If you are a business owner in today’s climate, you may feel overwhelmed with the many financing options in the market. After all, every business is unique and will have different reasons for getting a loan at a given time. In this article, we will break down the top financing options for small businesses and how to select the right one for your current business goals.
At Biz2Credit, we help small businesses get funding fast by skipping the traditional lengthy paperwork and dreaded long waiting period for a decision. We understand how important flexibility is for a business owner, and that should go for your financing as well. In this article, we’re going to explain a few ways that Biz2Credit can help you with the business financing process.
Three Financing Options for Small Business Owners Biz2Credit Can Help You With
The first, and simplest, way that Biz2Credit can help you with your small business finances is simply by giving you access to direct financing products that can be used in your business for many different purposes. Biz2Credit provides direct access to the financial products listed below, which means more security for your financial information and often a faster decision as well.
- Term Loans
Term loans are what most business owners think about when they start thinking of business financing. A term loan has a fixed amount issued by a lender with a specified term and interest rate. Term loans are ideal for larger and longer-term projects, as this will typically require large funding up front and the flexibility of having a longer repayment term. However, with any term loan, you will be committed to paying a monthly amount, no matter how your business is doing or how that big project is going. Some popular uses for term loans are major renovations or buying fixed assets for expansions, such as equipment or real estate. You can apply for a term loan with Biz2Credit in just a few minutes.
How to qualify: 1) Your business has an annual revenue greater than $250,000 2) You have a credit score above 660, and 3) You must be in business for 18+ months.
- Working Capital
Working capital financing is best for funding a business’ everyday operations and short-term operational needs. This type of financing offers flexibility in the amount and a shorter repayment term (vs term loans). Businesses that benefit the most from working capital are those with high seasonality or cyclical sales. Some popular uses for working capital financing are to hire staff during busy seasons, buy new equipment, and stock up on inventory during an unexpected closeout. You can apply for working capital financing with Biz2Credit in just a few minutes.
How to qualify: 1) Your business has an annual revenue greater than $120,000 2) You have a business bank account with a history of deposits and withdrawals each month, and 3) You must be in business for 6+ months.
- Commercial Real Estate Loans
If you are looking to acquire a new or existing commercial real estate property or make improvements and additions to those properties, then a CRE (Commercial Real Estate) loan may be what you need. Depending on your industry, you could use a CRE for office space, industrial buildings, retail/restaurant, and more. Like a home mortgage, the borrower is required to make a 20-30% down payment on the commercial property, and the lender will place a lien on the property. You can apply for a CRE loan with Biz2Credit and get assistance throughout the process from our funding specialists.
How to qualify: 1) The property is at least 51% owner-occupied 2) You have a credit score above 650 3) In business for 3+ years, and 4) Have ability to make a 20-30% down payment.
Now that you have a better understanding of the different financing options you can get through Biz2Credit, we hope you feel more equipped to apply for business financing. But if you still have questions, a Biz2Credit funding specialist will be able to help you sort through your options in a one-on-one consultation. That’s because at Biz2Credit we also know that business needs are not always clear cut and that business owners need some guidance along the way with making the best financial decision for their companies.
Using Your Business Loan – How Biz2Credit Can Help
We work with small business owners who come from all different kinds of backgrounds, and we’ve seen a lot of creative and impactful ways that business owners are able to use funding to grow their companies. Here are some tips for using business funding that our funding specialists like to highlight to the business owners they talk to about financing.
- Growing your business – Growth can mean opening more retail locations in a new part of town or introducing a new product or service, all of which require a clear plan for funding. Establishing a new storefront means more rent payments and launching a new product or service may require R&D investments or buying more inventory. Working capital financing can be especially useful for these kinds of initiatives because it doesn’t come with a fixed payment and can offer more flexibility that way. However, make sure to have your accountant run the numbers to make sure the financing makes sense – meaning the new initiative will increase revenue enough to offset any financing payments you’ll be making.
- Buy equipment – If the demand for your goods has outpaced your supply, it’s time to consider buying new equipment as to not leave more money on the table, and the way to do that is with equipment loans. This also provides tax benefits, as you can deduct the expense and depreciation of the equipment from your business income. As mentioned above, make sure to run the numbers to see if the revenue from increased production can cover the loan repayments. You can also finance equipment repairs with working capital or secure a complete overhaul of your work kit using a term loan.
