Keys to the car - and success!
Finding a small business loan is not as hard as it looks, but it can be confusing. 
 
A lot of small business owners think that their only options are a term loan and maybe a line of credit. Most business owners don’t know that there are actually a whole variety of business loan options. Gone are the days when if you wanted a small business loan, you met with your bank and hoped for the best. 
 
Today, the alternative financing industry has created different loan options for you and your small business. The question is then, what’s the best option for you? 
 
Have you ever shopped for a car? 
 
Shopping for a car would have been a lot easier in 1910. Back then, you had one choice: the Ford Model T. Today, you have dozens of manufacturers making trucks, sedans, SUVs, crossovers, vans, minivans, sports cars and more. 
 
But we’ve been around these different types of vehicles all of our lives: we know why one person might need a hefty Dodge pickup truck and the other would prefer a sporty two-door Mazda. For a first time entrepreneur, figuring out small business funding is like transporting a 1910s car buyer to present day and telling them to make a purchase. They'd probably have no idea where to start. 
 
Just like purchasing a car, the trick to deciding on what kind of funding you need for your small business is to first determine your needs, then look for the type of loan that best fits those needs.
 
Start by asking yourself some questions.

How much money do I need and when do I need it?

List everything you’ll need for your business, whether it’s simply a domain for your website, or it’s a large warehouse filled with inventory or a brick-and-mortar storefront. List all the equipment you’ll need. Then do some Google searching to determine the price of each of these items. Your goal is to figure out exactly how much money you’re going to need and what you’ll use it for. 
 
Then ask yourself, when do I need it by? There are faster loan options, where you can get money in as quick as 24-hours (subject to lender approval). These loan options tend to be a little more expensive, but if you need the cash in a hurry, they might be perfect for your situation.

What is my credit score?

Although credit score isn’t the only factor lenders consider, the higher your personal credit score is, the more likely you are to be approved for a loan. A lot of options open up when you have a higher credit score. As a borrower, if you know your credit score, you'll be better prepared to honestly evaluate your loan options.
  • Red - poor credit score
  • Orange - fair credit score
  • Light green - good credit score
  • Dark green - excellent credit score
Recently, a borrower was frustrated that he didn’t receive a low-interest loan offer from a bank, and he thought he was being taken advantage of, mainly because he just received an auto loan from that same bank for 9%. What he didn’t realize was that 9% on an auto loan does not indicate a good credit score when those with good credit score get offers of 2% or lower. 
 
You can receive a free credit report from the three major credit reporting agencies. Each one will charge you a small fee to see your actual credit score. Alternatively, you can get an unofficial score estimated at CreditKarma.com.
 
Look at your credit score, understand where you are compared to other people, so you can have a better idea of which loan product will work best for you. If it’s not as high as you’d like it to be, you can also work to raise your score.

Am I disciplined?

Remember the car-buying analogy? Let’s go back to it. 
 
Let’s say you’re wanting to buy a car for yourself, but you know you have a lead foot and are not the safest driver. Should you go for the Lamborghini convertible, or a Volvo station wagon? 
Knowing yourself is a large part of the battle of being a small business owner. If you’re not great with spending, a line of credit or credit card financing might make it too easy for you to bury yourself in debt. However, if you are disciplined, these kind of loans can do wonders for your small business.

Am I flexible?

You need to be able to consider all of your loan options. A lot of people just want a traditional term loan with monthly payments, but they might not have the credit or time necessary to make that work for them. If you’re flexible, you’ll have many more funding options that will help you expand your business.

What collateral do I have?

A large amount of loan types require some form of collateral. This could be the equipment for your business, your car, even your house or retirement. Whenever you’re putting collateral on a loan, make sure you can pay it back, and you’ve consulted with your financial people. If you don’t pay back the loan, the lender has the right to take your collateral. Make sure you’re not taking too big of a risk with collateral. 
 
While it can be risky, collateral can be a great way to get a loan. When a lender has more of a guarantee of seeing a return on their loan because it’s backed up by collateral, they’ll generally give you a lower rate. 
 
There are also options that work off invoices and credit card transactions, so make sure you take those into account as well.
 
Now that you’re more aware of your general lending situation, let’s take a look at the different kind of loans out there.

Business line of credit

Business credit cards or lines of credit are one of the most flexible financing options to help your business, and can be a fast way to get your small business up and going. Credit lines are great for getting the money you need when you need it. When a business gets a line of credit, they basically have a cushion for any hardships that might come along. 
 
Like with a personal credit card, a business line of credit’s payments are usually determined by the amount you’ve used. If you haven’t used any, you won’t have a payment. If you have used some, then your payment will be a percentage of what you owe. You are generally not required to use any of the funds until you need them. Another great thing about lines of credit is you won’t be charged interest if you haven’t used any of the capital. 
 
Make sure you get a line of credit for your business, especially if your business is doing well. You’ll get a better interest rate than if you wait for an emergency.

Traditional term loan

 
 
A term loan is what most people think of when they think of a business loan. This is the kind of loan you’d usually get from your bank, with the monthly payments and lower interest rates. These are usually backed by some form of collateral, whether it be a car or a house. These loans generally are a little tougher to get, and can take longer to get as well. 
 
Term loans are forms of debt financing, like a mortgage or a car loan. Business owners can take these loans and use them for expansion, operating expenses and a host of other things. Today, these types of loans are not just provided by banks. There are also alternative financiers who have these available. Any business that has been in operation for more than two years with good credit can utilize a term loan.

Factoring

 
Factoring is also known as accounts receivable financing or invoice advancing. Factoring can help small businesses deal with large projects or expansion.   
 
This alternative form of financing allows you to receive capital up front in the event you are owed money for services completed. By helping the business owner close the gap, they can continue operating at full capacity and finance new projects more quickly. This also helps ensure steady cash flow instead of the valleys and peaks that come along with large projects. 
 
This type of financing can be great for a small business with less than perfect credit, because the focus is on the business that owes the receivable and not the company receiving the advance. Simply put, A/R financing is turning your company’s accounts receivables into immediate cash, which you can use to build your business.
 
So are you going with the sports car or the station wagon? Now you know yourself a little better, you’re starting to get an idea for what kind of loan is right for you. Once you’ve narrowed down your choices, do research on any offers given to you, and make sure you understand the terms clearly. Does it take a little time? Sure! But the end end result is pretty sweet: someone is literally giving you money to make your vision a reality.
 
Article provided by Lendio, the free and simple way to find all of your loan options, with the best rate. They pride themselves on making small business loans simple.
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