SBA 504 Loans

Business owners planning to renovate their commercial space can apply for an SBA 504 loan if they have a good credit score of above 650 and own the real estate property. The business funding can be used to modernize, remodel, or make additions to the building space as required.

Usually, an SBA 504 loan comes in three parts – 50% of the loan is offered by a lending institution like a bank, 40% of the amount is funded by an SBA-approved Certified Development Company, and the rest 10% is taken as a down payment by the borrower. SBA 504 loans generally come with a small 5% interest rate, and they can have a term of 10 to 20 years. What’s more, borrowers can also include soft costs of commercial remodeling, such as the fees of the general contractor, into the loan amount.

Bank Loans

Traditional bank loans are the next best option to SBA 504 loans. Business owners having a good credit score and a significant amount of equity in their business can apply for the loan and get it approved for competitive rates. Usually, the borrower would also be required to make a down payment of 20% to 30% to secure a traditional bank loan for commercial remodeling.

An equity loan or line of credit by a bank works quite similar to home equity loans and personal lines of credit. However, the difference here is that the loan would tap into the equity that the borrower has in the business. Entrepreneurs can also apply for secured lines of credit for commercial remodeling. Yet the terms and conditions might differ in this case depending upon the lending party.

SBA 7(a) Loans

An SBA 7(a) loan would be the most rewarding option for businesses that do not qualify for traditional bank loans. This is especially the case when a business owner is planning to renovate an office or industrial unit that is leased. SBA 7(a) loans are usually considered as general purpose working capital loans, but the funds can be used for renovation and remodeling of the business space as well.

Although most of the lending institutions hesitate to offer a commercial remodeling loan for a leased property, they would be more comfortable to approve the funding when it is guaranteed by the SBA. However, the borrower should have a good credit score and the ability to put at least a 10% down payment in order to qualify for the loan. Note that the more the down payment, the higher are the chances of getting the loan approved. The rates are more reasonable here, and the term can be up to 5 to 7 years.

Asset-Based Loans

An asset-based loan would work best for business owners who have a low credit score, and cannot qualify for an SBA-approved business funding for commercial remodeling. However, the borrower would still have to be the owner of the business property to qualify for the loan, as these are secured by commercial real estate. Besides, it also requires a larger down payment to qualify for asset-based or hard money loans.

Asset-based financing is generally more expensive than traditional bank loans and SBA loans, but they can have reasonable interest rates. Besides, the term to repay the loan amount can also be very flexible, but it would depend upon the lending party and their terms and conditions. An asset-based loan can be great for business owners who have an old facility and want to renovate it into a modern industrial unit.

Online Loans

Online loans and business lines of credit are the easiest to qualify for, but they can be very much expensive depending upon the lending institution. The lender usually does not put much emphasis on the credit score of the borrower here. Besides, there is no need for making a down payment to secure the loan either. However, lenders might require the borrower to agree to offer a general lien on their business assets to get the loan approved.

This business funding option can be the best thing for business owners who have a bad credit score as well as for new entrepreneurs who do not have much experience in managing a business. The funds are released very quickly here and it can be used for virtually any business need. The only thing to take note of here is to manage the scheduled payments sensibly, so that the business assets put as collateral are not seized because of default.

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Technically, working capital refers to the amount of money you have left after cashing in your assets and settling your liabilities within a period of 12 months. It is important that you have a positive working capital to keep the business functions up and running. Securing a working capital loan will ensure that you always stay in a better position financially and maintain the normal flow of your business operations.

Generally, working capital loans involve a shorter repayment term, which can range from three months to one year. This means that the interest accumulated on the loan would be much smaller than other traditional business loans. That is why working capital loans can be a great option for small businesses to make the most of during downtime.

Downtime can be experienced by any business at any time, so being ready for the hard times will always be a wise choice. This is especially true for seasonal businesses, such as those that make most of their income during the holiday season or any specific time of the year. A working capital loan can help such businesses manage their operations smoothly even when they are not making any sales.

Besides downtime, there can be many other financially tough situations where a working capital loan can help. For instance, if one of your biggest clients drops off or if you face some kind of a lawsuit, this can have an adverse effect on the financial state of your company. However, when you have positive working capital at hand, you can deal with such scenarios easily without having to run in all directions to get some business funding.

You can also use a working capital loan to pay off your short-term debts so that your business continues to stay in a healthy place. This will also help you to focus on the growth and expansion of your company. As your business capital remains positive with a working capital loan, you can have peace of mind and make thoughtful decisions to take help take your company to new heights.

