What SMB Owners Need to Know About Securing Loans
As the saying goes, “You have to spend money to make money.”
Anyone who has ever started their own business knows this to be true. That’s why business owners must typically secure loans to turn their visions into realities. Unfortunately, there’s reason to believe interest rates for small business loans may rise in the near future. Small business owners must prepare accordingly.
Deciding How Much Funding You Need
The first step involves creating a thorough business plan in which you estimate how much business funding you expect to need. While many factors impact this, it helps to research what similar business owners have spent during their early stages of growth.
Starting a microbusiness typically costs approximately $3,000 on average. However, if your plan is to create a startup that grows into a major enterprise some day, you’ll likely need to spend more. You also need to try and conserve capital as much as possible. It may be necessary if interest rates do increase significantly this year.
Your business plan should also serve to give potential lenders reason to believe you will pay back your loan in a timely manner. Odds are good they’re only going to invest in your business if they’re given reason to believe that doing so will be profitable for them. Thus, you want to demonstrate how you plan to deliver a substantial return on investment.
How to Find Loans as a SMB Owner
Options for finding loans vary. Most entrepreneurs do invest their own money into their business at the early stages. Unfortunately, it’s unlikely you’ll have enough money to cover the total costs. You’re going to need to secure funding from an outside source as well.
That could include friends and family members. It’s not uncommon for successful businesses to start this way. The lack of any interest rates is a major benefit this approach offers. That said, if you don’t pay a loan back in time or deliver the promised ROI, your relationship with someone who loaned you money could become strained.
You may wish to avoid this. If so, pursuing a business loan from a professional lender is a better option. This is also a smart option to consider if you want to maintain full control over your business. When someone else invests in it as a partner (whether they be a friend, family member, or venture capitalist), they understandably expect to have some degree of input in the way the business is run. That’s not the case when you get a business loan.
There are several types of loans available to you if you choose to go this route. They include:
Term loans are similar to mortgages. Banks provide them to small business owners, who pay them off (with interest rates) over a specified course of time. Unfortunately, the credit standards for such loans are very strict.
Banks can be reluctant to provide loans to small business entrepreneurs due to the inherent risk. SBA loans help to mitigate this risk. The Small Business Administration certifies them, which means the government essentially guarantees repayment of at least a portion of the loan if a borrower defaults. Aside from this distinction, SBA loans work fairly similarly to term loans.
Business Credit Cards
Business credit cards are exactly what they sound like. That means they offer the same types of risks and benefits as traditional credit cards. They provide you with easily-accessible funding, but they may be expensive to pay back.
These are all options to consider if you’re thinking about starting a small business in 2019. With interest rates for loans potentially on the rise, you need to be ready to secure funding. Keeping these points in mind will help.