Every business needs working capital to survive. Without enough cash flow to pay the rent, cover payroll or market your products or services, no small business can thrive for long. But what are the options if you need to secure capital for your business?
At Addition Financial, we work closely with our business members to help them manage their money and secure small business loans, including equipment financing. The good news for you as a small business owner is that you have multiple options when it comes to business funding. Here’s what you need to know about raising capital for your company.
What are different business loan options?
When it comes to obtaining small business capital, you have multiple options. Each funding option has its advantages.
Small business loan
Small business loans are term loans, meaning that payments are made on an installment basis over the term of the loan. Our Addition Financial business loan terms range from three to seven years.
Small business loans may be secured, meaning that they require collateral, or unsecured. There will be limits on how much you can borrow if you don’t have collateral, such as business shares or eligible business equipment or inventory.
Equipment loan
Equipment loans are specialized term loans that must be used to replace, upgrade or purchase necessary business equipment. Equipment has a broad definition when it comes to lending, so your purchases may include everything from tablets for your employees to heavy construction equipment.
Equipment loan terms may range from three to 10 years. The equipment purchased with the loan serves as collateral. Financing equipment purchases with an equipment loan has tax advantages, since you will own the equipment and can claim depreciation deductions when you file your taxes.
Business line of credit
Unlike business and equipment loans, a small business line of credit is a type of revolving credit, meaning that you pay only for what you withdraw and can repay and borrow as often as you like during the withdrawal period.
The funding from a business line of credit may be used for any purpose related to your business. You can use it to pay overhead expenses or meet your payroll. You can also use it to buy raw materials or to market your services to your target audience. There is typically a withdrawal period during which you can withdraw funds followed by a repayment period when you must make monthly payments to repay what you borrowed.
Commercial vehicle loan
Business vehicle loans are another type of commercial term loan that can be used to buy vehicles for your business. There are usually restrictions on the vehicles, meaning that vehicles over a certain weight must be purchased with an equipment loan.
With a commercial vehicle loan, you can buy one vehicle or several. Addition Financial business vehicle loans have terms up to six years and may be used to purchase new or used vehicles.
Commercial real estate loan
Commercial real estate loans are also referred to as commercial mortgages. They can be used to buy a building or a plot of land for development. One thing that differentiates commercial real estate loans from residential loans is that commercial loans often come with a balloon payment at the end.
The terms for commercial real estate loans are usually shorter than those for residential loans, ranging from five to 20 years. The balloon payment is there because, while the loan has a shorter term, it typically will have a 30-year amortization period, so you’ll need to pay the balance at the end.
Angel investors
Angel investors are private investors and may be either individuals or investment firms that find businesses with potential and invest in them. The terms of the investment may vary depending on the investor and their requirements.
It’s common for angel investors to provide start-up or seed money in return for an ownership stake in the company. There’s no repayment period and the investor may recoup their investment or not, depending on how the company performs.
Equity financing
Some businesses can raise the working capital they need through equity financing, which means selling shares of the company. Shares may be sold to existing shareholders or to new investors.
In most cases, business owners sell minority stakes while still retaining control of their companies. This type of business funding comes with some complications because shareholders may want a say in how your business is operated.
Credit card
While it’s not ideal, one option that can be useful for small amounts of business financing is using a business credit card. If your company is new and you need to make purchases, you can do so on credit.
The downside to this option is that credit card interest rates are often significantly higher than loan rates. Unless you can afford to pay your balance quickly, you’re likely to pay far more with this option than with the others we’ve mentioned.
What are the requirements for a business loan?
Business capital funding may be obtained from a financial institution or from an online lender. For many business owners, the first choice may be to go to the credit union or bank where they have their business checking account and business savings account. Using the same financial institution can simplify business account management.
Borrowing requirements for online lenders tend to be simple and may only require businesses to have been in operation for a specified period, often one to three years, and to provide bank statements to verify their monthly receipts. The trade-off for the minimal requirements is usually a higher interest rate than what you would find at a credit union or bank.
Requirements for credit unions and banks tend to be more involved. For example, Addition Financial requires the following items for businesses to apply and be approved for business capital funding in the form of a commercial loan:
- A completed Addition Financial loan application
- Completed financial statements for all owners
- A Sunbiz.org printout
- Most recent 3 years of business tax returns
- Most recent 3 years of personal tax returns for all owners
- Current balance sheet and income statement
- A business schedule of debt
These items help us evaluate your business and make sure that you have the financial stability and strength to repay your loan. Having your finances in order indicates good business financial planning. While online lenders may have fewer requirements, credit unions typically offer the most advantageous interest rates on business loans.
What factors should be considered when choosing the right capital option for a business?
There are many factors that must be taken into consideration before you choose a capital option for your business. Each of the funding options we’ve listed here has advantages and disadvantages. Here are some questions to ask as you weigh your options.
What is the financial state of my business?
The financial status of your company will determine what types of financing are available to you. For example, if your business is new, you may be able to get a loan from an online lender but not from a traditional lender. If you’ve got a solid business plan and have established yourself, then you’ll have more options to choose from.
How much money do I need?
The amount of money you need may also determine which financing option is best for you. If you need a small loan to buy a few tablets for your employees, it will be easier to obtain financing than it would if you needed a million dollars to buy heavy machinery.
Why do I need money?
This might seem like an obvious question but it’s an essential one. If you need working capital to buy business equipment, it doesn’t make sense to approach a lender who doesn’t offer equipment loans.
Do I have the cash flow to make monthly payments?
Cash flow is an issue for many small businesses. Before you take out any type of loan, you should review your cash flow and budget to make sure you can make on-time payments. Failure to do so can have a negative impact on your business credit and your ability to borrow in the future. You should also ask how quickly you can repay the money, since that will impact your monthly payments.
Do I want others to have a say in my business?
Two of the business finance options we’ve mentioned here, angel investors and equity financing, may require giving others a percentage of your business and allowing them to have a say in how your business is run. You’ll need to decide whether those things are tolerable to you before you choose how to get the money you need.
How quickly do I need the money?
Some options to get capital for your business are quicker than others. If you need money immediately, then you may need to get financed with an online lender. Their approval processes tend to be quicker than those for traditional lenders, but remember that the trade-off is usually a high interest rate. If you can wait, then going through a traditional lender is likely to cost you less.
Secure capital for your business with Addition Financial
The success of your business may depend on your ability to secure the capital you need to pursue your most important business goals. The information here can help you evaluate your options and choose the financing that’s best suited to helping your business thrive.
Do you need affordable business financing? Addition Financial is here to help! Click here to read about our business financing options and begin the application process today.
Posted on Sep 27, 2023
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