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A small business can borrow any amount from $50,000 or less to $5 million under this program in order to meet with its business requirements. However, this will depend upon how they qualify for the SBA Microloan Program. That being said, the loan amount can be used for a variety of purposes, such as to purchase raw materials, manage staff reimbursements, launch an advertising or marketing campaign, etc. Nonetheless, these funds cannot be used to refinance any debts or to buy a property.

SBA Microloan Program usually involves shorter terms, which means that the interest accumulated on the loan amount would be lesser when compared to the other types of SBA loans. Normally, they have interest rates ranging from 6.5% to 13% and repayment terms of up to 6 years.

Applying for the SBA Microloan Program

The SBA Microloan Program can be an amazing option for those small businesses that expect a positive impact on their business with a little funding. However, a borrower would need to meet the qualification terms and minimum requirements set by the intermediary lender to apply for the loan program. Note that the loan can only be obtained through local intermediaries, so the application process and requirements would depend upon the policies of the intermediary lender.

Most of the lending institutions would require the borrower to have a personal credit score of at least 600 to qualify for the SBA Microloan Program. The borrower would also need to sign a personal guarantee as well as put up collateral for the loan. Also, as it is seen with any type of SBA loan, the borrower would also need to present a well-devised business plan while applying for the SBA Microloan Program. This is especially important for startups and small businesses that are new to the industry and do not have much experience in the field.

Although the loan amount would be much smaller in the SBA Microloan Program, the application process would be very thorough. Sometimes, it could take even up to 4 weeks or longer to get the loan approved and receive the funds. That is why the Microloan Program might not be suitable for those looking for some immediate funding.

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The most important thing to note here is that it can be very difficult for some businesses to avail a traditional business overdraft from major banks or financial establishments. It is seen that while some of the banks are removing their overdraft policies that are currently offered to small businesses, others are reducing the amount involved in business overdrafts. This is especially distressing for businesses that have an irregular income, such as those in the retail, tourism, and hospitality industry, because it can lead to a significant gap in their working capital.

Fortunately, there are many alternatives available to business overdrafts these days, which such businesses can avail to meet with their financial requirements. Below are 3 feasible alternatives to business overdrafts, which can help a business to maintain its operations smoothly.

Revolving Credit Facilities

Revolving credit facilities work quite similar to business overdrafts by offering a consistent source of funding to the company with a pre-set limit. In other words, it can be like a small business loan that is ready to be used as and when needed. Besides, the borrower is only required to repay the amount used, which makes revolving credit facilities a much reliable option to secure business funding as required.

Merchant Cash Advances

Merchant cash advances are a way of financing business operations in exchange for their projected card sales. It involves flexible repayment schedules and the option to top up the funds when a part of the advance loan has been repaid. The most amazing thing about merchant cash advances is the speed of processing the funds; the borrower can draw out cash within a couple of hours after setting up the account.

Business Credit Cards

Business credit cards can also be a good source to acquire some quick working capital. They work the same way as a personal credit card does, but come coupled with many business-specific features, such as expenses tracking and the option to link multiple cards to the same account. The main benefit of business credit cards is the amount of funding, which can be much flexible when compared to business overdrafts. However, note that the credit limit, as well as the interest rate, might vary from lender to lender.

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Below are some of the most common financial mistakes that startups make, which you can easily avoid to ensure that your business blooms to its greatest potential.

Not Having an Investment Strategy

It is very important to have an investment strategy planned so that you can allocate the funds for your business growth in time. You can apply for a business credit card to manage the small inward expenses, while an SBA loan would be especially helpful when you plan to buy new equipment or expand your business operations. Just make sure that the repayments are done in due time so that you do not accrue any unwanted interest amount.

Not Managing Personal and Business Accounts Separately

Using personal accounts for business expenses is the silliest decision one can make. Although it might seem simpler at first, because you are the owner of the business, it would eventually make it very difficult to figure out which expenses were made for your business needs. Besides, keeping the accounts separate is also vital for filing your taxes properly and steer clear of any unwanted IRS penalties.

Not Including Own Remuneration

It is seen that most of the new entrepreneurs leave out their own salaries when planning the initial budget. They think that it would help them in saving maximum funds for the other expenses of the business. However, this is an amateurish strategy – you would surely need some income after a couple of months, and if you tried to take that out of the allocated funds for your business without planning it beforehand, it will surely blow out the resources in no time. 

