalized, funds are distributed, and the buyer takes possession of the business.How Can I Help Sell My Business?You can assist in the process by fully cooperating with your broker and any other advisors, such as accountants or attorneys. Buyers will require up-to-date financial information, so it’s helpful to work with your accountant to provide this. If you have legal representation, make sure they’re familiar with the business sale process and are available to attend the closing, especially if you want a quick sale. Delays caused by your attorney’s schedule could give the buyer a chance to reconsider or amend their offer.Ultimately, your team of advisors should all be working toward the common goal of selling your business at the best possible price and terms, while closing the deal as quickly as possible. Cooperation with all parties involved is key to a successful sale.
