Running a business can be a rewarding — but expensive — undertaking. In addition to your revenue, you may need extra capital to keep operations moving smoothly, whether that means making payroll, stabilizing your cash flow or setting your sights on expansion.
Borrowing is one tool that can help small business owners grow their companies in the long term, or cover unexpected expenses in an emergency. However, there are many different kinds of business loans, and how each provides a unique advantage, depending on how you plan to use the money.
In order to secure the right funding for your business, it’s important to know about common types of business loans as well as practical uses for each. Having an intimate understanding of the business lending landscape can enable you to borrow strategically today — and set you up for tomorrow.
Questions to ask yourself before you apply
To select the right loan for your business, begin by asking yourself a few questions. The first and most obvious questions relate to your financial needs, followed by more nuanced ideas about your current financial situation as well as which loan types might be best suited for your goals.
Here are some common questions you’ll need the answer to before you apply for a small business loan:
- What do I need capital for? Are you looking for funds to cover short-term expenses, such as overhead, or long-term investments? Do you need to supplement cash flow?
- How quickly do I need funding? Are you looking to solve an immediate issue, or can you wait to receive your loan?
- How much capital do I need? What amount of money do you need to reach your goals, and how much debt is your business able to take on?
- What does my business history look like? How many years of revenue figures can you provide to a lender, and how strong is your credit history?
You’ll want to have answers to these questions before you start the loan process since each will affect not only what kind of loan you’ll want to apply for, but which you’ll be qualified for.
Size up your options
Different businesses will benefit from different types of loans. Some loans are specifically meant to finance specific assets, while others are for general expenses, for instance. Additionally, not every business will qualify for each type of loan. Having a sense of both the use cases as well as requirements for different types of business loans will help you find the right funding option.
- SBA 7(a) loans: These small business loans provide flexible capital through private lenders and financial institutions. They are backed by the U.S. Small Business Administration, and generally have lower interest rates and higher capital amounts than other loans. They are paperwork intensive, so they have longer lead times to approval, and only go to the most qualified small business owners.
- Bank term loans: These loans are lump-sum capital, obtained through private lenders and financial institutions. They vary in both interest rate and capital amount, which is contingent on the creditworthiness of the applicant. They can be used for short-term expenses and long-term investments alike.
- Equipment financing: These loans are specifically meant to finance hard assets, such as machinery. They can be obtained relatively quickly, with less paperwork and fewer requirements than other loans. In these loans, the financed asset secures the loan in case of default.
- Business line of credit: These loans enable borrowers to draw against an approved capital amount, which replenishes (“revolves”) when the amount is repaid. Applications for these loans can be approved quickly, and are often used to cover short-term and emergency expenses as well as supplement cash flow.
Review your finances
Lenders typically request a significant amount of information about your business before they green-light a loan. This helps them determine your creditworthiness, your ability to pay back the loan on time, how much you can afford to borrow, your interest rate and more.
In a typical loan application, a lender might request credit scores (both business and personal), a profit & loss statement, a balance sheet, revenue figures, a business plan and tax returns. Some loans require specific paperwork as well; for instance, an equipment loan generally includes a quote for the asset you’re looking to finance. SBA loans require the most documentation, including additional personal information and specific forms.
Picking the right loan for your business means understanding how much documentation you’re willing to pull together in a certain timeframe as well as how strong a financial story your documents tell.
Find the right lending partner for your business
Not all loans are the same — and neither are the lenders who offer them. Partnering with the right bank can help you not only access the capital you need today, but also help build a strong financial future for your business.
Valley Bank brings knowledge and expertise to the business loan process, and can help your company find the right solution. Learn more about business lending with Valley Bank.