Ultimate Guide to Small Business
Loans in 2019
Small Business Finance in the Era of Rising Interest Rates
Small business entrepreneurship has experienced a renaissance starting in 2017. Despite the distractions and uncertainty of a turbulent political environment, major natural disasters and questions about taxes and regulation, small business owners had a fantastic year in 2017. Some of that euphoria spilled into 2018 as well due to soaring demand, healthy employment and low interest rates. A booming stock market and new tax policies also provided an economic tailwind thanks to sky-high consumer confidence and spending.
Going into 2019, the outlook for further expansion of the small business marketplace is not so clear. In December 2018 the stock market experienced its worst December since the Great Depression as many major and forward-looking indexes are predicting an economic slowdown, or at least a pause in corporate expansion.
Types of Small Business Loans
When it comes to getting funding for a small business, business loans and other alternative kinds of financing are both popular and accessible to many entrepreneurs. In 2019 here are the kinds of funding you should definitely think about.
Term Loans are traditional bank loans to small businesses in which the borrower requests an amount of money and then agrees to pay, with interest, over a specified period of time. In this way, securing a small business loan is indeed similar to getting a mortgage to buy a house. Lenders are typically repaid on a monthly basis. In order to obtain a bank loan, the borrower must meet certain lending criteria, including having a personal credit score above the parameters set by underwriters. Individuals with little or no credit repayment history often find it difficult to secure funding through a term loan because of these requirements.
SBA Loans are term loans that come certified by the Small Business Administration (SBA). The agency itself does not provide funding. Rather, the loan comes from an authorized lending partner - usually a bank -- at rates and terms determined by the lender. SBA loans differ from traditional small business term loans because the federal agency guarantees a portion of the loan - often up to 75 percent - in case the borrower defaults. By doing so, the SBA mitigates risk for the lender and provides incentive for banks and lenders to make capital available to entrepreneurs. Often, the interest rates charged are quite attractive and SBA loans are used by businesses at all stages of their growth.
The downside of SBA loan applications is that they require a lot of documentation, which slows the loan application process and lengthens the amount of time it takes to finalize the deal. Decisions hinge upon the borrower's credit score, which is a reflection of his or her payment history. However, borrowers with a sufficient level of creditworthiness will find an SBA loan a really attractive option because the interest rates they offer are tough to beat with other financing options.
Business Credit Cards
Business credit cards are readily available. Who among us has not received a business credit card offer in the mail at least once in the past few months? They typically come with credit limits that range from $3,000 to $20,000. Often, they are easy to apply for and don't have stringent requirements, and many of the companies that issue business credit cards make an initial offer with a low annual percentage rate (APR) for a certain period of time. However, after the introductory period has passed, the interest on credit card purchases can be quite high. Using credit cards to launch a business can mean high repayment costs if it takes a while to repay the debt. Further, if you need to borrow a large sum of money for purchases of property, building renovations, equipment purchases, and inventory, a credit card's borrowing limit may be too low for you to cover the full cost.
Business Line of Credit
A business line of credit is a form of small business financing in which an entrepreneur has cash available to draw upon whenever it's needed. It's like having a guarantee from the bank that money will be available for you to borrow if and when you need it. The line of credit provides access to funds quickly. When needed, a business owner taps into the credit line. Interest is paid only on the amount of money that has been borrowed. Business owners like this type of small business financing because of its flexibility and because the interest rates charged tend to be much lower than the rates of business credit cards, which can approach 19 percent APR (annual percentage rate) or higher.
But while a business line of credit sounds like a perfect option for any business owner, the reality is that these are very difficult to acquire for most entrepreneurs. Only certain types of businesses will be able to get approval for a line of credit, and they'll have to maintain excellent credit scores in order to keep the line of credit open.
Equipment financing is exactly what it sounds like. A business owner borrows money to buy a piece of equipment and pays it back over a pre-defined period. With this type of funding, the equipment is put up as collateral. In case of default, the lender can take possession of the equipment and sell it to recoup the loss.
Accounts Receivable Financing
Accounts Receivable Financing is an option that established business owners use when they are caught in a cash crunch. If unanticipated costs or slow-paying customers are impacting cash flow, this type of financing can provide a quick infusion of capital. However, business owners should be aware that this is not a loan but an alternative kind of financing entirely. Essentially, you are selling your future earnings at a discounted price to the company that provides the funding. The flexibility that's offered by this kind of financing is great for businesses that need cash quickly to finance big projects today, and who have predictable income available in the future.
Merchant Cash Advance (MCA)
Merchant Cash Advance (MCA) is a similar form of small business financing to Accounts Receivable Financing. In fact, many people describe MCAs as a type of A/R Financing. MCAs provide a lump sum of cash that is paid back by providing authorization for the funder to take a certain percent of your daily sales or credit card receipts until the amount of the loan is repaid. Borrowers are able to pay based on the company's sales. The amount of repayment during a period of time is related to the fortunes of the borrower. During good weeks, they pay more, during slower weeks, they pay less. This makes it a great option for businesses that For instance, if you need to borrow $10,000, the repayment amount might be $12,000, which is repaid as a percentage of credit card receipts after the money is withdrawn for the length of time it takes to repay the full agreed-upon amount.