- Remodel or expanding – If you have been thinking about remodeling your place of business, it is probably already overdue. Are some of your storefront features outdated, or is it in need of a bigger welcome area for more customers? If so, it may be time to give your business a facelift, which can also help generate some buzz and attract new customers. While the direct benefits of this kind of project are harder to calculate, it is an investment that communicates to your customers and employees that you care about your business. A business term loan can often be a great solution for these kinds of investments.
- Seize unexpected opportunities – If there was a sudden price drop for an important inventory item and you can safely stock up, or space opens up at an industry trade show your clients attend, having financing on hand can help you seize these last-minute opportunities. Working capital financing is purpose-built for this kind of quick turnaround and is a good option when you’re able to pay off the financing faster because of increased sales or better margins.
- Overcome seasonal cash flow gap – If you have a seasonal business and know when your cash flow tends to slow down, plan ahead by getting enough financing to stay afloat until the busy season comes back around again. You can review your past financial statements to estimate the duration of slow periods, how long it takes for customers to pay invoices, and general expenses at this time. After you run the numbers, you can apply for a loan that is enough to cover the expenses.
How Biz2Credit Can Help You Select the Right Loan for Your Industry
At Biz2Credit we have extensive experience with all kinds of small businesses, from hotels and restaurants to salons, accounting firms, construction companies, and many, many more. Our expert funding specialists often spend most of their time working with one type of business, and we’ve surveyed them to get the most common recommendations they have for business owners in different industries.
- Insurance agency loans: As an insurance agency, your loan options may be more limited than other industries as your business might be considered high-risk. However, the criteria for selecting an insurance agency loan remain the same: low-interest rates, repayment terms, eligibility, etc. Viable loan options for your insurance agency can be SBA Loans, traditional bank loans, lines of credit, and more.
- Loans for doctors: The great news is that most financial institutions consider doctors to be excellent loan applicants, as they are considered low risk, so there are plenty of options for loans for doctors. However, doctors do face unique challenges such as slow payments from insurance companies, costly medical equipment, and the possibility of malpractice lawsuits.
Depending on your needs, there is a loan for any occasion. If you are starting a new medical practice, a term loan will be the best option in order to pay it off long term. To replace a piece of expensive equipment, equipment financing can be the best option as the loan is secured by the equipment itself, which means the interest rate and terms are typically good and the loan itself is easier to come by. These are just a few of the many viable loan options for doctors.
- Gas station loans: Gas stations are one of the most prolific businesses in the US, which means gas station loans are more accessible compared to other industries. However, they face unique challenges such as slim profit margins if only considering gasoline sales, as crude oil prices fluctuate due to regulatory and environmental changes. This explains why you will see connecting small restaurants or convenience stores to a gas station as an additional revenue stream.
Several reasons for a gas station to obtain financing could be to stock up on inventory for the convenience stores, purchase gasoline in bulk to beat fluctuating oil prices or upgrade equipment to meet regulatory standards. Traditional options for gas station loans, same as for other small businesses, are Small Business Administration (SBA) 504 and 7(a) loan programs. But lending can be more than just the traditional loan. If you do not have the initial collateral to help secure the loan, you can look into securing an unsecured loan, line of credit, or merchant cash advance.
- Restaurant loans: Restaurants are expensive, there is no doubt about it. There is a high overhead cost from running the physical space, hiring employees, and providing benefits, commercial equipment, inventory, marketing, and more. These restauranteurs will need a restaurant loan at some point to run things smoothly. Restaurants also face high turnover rates as they can go through multiple owners, iterations of themselves, and short-term employees who join during peak season. Therefore, owners must always be up to date on their restaurant’s full financial health, so that they can decide why they need a loan, which will determine the type and size of loan to apply for.
Although a rigorous process, an SBA loan is a popular choice to overcome cash flow issues that come from running a restaurant, as it carries the lowest interest rate due to the federal government’s guarantee. If you need to buy or lease equipment like a pizza oven or cooler, you can apply for an equipment loan that will hold what you buy as collateral, which means lower interest rates. To stock up on trendy ingredients, a line of credit can enable you to make the purchase without sacrificing cash flow.
