5 Types of Business Borrowing for Entrepreneurs

Chip Schweiger: 0:00

Understanding the different types of business lines of credit can help you choose the most suitable one for your business needs. Now remember the best time to obtain a business line of credit is when you don't need it. So apply for a line of credit when you're flush with cash, and then it'll be there. When you have temporary, short-term cash crunches and here's the pro temp With a line of credit, you should only be in the line 90 to 120 days per year, meaning the rest of the year pay down the line and carry a zero balance.

Chip Schweiger here. Welcome to another edition of the Things Entrepreneurs Should Know. The business podcast for entrepreneurs, founders and business owners who want to build lasting financial value and supercharge the growth of their business. Starting and operating a business requires a significant amount of capital. However, not all entrepreneurs have sufficient funds to finance their business growth. When that's the case, borrowing becomes a necessary option. However, business borrowing can often be overwhelming, so many options such as a term loan or a line of credit or a personal loan. So today on the show, we'll explore five different types of business borrowing for entrepreneurs. You'll learn that there's a wide range of borrowing options available to you and since assessing each type, and choosing the right type of borrowing for your business can help you secure the necessary working capital that you need. We'll talk of the different terms of eligibility criteria, interest rates, repayment terms and collateral requirements. After the episode, check out the show notes at TESKpod.com.

Hi there and welcome back. Starting a business requires a lot of capital. Entrepreneurs are usually faced with the challenge of finding and sourcing funds that they can use to get their projects off the ground. Now there are different ways of obtaining funds, and one of them is borrowing. Borrowing can be a great strategy to access capital when starting a business, expanding your business or recovering from an economic dip. However, finding the right type of loan can be a daunting task, so let's talk this week about the five types of business borrowing options that you should consider.

So the first one is a traditional bank loan. These are loans that are the most common type of business loans. They're granted by traditional banks and require collateral, good business credit and a solid business plan. The interest rates are relatively low, usually between 4 and 10 percent, and the repayment periods range from one to seven years. Now the downside is that they may require a long application process and approval rates sometimes can be challenging. So how do you get approved for a business bank loan? Well, before you apply for a bank loan, it's important to know the lender's requirements and criteria for loan approval. Typically, banks will look at your personal and your business credit score, the age and type of your business, revenue and cash flow, collateral and personal guarantees and your capacity to repay the loan. Make sure you meet these requirements before you submit your application To apply for a business bank loan, you'll need to prepare and gather relevant documents that support your loan application, so these are gonna include your business plan, financial statements, tax returns, bank statements, legal documents so the business registration or ownership or any licenses that you have, and other supporting documents that show the stability and potential of your business. Make sure your documents are complete, accurate and up to date. Now there are many different types of banks and financial institutions that offer business loans, and each may have different interest rates, terms, fees and repayment schedules.

Take your time to research and compare lenders to find the one that fits your needs and goals. You're gonna wanna consider factors such as the loan amount, interest rate, the term, collateral requirements and any additional services that they may offer. Sometimes it's online banking or it may be a credit line. Once you found the lender that seems the best fit for you, it's time to apply for the loan. Simply fill out the loan application form and submit it along with all these business documents. Now some lenders may also require an in-person interview or a credit report review. Once you're approved for the loan, review the terms and conditions carefully and negotiated if necessary. So don't be afraid to ask for a better interest rate, maybe a longer term or lower fees, especially if you have good credit score and a strong negotiating skills. Now, getting a business bank loan is just the first step. You're gonna wanna make sure that, to get the most out of your loan, use it wisely for its intended purpose, whether it's to expand your business, to purchase inventory or to invest in new technology.

Keep track of all your expenses and payments and make sure you repay the loan on time and in full. Now, this will not only help you build a good credit history and relationship with your lender, but it's also gonna pave the way for future financing opportunities. Another type of business borrowing is an SBA loan. Sba loans are backed by the Small Business Administration and they're designed to help small business owners secure funding more easily. So these loans can be used for business expansion, for inventory, for equipment purchases and for working capital. Sba loans require a good credit score and a sound business plan. Now the interest rates are lower than a traditional bank loan and the repayment terms can actually be up to 25 years. In order to get an SBA back loan, you'll visit the SBA's loan page to find a loan type. You're gonna find a lender in your area and then you'll apply for that loan through your local lender. From there on out, the process is about the same as applying for a traditional bank loan.

