Ultimate Guide to Business Loans in 2020
The Top Ten Things Every Entrepreneur Should Know About Business Loans and Business Financing in 2020
Small business financing in 2020 poses a few unique challenges for a business owner. The good news is that it is arguably one of the best times ever to get a business loan. Because of the emergence of non-bank lending sources, small businesses have more choices and lower hurdles of credit-worthiness to overcome when it comes to business financing and small business loans.
The shifting labor markets in the US as well as globally also hold some important lessons for new and existing business owners. Let's take a look at the state of business ownership and business financing in 2020.
Why Are So Many People Starting Their Own Businesses?
What motivates an entrepreneur in 2020 has changed dramatically from just twenty years ago. Gone are the days of decades-long tenure at a single corporation and a comfy retirement with a pension. This has given rise to more people becoming entrepreneurs than ever before.
In fact, beginning in the early 1990s the idea of a Defined Benefit retirement plan was already beginning to disappear. Defined benefit was essentially a pension plan that guaranteed workers a "defined" monthly cash benefit through retirement when they worked a certain minimum number of years. Those plans are very rare these days.
Gone along with that safety-net are the incentives to stay at a company for any serious length of time. Workers are now moving from job-to-job based on other factors such as more pay, a better benefits package and better conditions.
Workers in the U.S are only staying with an employer for an average of 4.2 years according to the Bureau of Labor Statistics September 2018 study. Due to changing demographics, and employee/employer relationships, there is no longer a bond between the two sides like in the past. The notion of the workplace (especially large corporate environments) as an extended family is all but gone.
The erosion of tenure or longevity benefits combined with the instability of today's companies has led many workers to the conclusion that they are better-off going it on their own as an independent business owner.
Every business begins with an entrepreneur's dream, desire or necessity. Many people start businesses because they want to pursue their passion in life, whether it's cooking, creating floral arrangements, renovating homes or some other interest or passion. There is something empowering about coming up with an idea for a business, building it from the ground up and being in control of one's destiny.
Risk-averse individuals may opt to take a more cautious route of purchasing a franchise, which comes with an established brand and proven operational systems. In 2020, there are hundreds of diverse franchise opportunities to cater to a wide range of personal interests.
As we have noted above, more and more new companies are being launched out of necessity. It is not uncommon for someone who has been terminated from a job to then take the opportunity to start a business. In fact, they may have dreamed about being the boss for some time, but were unwilling or unable to assume the risks associated with starting a business while still employed at their old gig.
Often, this type of entrepreneur launches an enterprise in the same field they have always worked in and vows to do it better.
You Have Decided to Open Your Own Business, What Next?
Once you have committed to starting a venture, it's time to get serious about financing your company. Too many entrepreneurs start their business without an adequate plan in place to secure the cash they need on hand to keep the business running smoothly week to week. Being prepared starts with having a clear idea of how much funding you'll need to see your dreams soar.
If you're at this point it is time to write a business plan which explains what the business is, who the customers will be, where the business will be located, and when it will operate. The plan provides a roadmap to profitability and details the inherent assets of the business that will make it successful. Importantly, a business plan is critical for raising funding to run the business. The business plan will be the first thing reviewed by lenders who you might approach for capital.
Potential lenders or investors ultimately want to know whether borrowers will be able to repay in a timely manner. They will base the decision on the vision you outline in the business plan, the expertise of those involved in running the company and the financial data provided. There's still no doubt that business owners looking for financing in 2020 should start with a solid business plan.
Deciding how much to borrow
- Drawing the right amount is no easy feat. Taking too much or too little capital to finance your business can have disastrous consequences on your success. While there is no single formula, you may wish to ask your lender if they have experience lending in your field or industry.
- Many entrepreneurs make the mistake of viewing their lender or investor from an adversarial perspective. A professional lender will have a strong interest in seeing you succeed and may be a valuable ally in establishing budgets and financial projections. Popular reality shows like Shark Tank are a great way to see how the fine line between investor as ally versus adversary (or predator) can be navigated.
- To start, have a strong foundation for the amount of money you will need. The business plan will describe the elements about the company and management team that will guide the firm. Draw upon your expertise in the industry to determine a budget that outlines how much money will be required to start. Also it will provide documentation that backs up the assertion.
- A rule of thumb is to ask for more than you have estimated. Startup owners are wise to borrow more than the estimated budget. Inevitably, surprises and setbacks will occur during the pre-launch phase of the firm. Request an amount that provides cushion in case of cost overruns. After all, most companies lose money during their first year of operation. Estimate the firm's burn rate (the amount of money spent each month on costs) and determine how long you can realistically afford to stay in business before turning a profit.
Identify sources of small business funding
Some entrepreneurs are fortunate enough to have enough money that they can self-fund a new business effort. In such cases, these business owners are able to cover startup costs without getting money from outside sources. Debt financing means that the company borrows money and then must repay the lenders with interest over a specified period of time. Equity financing means that investors put up money to launch a business and receive a percentage of its ownership.
Best kinds of small business financing in 2020
Countless firms are started by individuals who enlist their family and friends to put up money to fund a business venture. Many times the lenders are willing to provide the money with little or no interest. However, there is the inherent risk of strained family relationships and loss of friendship if the business fails and the money is not repaid. Often, the lenders are given a percentage of ownership in the firm. This is known as equity financing.
Entrepreneurs who do not have a network of family and friends who are willing to put up capital often look to venture capitalists who will put up the cash in exchange for a percentage of the company. The hit series Shark Tank has widened the understanding of this type of small business financing.
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.
SBA Loans are term loans that come through 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.
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 loans they offer are tough to beat.
Business Credit Cards
Business credit cards are readily available. Who among us has not received a business credit card mailer 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 secure, 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.
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 when needed. The line of credit provides access to funds. 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 are much lower than the rates of business credit cards, which can approach 19 percent APR (annual percentage rate).
Equipment financing is exactly what it sounds like. 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.
Merchant Cash Advance (MCA)
Merchant Cash Advance (MCA) is a similar form of small business financing. MCAs provide a lump sum of cash that if paid back by providing authorization for the lender to skim your daily credit card receipts or other business 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 receivables of the borrower. During good weeks, they pay more, during slower weeks, they pay less.