- Hotel loans: With the travel industry recovering at full speed, the hospitality sector needs to be prepared to meet the incoming demands with hotel loans. In a 2017 study done by Expedia, the independent sector saw greater growth than the big brands or chain hotels. Fortunately, there are plenty of financing options for hospitality business owners, and like other industries, it depends on what they aim to accomplish.
To acquire fixed assets for expansion or modernization, such as purchasing or developing new properties, the conventional commercial term loan and SBA 504 loan program are ideal for their long-term, fixed-rate financing. The main distinction between the two is that the SBA loan will offer lower rates as it is guaranteed by the federal government but will have a more rigorous application process. Another option for the smaller hotel companies is the SBA 7(a) loan, but they must meet SBA’s size standards (considered small within the industry) and show a profit. For hotel owners that just need to cover minor expenses, they can apply for an unsecured loan that relies solely on the business’s cash flow and ability to generate profits, but rates will be higher.
- Salons: The salon industry was greatly impacted by the pandemic. As the country returns to normality, it is critical for salon owners to have the best salon financing to recoup their losses. Applying for and getting a hair salon loan is an easy process if you plan correctly and organize your financial statements. Extra funds can help with furthering education and training for the stylists, stocking up on products, or modernizing the salon interior. However, it is not always easy to get financing from traditional bank lenders as they need to see a positive cash flow. With high overhead costs and periods of inconsistent incomes, these salon owners may need to seek alternative methods of financing.
If owners don’t have the initial collateral to secure the loan, they can look into unsecured loans but must be prepared for more stringent financial requirements such as a higher credit score. Those willing to offer up their salon assets and equipment as collateral can receive a line of credit up to the value of the assets. Traditional financial options for hair and spa service companies are the (SBA) 504 and 7(a) loan programs, which has a lower rate with the backing of the federal government, but the borrower must meet the eligibility requirements and adhere to the SBA Standard Operating Procedures for loan underwriting. The main difference between 504 and 7(a) is the minimum and maximum amounts they can borrow, the terms of the loan, and the down payment required. To buy an existing salon business, they can get seller-carry financing, which is essentially negotiating the pricing, terms, and financing with the current owner. An advantage of this financing is that the owner can oversee the training of new staff during the transition period to ensure business success.
- Commercial Auto: The application process for a commercial auto loan isn’t the same as a regular car loan. A lot more weighs into this decision such as the business purpose of the vehicle and whether it is necessary, and if the business can turn enough profit to afford the loan. Examples of commercial vehicles could be a dump truck, van for electrical equipment, or food truck. Smaller businesses who are unable to purchase their vehicle outright, they may choose to finance it after determining it is truly necessary.
The most direct loan for a commercial auto loan is, you guessed it, a commercial auto loan. To get this loan, the owner must assess the financial status of their company to ensure they are in good financial standing. This step is crucial, so owners should always make sure their financial documents are up to date. Then they must design a good loan proposal, essentially a sales pitch, that explains why they need financing, the purpose of this vehicle, and the exact vehicle they need. The business’ credit score will be evaluated, as well as the value of the business assets should the owner offer that up as collateral.
- Professional services: For businesses without the selling of a physical product, such as law firms or consulting businesses, the loan application process could be less straightforward. Lenders may find it difficult to determine how much revenue these professional services But these business services are every bit as valuable as tangible services and need the financing to continue innovating and growing to stay relevant against stiff competition. Other things to consider are whether the business owns any patents or trademarks, and the ownership team or staff. For lenders, the evaluation will come down to how much revenue these professional service businesses have been generated in the past.
The most common professional services financing option is traditional loans, which banks issue for expansion, build new facilities, and purchase new equipment. For professional services to get these loans, they may have to offer some sort of collateral or a well-defined revenue forecast. SBA loans are similar to traditional loans, but approval is sometimes easier to get, which makes this option more accessible to professional services businesses. To avoid the strict regulations and requirements banks have, these businesses could get funding from online and alternative lenders. They can seek lenders that specialize in professional service loans or are backed by investment groups or private investors whose interests are in their specific type of business. This could mean more favorable terms versus the traditional banks who consider them difficult to lend to.
