How to Choose a Business Loan

You’ve decided to begin your journey and start your own business. This one choice can drastically change your life, so it’s important to do it right. Before jumping right into that cold-water step back and make sure you’re ready. Do you have everything you need to begin?

Of course, every business has different needs but if you’re already at this step you probably know what it’s going to take. Now the question is, how are you going to put this all together financially? Maybe you’ve been saving up for years or maybe you just came across a large amount of money and decided to invest it into yourself? If you’re like the millions of others starting a business for the first time, it’s probably to create financial security for yourself while doing something you love.

Unless you stumbled into that money, your next big step is going to be securing a business loan. However, this one task can be so overwhelming that it could derail everything else in your business plan. Don’t fret, it’s not as daunting as it appears. Getting a business loan could actually make the future of your business more secure and honestly make the next steps so much easier.

Determine Your Business Needs Before You Commit

The first thing you need to know is how much you want to finance yourself and how much you want to borrow. We suggest creating a business plan with all of your financials laid out in detail. Does this include office space? If so the type of loan you’ll need will be different than if you are just looking to start a business in your home or an already existing office space. It’s important you work with your lender and a broker to find the best option for you before you make such a big commitment.

The Different Types of Business Loans

There is a huge difference between your standard personal loans for things like mortgage and cars, and the highly-structured nature of a business loan. It goes without saying that we recommend not taking out a personal loan to start your business. A business loan is utilized for working capital, asset acquisition, debt consolidation and/or business growth. Security for these loans includes business assets and personal guaranty of the owners, whereas a personal loan uses personal collateral, which could end up hurting you in the end. It’s a good idea to always keep your personal and business life separate.

There are so many options out there for small businesses that personal loans are really unnecessary in today’s market. Let’s explore some common types of loan structures and terms:

  1. Line-of-credit loans
    This is typically a commercial loan that provides a line of credit you can draw working capital from. What’s special about these is that they’re revolving, so you can draw from it and pay back into it up to authorized amount whenever you need to. It can be secured or
  2. Installment loans
    An installment loan is one of the most commonly understood types of loans, where identical monthly payments are made throughout its terms, which include the principal and the interest. Car loans and mortgages are arranged as installment loans.
  3. Balloon loans
    A balloon loan is designed so it doesn’t amortize, or get fully paid off, through its regularly scheduled payments, but instead requires one big “balloon payment” at the end to pay it off. It’s a way for a company to receive more money than it could afford in normal monthly payments with the promise that they’ll be able to afford a lot more by the time the loan term is ending.
  4. Interim loans
    Interim loans are short term loans a company can receive which stipulate that a longer term or intermediate loan will be taken out afterwards. It can help a company continue operating while hammering out details for a longer loan, which requires more commitment and thought.
  5. Accounts receivable loans
    An accounts receivable loan or financing plan puts a company’s receivables like due invoices as collateral. The lenders in these arrangements are called “factoring” firms, and helps businesses with slow or difficult to collect cash flow gain access to liquid capital.
  6. Secured and unsecured loans.
    A secured loan is a loan secured by collateral, whereas an unsecured loan has no collateral pledged as security for repayment. Typically, secured loans have lower interest rates and more relaxed terms because the borrower’s commitment to repaying the loan takes a physical or financial form.
  7. Letter of credit
    A letter of credit is a three-party document issued by a bank that guarantees the payment of a customer’s check and/or draft up to a stated amount for a specific period of time.
  8. Term loans
    A term loan is typically from a bank for a specific amount on a specific schedule for repayment, typically for real estate, equipment, or working capital. They are typically repaid on a monthly or quarterly basis, and are suitable for small businesses.
  9. Inventory loans and equipment loans
    Inventory and equipment loans are usually structured as a line of credit or short-term installment loan with the equipment serving as collateral. These are a good option for some small business owners who have large upfront equipment expenses, like dentists looking to start their own practice for example.
  10. Commercial Real Estate Loans
    Commercial real estate loans help prospective and current property owners acquire, develop or refinance commercial property like apartment complexes and office buildings. The property asset serves as liens in this arrangement. Property owners have many options for financing in this field, and an experienced lender can help them find the right one for their new building.

No business is too small, large or complex for the right lender. Find someone who takes pride in working step-by-step with owners, and seeing small businesses grow. They should walk you through the process and be an advisor throughout.

Next Steps to Financing Your Business

Your lender will send you the required documentation along with information on loan specifics you are seeking.  You can work with your financial team (like a bookkeeper, CPA, etc.) in providing the information required. Your lender’s job is to help make this process as streamlined as possible. That’s why it’s important to research your lenders. Look for businesses with staff that have years of experience and are leaders in their industry. Find a lender that is an expert in their particular part of the field. Every new borrower brings a unique perspective and needs. Meeting and exceeding customer expectations should be your lender’s top priority.

 

 

Faraz Rouhani

Faraz Rouhani

This guest article was provided by Faraz Rouhani with Bellevue Capital Group. Rouhani is an accomplished entrepreneur hyper-focused on sales systems, capital markets, and technology. He has served equal time as a sole owner and as a managing partner across companies, giving him the operational insights necessary to generate millions in annual revenue. His tech experience has had him leading everything from intuitive CRM systems to ecommerce platforms and even website building solutions. Between running these and more traditional businesses like bars, Faraz brings an understanding of the challenges business owners face to the team at Bellevue Capital Group. Follow Faraz Rouhani on Twitter @faraz_rouhani.

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