Whether it’s to get established, grow, explore new markets, or just improve the bottom line, businesses typically feel the need to borrow money at some point – or several points – throughout their lifecycle. While it can seem intimidating, taking on a business loan or “debt financing” can be use just what your business needs to:
- Purchase real estate
- Expand operations
- Gain inventory
- Increase working capital
Knowing this, most banks offer a range of business loan products to help entrepreneurs get their feet off their ground and keep reaching their objectives. The question for business owners then is how to choose the right business loan for what they’re trying to achieve.
The following are some of the common products offered and what they can do for you.
Line of credit
Unlike a loan, a business line of credit gives you the flexibility to borrow as you need to, over time. There is not one lump sum to borrow or terms of repayment. You simply pay it back as you use it. Business owners like this option because it lets them budget for inventory, working capital and business cycle needs. It is also backup protection for unexpected expenses and emergencies. Although lines of credit are available in various credit limits, often from $5,000 up to $150,000, they are generally used for basic operating expenses and not large capital expenses, real estate or equipment.
An option many business owners don’t think of as a business loan is a credit card. Just as they are for household spending, credits cards designed for business are convenient and effective. They can be used to track expenses, manage finances online, and easily pay for supplies, equipment and travel. They do come with a credit limit, and there are annual fees and interest payments. And, just like with personal credit cards, business owners should be diligent about not charging more than they can pay off in a timely manner.
Small Business or SBA Loans
Small Business Administration or SBA loans are loans for set amounts for things like land or buildings, new construction, equipment, furniture, or supplies or for funds to purchase an existing business. They are secured, meaning they are linked to your company or business assets as collateral. But they are also government-backed, which can give banks more flexibility in their lending.
This does not mean the Small Business Administration makes the loan. Instead, it provides a guarantee to banks or lenders that they will be paid back in the event of a default.
Some SBA loans offer lower down payments and longer repayment terms than conventional loans, which can help when you’re trying to maintain cash flow and manage debt.
Letter of credit
Another type of business loan is not a loan specifically, but a promise that future loans from other vendors will be paid back. As a business owner, you can apply for a letter of credit, which is basically a letter from the bank guaranteeing that the amount you borrow from other lenders will be paid back on time and in the right amount.
Having a letter of credit in place can give you more borrowing power with potential lenders, especially if you’re dealing in overseas transactions with creditors, wholesalers or service providers that are not familiar with your company.
If a line of credit or an SBA loan is not preferred, most banks offer a range of loans specifically for businesses. Loans can be devised in varying interest rates, amounts and repayment terms, and can be used for the broader business needs that may not be covered with other loans, such as:
- Agricultural needs related to farming operations or real estate or equipment purchases
- Construction and development needs related to constructing commercial projects, such as a new office building or retail center
- Real estate needs for commercial properties or investment properties, and
- Equipment needs, which can be financed through loans and leases, leaving you more working capital for operating expenses or inventory costs.
Business loans can be an effective way to finance debt so you can keep moving forward. In the meantime, they can help you establish credit for even more strategic steps down the road. To learn more about the business loans available at Guaranty Bank and the application process, contact us.