When running a business, cash is king. Sometimes businesses run short or need a financial injection for a new project, and this is totally normal. If you are running a business, big or small, you may find yourself with a cash flow issue and be thinking about a small loan. If this is the case, you have come to the right page. Below we are going to discuss small loans, why you may need one, and how to get one. Read on to find out everything you need to know about small loans for your business.
What is a Loan?
Firstly, we should discuss what a loan is, just to be certain we’re on the right page. A loan is an injection of cash from outside your business. This can come in the form of a traditional bank loan, a credit limit, or even small loans online from more modern lenders. With a traditional loan, you will then be given a period of time to pay this loan back to the lender or creditor. This can range from as little as three months up to 10 years or more. Longer-term loans may mean your monthly repayment is smaller, but you may be charged more interest on a longer loan, meaning you end up owing more overall. More on interest next…
Most loans will charge interest on your initial amount of borrowing. For example, an interest rate of 11.9% means that you will pay back your loaned amount of cash, with 11.9% on top of it. Some loans offer interest-free periods, or even completely interest-free loans, though these are rare for businesses. After all, the lender needs to make a profit, as they are a business too! Make sure you consider all the details of a loan before taking it out, such as payment terms (monthly, quarterly, yearly) and the amount of interest being charged. This way you know you are able to repay the loan in full. If you do not, you will likely be charged fees, or have collateral taken from you such as equipment to cover the lender’s losses.
Types Of Loans for Businesses
There are a few different types of loans available to you as a business owner. Let’s look at a few of the different types and who they may be suitable for:
Line Of Credit Loans
Line of credit loans works like an overdraft or credit card. You will have a set credit limit agreed by a lender which you can withdraw all at once or in installments. You don’t need to ever withdraw or use the full limit agreed, but it is always there if you do need it. The difference to a standard credit card is that every withdrawn amount becomes its own individual loan, with its own repayment terms. This is good for many small loans as and when you need them!
Standard Installment Loans
A standard installment loan is the type of loan most people will be used to in their personal lives. As previously described, you would borrow a fixed amount of money and pay it back on agreed terms. These loans are simple and easy to understand, but compared to a line of credit they require you to know exactly the fixed amount you need upfront.
Balloon or Interest-Only Loans
These are a very different kind of loan where you take a fixed amount, like a standard loan, but only repay the interest at first. This gives you the chance to take a lump sum and not pay very much back initially, freeing up more funds for your business. However, when you reach the end of the loan term, you have to repay everything left in one so-called “balloon” payment. So, it may seem cheap at first, but you must be prepared for the final payment!
Why Might You Want One?
Small loans can be used for many different things, at many different times. A common small or short-term loan use is for helping out when profits are low. Sometimes you may have a dip in sales and need to boost your finances for a short time, and a small loan can be an excellent way of doing so.
Another reason to grab a small loan could be to expand on and increase your inventory. As they say, you have to spend money to make money, right? So, without inventory, you would have no sales. Getting a small loan so you can start making sales, and spreading the cost of the loan repayments is a smart move for sure.
Expansion is also a classic reason business people ask for financial help. Say you want to hire a new member of staff to double your output or purchase slightly bigger premises to help grow your business, a small loan could be a perfect way to finance these things. Spend a small amount expanding, giving you the ability to make more profit.
How to Apply for a Loan?
There are many ways to apply for a small loan. Classically, you would have had to sit down with a bank manager, show him your business plan, and hope he agrees with your ideas. These days things are a lot easier. You can apply online or over the phone for most of the products described above. You can also compare deals online using the comparison sites.
Depending on the type of loan, there will be certain eligibility criteria you would need to fulfill before being approved for the cash. For some loans, they will check your credit score to ensure you are deemed good with credit. For others, they may require a certain amount of money in the bank, or collateral to be placed against the loan.
Everything you need to know about how to get, and why to get a small loan has been covered here. If you are considering taking a loan for your business, you should now be armed with all the details you could possibly need to understand to get things started. Good luck with your business, and make sure you borrow responsibly!