How to Find the Best Financing Option for Business

Several businesses need financing for multiple purposes. It can serve as additional capital to help power up the enterprise, and a useful cushion should the company need a few extra funds. 

The problem is that it’s not always easy to find and get a hold of a credit product as soon as possible. As a result, companies typically go through the bumpy road of proving their business’s creditworthiness to lenders. 

But we’ve got you covered. If you’re currently looking for a financing option, here are some nitty-gritty you need to keep in mind. 

Determine Your Business’s Financial State

Get a sense of your business’s financial state. Analyze your company’s balance sheet, income statement, and cash flow statement. Additionally, run a financial ratio analysis, including the following:

 

  • gross profit margin
  • net profit margin
  • coverage ratio
  • current ratio
  • quick ratio
  • debt-to-equity ratio
  • inventory turnover
  • total asset turnover
  • return on equity (ROE)
  • return on assets (ROA)

Understand Your Goals with Getting a Loan

One of the most pressing issues businesses face is securing financing. Lenders must know your intention for a loan, such as whether it’ll help you scale your business or just keep your business above water. 

How to Find the Best Financing Option for Business

There’s a need to be more detailed about the kind of financing you want and how you’ll use it for your business loan. The more in-depth you’ll be, the more creditworthy you’ll be in the eyes of the lenders. Here’s what you need to be clear of: 

 

  1. Do you need the capital ASAP? Or can you wait to get better terms?
  2. How are you going to use the capital? 
  3. How much do you need?
  4. What kind of credit product do you want to access? 
  5. How much time do you need to make repayments for your loan?

 

All points listed here aren’t exhaustive, of course. Even so, the ten questions above can help you figure out the kind of loan you’ll be the most eligible for—and that’ll help your business the most. 

Know Your Options

Although several businesses are considered high-risk, it doesn’t mean your options are limited. You just have to know the best approach to dealing with your financing needs. Here’s a list of your best financing options:

 

1. Traditional Bank Loans

Brick-and-mortar banks’ line of credit or term loans are the most cost-effective source of capital for your business. They generally have low rates and generous terms. However, it’s the best option if you need the capital now. They usually have lengthy and time-consuming underwriting processes and low approval rates. 

 

2. SBA Loans

Small Business Administration (SBA) loans lower interest rates and agreeable terms. However, this might not be an option if you have a bad credit rating. You need to have a credit score of 600 or above, a minimum of $180,000 annual revenue, and a business running for at least four years. In addition, its application process takes too much time. 

 

On the contrary, there are other alternatives that you can opt for instead of SBA loans, including:

  • 7(a) Loan. You can borrow working capital up to $5 million with repayment terms within 7-25 years. 

 

  • CDC/504 Loan. You can borrow up to $5.5 million (but only for fixed assets like equipment)  with repayment terms up to 20 years. 

  • Microloans. You (usually for startups) can borrow up to $50,000 with repayment terms of up to six years. 

 

3. Online Lenders 

Online lenders promise quick disbursement of funds as fast as within a day since they have minimal eligibility and document requirements. They also have a variety of financing options to choose from. Their only downsides are having higher interest rates and shorter loan amortization terms. 

 

Moreover, several businesses are usually torn between business loans and personal loans. Here are some main points to know about a business loan versus personal loan:

 

  • Personal loans can be utilized for any purpose, while business loans are limited to business purposes only. However, remember that although a personal loan can be used for your business, it won’t build business credit through repayment.

 

  • Personal loans are easier to qualify for since they’re typically unsecured and don’t require collateral. In contrast, business loans are easy to obtain only if your business has an established credit history.

4. Business Line of Credit

A business line of credit (LOC) can serve as your company’s revolving credit and insurance policy, especially during lean times and unforeseen financial crises. It’s the best option for those owners who are so fed up with a repetitive approval process. With LOC, what owners need to do is draw on, repay, and repeat. However, its upfront fees and low borrowing cap are its disadvantages. 

 

5. Equipment Financing

Equipment financing is the best choice when planning to invest in expensive equipment, which will then serve as collateral. While it may come with higher fixed interest rates, it doesn’t require owners to put up extra funds as security and installment payment is possible. 

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Final Thoughts

In any financial situation, having good decision-making skills and strong financial knowledge is helpful in weighing options and making informed choices. Hence, be keenly aware of a loan’s actual cost and be self-assured in your investment.

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