A third type of business borrowing is a business line of credit. So a business line of credit is a type of loan that allows entrepreneurs to access funds when you need it. They're similar to credit cards, where the business uses them when necessary and you only pay the interest on the amounts that you use. Now you can use the loan for small purchases or to cover gaps in working capital. The interest rates are usually higher, but the flexibility is worth it. Now, as to how you actually get a line of credit, it's a little bit trickier than a loan, mostly because most lines of credit are unsecured. So before applying for a business line of credit, you'll need to know the requirements, and these can include your credit score, your business's financial history and the amount of revenue your business generates. Most lenders typically require a minimum credit score of $600, a solid financial history and a significant and steady source of revenue. Knowing what the requirements are will help you avoid wasting time applying for a line of credit that you're not eligible for. You'll also want to choose the right type of credit line, so several types of business lines of credit exist, but we're really focused here on revolving and non-revolving.

Revolving lines of credit allow businesses to pay back the borrowed funds and to utilize the credit again, while non-revolving lines don't. Providing the different types of business lines of credit can help you choose the most suitable one for your business needs. Now, remember the best time to obtain a business line of credit is when you don't need it, so apply for a line of credit when you're flush with cash, and then it'll be there when you have temporary, short-term cash crunches. And here's the pro temp. With a line of credit, you should only be in the line 90 to 120 days per year, meaning the rest of the year, pay down the line and carry a zero balance.

Another type of business borrowing is called invoice factoring. So invoice factoring or invoice financing allows entrepreneurs to get funds based on their outstanding invoices. It's a great option for businesses with high cash flow requirements, such as fast growing businesses, and it can be a really good tool that businesses can use to convert outstanding invoices into cash. It's a type of financing where a business sells its outstanding invoices or accounts receivable to a financial service provider, also known as a factor, and they sell those at a discounted rate. The factor then provides an immediate advance on the outstanding invoices, usually between 70 and 90% of the total value. The remaining amount will be held by the factor as reserved to cover potential invoice disputes and to cover charge backs. Once the customer pays the invoices, the factor deducts its fees and releases the remaining funds back to the business. Now invoice factoring is not alone and it doesn't require collateral. This financing method relies on the strength of a company's customer's credit worthiness rather than the company's credit history, and that's a lot of its magic.

Invoice factoring provides businesses with an immediate cash injection that they can use to cover operational expenses, pay suppliers and employees and invest in growth opportunities In. Unlike traditional loans, business invoice factoring is relatively stress-free. There's no complicated application process, credit checks or collateral requirements. They help business accelerate their invoice payments and reduce the time spent waiting for customers to make the payments, which also helps maintain a healthy cash flow. Customer and companies take on the risk of customer nonpayment of credit monitoring and collection, allowing the company to concentrate on more important aspects, such as operations and maintaining customer relationships.

And the last type of business borrowing is actually personal loans. So personal loans are an option for entrepreneurs who don't have good business credit score or who are still working on building their business credit. They're granted based on your personal credit worthiness and can be used for personal or business purchases. However, personal loans can be expensive and they usually have high interest rates and short repayment terms. Also, make sure that if you personally borrow money for business purposes, that you also lend the money back to the business. So to do that, you're going to need a formal loan agreement between you and the business, with stated repayment terms and a stated interest rate, to avoid it being deemed as a capital contribution. And remember, personal loans to finance your business are different than personal guarantees on business borrowing.

So from all of this, here's the takeaway it's essential to understand the different types of business borrowing options and their pros and cons. Each option comes with different terms, interest rates and requirements that can support or can hurt your business. Test your business needs, risk and goals before deciding which borrowing method to use. When choosing a business borrowing option, carefully review and compare the terms and conditions of each loan to find the one that's most appropriate for your business, and make sure that you can afford the repayments. And don't forget to include the loan payments in your business's budget.

Well, that about wraps up another edition of the Things Entrepreneurs Should Know podcast. Be sure to check out our website at TESKpod.com, where you'll find all the show notes, an archive of our past episodes and other resources to help you grow your business. That's teskpod.com, and if you haven't done so already, I'd really appreciate it if you'd take just one minute to give us a review on Apple Podcasts or rate us on Spotify. It helps out a ton to get this to more entrepreneurs and business owners. And if you've already done that, please consider sharing this show with family and friends who you think would get something out of it. As always, thank you so much for your support. This is Chip Schweiger reminding you that if you always do what you've always done. You'll always get what you've always got. We'll see you next time.