At some point in their business, small and large business owners alike find themselves in tough financial situations. Financial difficulties always require extreme measures, but these measures need to be taken to prevent worst-case scenarios from happening.
Under such circumstances, business owners start considering their funding options, and, sooner or later, they decide to take out a loan. There are certainly many funding options available, but loan financing remains one of the most popular forms of funding for many business owners. Here’s everything you need to know about loan financing and how to use it to fund your business in its struggle.
What Is Loan Financing?
Loan financing sometimes referred to as debt financing, is the act of getting a loan from a lender to fund your business. This option is preferred by many business owners due to a simple fact: they get to maintain full ownership of their business, in contrast to other forms of funding, such as seeking investment.
The business owner takes out a loan, which is referred to as the principal amount, and the lender becomes a creditor of this business. The business owner then signs a contract, in which details about the repayment schedule and interests are laid out.
The most common way to get a loan is through banks and credit unions, but other options are taking the market by storm these days. For instance, there are alternative business financing companies that operate online, and the Rapid Finance reviews made by its clients just show how efficient this way of funding is. Its business model is ingenious in its practicality; business owners fill in an online application and can get approved for the loan in a matter of minutes.
Both traditional and modern ways of loan financing satisfy your urgent need for cash through various kinds of loans, and they can be your best bet — but only if you have a solid repayment plan.
Funding Your Business Through Loan Financing
Whether you opt for traditional or more modern methods of loan financing, you have a lot of options to choose from. Here’s an overview of the most common loan financing options available:
SBA loans are facilitated through the Small Business Administration (SBA); a federal agency that empowers entrepreneurs in achieving their business goals. The SBA doesn’t directly lend money, but it acts as an intermediary between lenders and business owners, even if they have bad credit. This form of backup encourages lenders to approve loans that would otherwise be rejected.
Term loans are the most common form of business loans. They’re the loans you get after signing a contract binding you for a specific period in which you’ll pay back your debt and its interest — if there’s any. These kinds of loans can be short-term; to be delivered over a period of 6 to 18 months, intermediate-term; paid within 3 years, or long-term; to be paid within five years or less.
Business Line Of Credit
A business line of credit works in a similar way to how credit cards work. You get a line of credit designated for your business, enabling you to make purchases or spend cash whenever you need to, but only if you need to. This option offers the most flexible form of loans for business owners, which is why it’s growing in popularity.
Many manufacturers and sellers offer this kind of loan to their customers. Sometimes, you’ll need to invest in costly new equipment or machinery, ones that your business depends on for success. In situations where you’re short on cash, you can get equipment financing from the sellers themselves, or through a lender of their network.
If you face frequent cash flow issues due to late payments from your customers, then invoice financing can be a good option for you. Basically, the lender pays you in advance for the invoice, usually 80% of its value, and, in turn, they purchase your account receivables.
Merchant Cash Advance
Unlike invoice financing where the lender purchases an active invoice, merchant cash advance lenders purchase your future earnings; ones not made yet. This is suitable for businesses that operate on a seasonal basis, suffering in the out-season from lack of cash flow.
Loan financing remains one of the best business funding options; you get the cash you need while keeping full ownership of your business. The only catch is that you need to have a solid repayment plan, otherwise you’ll fall into an abyss of debt. If you have studied your finances and you think it’s your best bet, you won’t fall short on options when it comes to loan financing.
Interesting related article: “What is Business Finance?“