Not Investing the Profits Back into the Business

First-time entrepreneurs forget the need to keep on investing in the future and look to take the extra income home. This is another silly mistake; instead of taking more of the profits for self, reinvesting it into the business would surely help to reap more in the long run.

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Banks

Approaching a bank for a small business loan can work best when you can provide collateral. In addition to the funding options like term loans and lines of credit, a bank can also offer you commercial mortgage financing to buy or rent properties. However, you would need a good credit score to secure a loan from a bank. The cash flow would also be slower here, as banks usually release funds on a periodic basis. Note that small businesses generally find it very difficult to get a loan approved by banks because of lower sales volume and poor cash reserves.

Microlenders

Microlending can be the best alternative when you cannot secure a traditional loan from mainstream banks due to bad credit, lack of collateral, or low-rated company profile. Microlenders are non-profit institutions that lend short-term loans to small businesses, typically in the range below $35,000. However, the annual percentage rate or the total borrowing cost can be a bit higher in microlending when compared to bank loans. Besides, you would also need to provide a detailed business plan as well as financial statements for loan approval. Some lenders might also require you to give an explanation of how the funds will be used. All these can make approval of the loan a lengthier process.

Online Financing

Online lending can work the best for you when you do not have collateral but need the funding to be approved quickly. Online lenders can offer different types of loans up to $500,000, which can be great for small businesses to get going with their business ventures. The annual percentage rate can vary considerably here though, depending on factors like the type, size, and duration of the loan, as well as your credit history. The total borrowing cost can also vary from lender to lender, and some may require you to offer collateral as well. Regardless, the approval rates are much higher in online lending, and the funding is released much faster when compared to other types of small business financing.

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• Managing Receivables – Receivables refer to the amount you are owed for providing your services. Usually, new businesses fail to manage their outstanding receivables, which in turn lead to a shortage of income to run their daily operations. It is reported that about one-third of the small businesses in the US go on with roughly around $15,000 in outstanding receivables.
• Managing Payables – Although the advance payment method helps businesses to charge for their services beforehand, it can take a long time to actually get the invoice paid and process it for their daily operations. Around 60% to 70% small businesses reported that it takes about 25 to 30 days to receive payments after issuing the invoices to their customers, while they still have to pay to their suppliers to ensure smooth business operations.
• Managing Employees – Even though the income of the business is affected due to late payments and outstanding receivables, the company cannot delay employee remuneration. However, most small businesses find it very difficult to pay their employees on the assigned payday because of the lack of cash flow. When employees are not paid on time, the company might not be able to retain the required workforce for daily operations.

Resolving Cash Flow Challenges

Monitoring the payments and receivables on a weekly basis is the best way to keep track of the cash flow. Nonetheless, as these can be sometimes out of the control of the business owner, it is always better to seek out practical funding options to manage the cash flow troubles. For instance, availing a short-term loan from online lenders can be of great help in such scenarios. They release the loan amount very quickly that you can use to fulfill your business’ financial requirements. At the same time, continue keeping an eye on your outstanding receivables and follow up on the invoices promptly. This way, you can repay the loan amount without any hassles.

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Below are some of the most common financial mistakes that startups make, which you can easily avoid to ensure that your business blooms to its greatest potential.

Not Having an Investment Strategy

It is very important to have an investment strategy planned so that you can allocate the funds for your business growth in time. You can apply for a business credit card to manage the small inward expenses, while an SBA loan would be especially helpful when you plan to lease business equipment or expand your business operations. Just make sure that the repayments are done in due time so that you do not accrue any unwanted interest amount.

Not Managing Personal and Business Accounts Separately

Using personal accounts for the business expenses is the silliest decision one can make. Although it might seem simpler at first, because you are the owner of the business, it would eventually make it very difficult to figure out which expenses were made for your business needs. Besides, keeping the accounts separate is also vital for filing your taxes properly and steer clear of any unwanted IRS penalties.

Not Including Own Remuneration

It is seen that most of the new entrepreneurs leave out their own salary when planning the initial budget. They think that it would help them in saving maximum funds for the other expenses of the business. However, this is an amateurish strategy – you would surely need some income after a couple of months, and if you tried to take that out of the allocated funds for your business without planning it beforehand, it will surely blow out the resources in no time.

Not Investing the Profits Back into the Business

It is seen that most startups fail because they do not have a reinvestment plan either. When the profits increase as the business starts to grow, first-time entrepreneurs forget the need to keep on investing for the future and look to take the extra income home. This is another silly mistake instead of taking more of the profits for self, reinvesting it into the business would surely help to reap more in the long run.

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