- Medical practice: Doctors, dentists, and other healthcare professions are held in high regard for their expertise and their higher salary. Although doctors’ earnings range from $156,000-$300,000, these professionals are also riddled with student loan debt and the high overhead cost of running their practice. Once their student loans are paid off, which normally takes years, they may look to expand their practice, hire more staff, digitize medical records, and more. All of this requires working capital and looking for the right medical practice loans to get it.
If a medical practice is looking to purchase or rehabilitate a building, a commercial loan could be the answer with a 15 or 30-year fixed-rate loan, and a 20% down requirement. For startup practices, they may qualify for SBA funding which offers attractive rates and terms. For practitioners who just want to have cash readily available to ensure smooth operations, a business line of credit is the optimal choice. Once a lump sum amount is agreed by the lender, the money is ready for use, and the interest rate is only charged to what the borrower spends.
There are lots of other business lending options for small business owners in different industries from these. We’ve put together more recommendations in this helpful set of how-to financing guides.
More Resources for Small Business Owners
We’ve talked a lot about the fact that lenders will evaluate the business before deciding to provide financing. Biz2Credit is focused on helping business owners access financing on their terms: when they need it and in ways that lead to success. That’s why we’ve developed a set of resources and tools that business owners can use to improve their understanding of their unique financial circumstances, all available in our Business Toolkit. In this section we will do a deeper dive on the methods lenders use to assess businesses with the help of our Business Toolkit, specifically financial calculators and the BizAnalyzer Virtual CFO so you can determine your business’ financial health. This will give you insight into how your business is evaluated by potential lenders so that you know where you may need to improve your chances of getting loan approval.
Here are some of the tools we recommend business owners use while preparing for a loan or financing application so they can be on top of the way that lenders will evaluate their business.
- BizAnalyzer Virtual CFO is a 360-degree financial review and monitoring solution for business owners to use to understand how their business finances are performing in the eyes of lenders. You’ll get the equivalent of a business credit report through your Virtual CFO account, with details on how your business is performing financially right at your fingertips. The system helps you compare your business to other companies in your industry or local area so you can see how you’re really doing. And you’ll have access to financing options faster once you complete your full profile. Sign up for a limited access service for free and get instant insights into the way that lenders are going to assess and evaluate different elements of your business. Plus, you’ll get helpful recommendations on how to improve your rating as well.
- Small business loan calculator helps to calculate monthly loan payments for fixed-rate loans. Enter your loan details, including loan amount, interest rate, and loan term, and then click “Calculate” to see results.
- Equipment value calculator helps for equipment valuation using the annual straight-line depreciation method, the most used and easiest method.
- Inventory value calculator helps with inventory valuation using the annual straight-line depreciation method, the most basic inventory valuation model.
- Inventory turn time calculator helps with calculating the inventory turnover rate, which measures the number of times you have turned your inventory in the past 12 months.
- Loan to value calculator calculates the ratio of the borrowed amount against the asset value you are purchasing or refinancing.
- Debt service coverage ratio calculator is used by banks to determine if the property is generating enough income to pay back the debt obligations. Most lenders require a minimum DSCR of 1.2.
- Debt to income calculator determines the debt-to-income (DTI) ratio, the percentage of a consumer’s monthly gross income that goes towards paying debt.
- EBITDA calculator calculates earnings before interest, depreciation, taxes, and amortization. EBITDA measures profitability but can be misleading as it doesn’t consider cash used to fund working capital or replace old equipment.
Taking Your Business Forward with Help from Biz2Credit
Now that you have a good understanding of the top small business financing options, the popular ways other business owners use each kind, and a good sense of which kind of financing your business might benefit from, we hope you’ll turn to Biz2Credit for assistance with your business financing needs when you’re ready. With business toolkits like the financial calculators and BizAnalyzer Virtual CFO to check your company’s financial health, Biz2Credit is here to ensure you are set up for success every step of the way.
At Biz2Credit, our number one priority is helping small businesses across the United States. Whether through assisting small businesses with acquiring loans or providing them with timely and relevant news pertaining to their individual industries, we are here for small business owners. Stay in touch with us, apply for financing if you’re ready, or schedule time with a funding specialist to get a one-on-one consultation.