Business Loans

Most businesses consider taking business loans at some point. This is true no matter what the size of the business or the industry they are in. This article will briefly explain the various types of loans available to small business owners and the pros and cons you should consider when deciding what type of loan to seek and whether the overall cost of the loan is worth it to grow your business.

Business Loans

Traditional bank business loans are usually applied for in person at your local community bank were even at some of the larger national banks, depending on the size of the loan you are seeking. Keep in mind you should have a very good credit rating or you will be wasting significant amount of time not only in the application process, but also in the lengthy loan review process.

In addition to banks, there are other lenders that may charge more interest than a bank, but but will have less stringent requirements for approving loans, such as lower credit scores. Some lenders, like OnDeck Capital (affiliate ad link) will approve loans to a business that a bank will not approve. Some of OnDeck Capitals requirements are: must be an existing business for 1 year or more, minimum credit score of 500, $100,000 revenue in the past 12 months and no bankruptcy in the past 2 years. Although OnDeck Capital can loan to over 700 different industries, there are some industries they cannot loan to such as new and used motorcycle and auto dealers, new and used boat dealers, personal trainers, pawn shops, adult entertainment, drug paraphernalia and dispensaries. 

  • Minimum time in business has changed from 9+ months to 1+ years in business.
  • Minimum annual revenue has changed from $75,000+ in the past 12 months to $100,000+ in the past 12 months.

While the interest rate will also be lower and the payback period will be longer that a true merchant cash advance, this only applies if you have a decent credit score.

Business Loans - Factors to Consider

                     Pros

  • Lower interest rate compared to other loan types
  • Improves your credit rating if paid off on time
  • Usually paid off over a longer term than other loans 
  • Monthly payments are smaller becuae of lower interest rate and longer term                                                                

                       Cons

  • Takes a long time to get approved
  • Considerable amount of paperwork required
  • May require you to hire an attorney or pay for the bank’s attorney
  • Requires very good credit scores
  • Requires a personal guarantee
  • Requires security against your assets
  • Your cash flow is taken into consideration
  • You cannot use the funds for personal needs

Merchant Cash Advance

Occasionally a business owner is in a situation where they do not have a good credit score, but have a fairly urgent need for capital. If they cannot get bank financing they may consider a merchant cash advance. This type of business financing carries a high rate of interest and a short payback period, so they are not for everyone. A merchant cash advance is not considered business loan. Technically not considered a loan, a merchant cash advance is classified as business financing based on a repayment from the future credit card sales of your business. If you would like to apply for a merchant cash advance please contact me to discuss your needs or use the form on the right so I can advise you on your options.

Merchant Cash Advance – Factors to Consider

Pros

  • Quicker to close than a bank loan ( a few days or less)
  • Very little paperwork required
  • Bad credit is not a problem
  • No attorney required
  • No personal guarantee required
  • No security required
  • No restriction on use of the funds  

Cons

  • Requires a fair to good credit score
  • Higher rate of interest than a bank loan
  • Will not improve your credit score
  • Must be paid off over a short time frame
  • Must be in business for at least 4 months                                    

Business Funding Against Future Credit Card Sales

Technically these types of transactions are not considered business loans, since the financing is provided against the future credit card sales of the business. 

Funding Against Future Credit Card Sales – Factors to Consider

                       Pros

  • Quicker to close than a bank loan
  • Very little paperwork required
  • No attorney required
  • No personal guarantee required
  • No security required
  • No restriction on use of the funds    

                       Cons

  • Requires a fair to good credit score
  • Higher rate of interest than a bank loan
  • Will not improve your credit score
  • Must be paid off over a short time frame
  • Must be in business for at least 2 years                                          

Equipment Loans or Equipment Leases

If you are looking for a business loan for the sole purpose of purchasing or leasing equipment and talk with the sales representative about financing programs. Usually the equipment company has an equipment finance company they work with to assist you in either purchasing the equipment or leasing the equipment with a buy out  at the end of the lease term.

Equipment Loan or Equipment Lease - Factors to Consider

                        Pros

  • Lower interest rate compared to other loan types
  • Improves your credit rating if paid off on time
  • Usually paid off over a longer term than other loans
  • Quicker to close than a bank loan        

                      Cons

  • Requires good credit scores
  • Considerable amount of paperwork required
  • May require a personal guarantee
  • Requires security against the equipment
  • Your cash flow is taken into consideration
  • No additional cash is provided    

If you do not qualify for a bank business loan or equipment financing and want some alternatives contact me to discuss your options. I have access to a number of merchant cash advance providers as well as sources for buinsess loans if you do not qualify for bank financing because of your poor credit history. 

Bad Credit Loans

These are loans that carry a high risk and therefore fall into two categories. They very risky for the lender and equally risky as well as expensive for the borrower, especially if there is a default in payment.  

The first category would be hard money lenders that require a personal guarantee and security in the form of hard assets, such as a second mortgage on your home, and a very high interest rate. The penalties for nonpayment are quite severe as you can see. The risk of loss to the lender is quite high as well, which is why the terms are so onerous. These loans are not made by banks but by private lenders, some of which do not have a good reputation.

The second category, and I think a better alternative for bad credit loan, is the merchant cash advance discussed above. 

Bad Credit Loans (NOT a Merchant Cash Advance) – Factors to Consider

Pros

  • Quicker to close than a bank loan
  • No restriction on use of the funds
  • Probably won’t require you to hire an attorney
  • Bad credit is not a problem        

Cons

  • Higher rate of interest than a bank loan
  • Must be paid off over a short time frame
  • Requires full security, including your home
  • Personal guarantee required
  • Severe penalties if you default

Conclusion

Carefully consider all the pros and cons when deciding on which of these types of business loans would be helpful for your business needs. If you don't qualify for a bank loan, then maybe a small merchant cash advance might solve your immediate cash needs, just be aware of the costs involved and weigh that against the benefits to be gained by accessing the needed cash.

Powered by NXGEN Payment Services, a Registered MSP/ISO of Elavon, Inc. Georgia.