Every business has to contend with cash flow and working capital problems; usually the smaller the business the more important these issues are. Fortunately, there are a few types of loans available to help ease the monetary stress of running a business.
Types
There are basically two categories of loans: term loans and short-term loans. Business Zone defines term loans as general-purpose loans that require a monthly payment throughout the life of the loan. Short-term loans are defined as loans that last for 12 months or less and require a lump sum repayment at the end of the loan term.
Specific Loans
Terms loans can be used for a variety of purposes, but are most likely used to finance expansion, equipment purchases or working capital. There are specific loans for these types of growth and maintenance. The most commonly used are:
Equipment financing: The equipment that you purchase with the funds received from this loan is used to guarantee the payment. In other words, if you can't pay the loan back, only the equipment purchased with this loan will be repossessed.
Line of credit: This is a set amount of credit generally given to you by a bank or a credit card company that you can use as you need. This type of a loan is generally used by businesses to help ease cash flow problems. These loans generally carry a higher interest rate and are only suitable if you can quickly repay them.
Lines of Credit
If a traditional loan is not an avenue that can pursued by your company or you need an immediate solution, many businesses use lines of credit. The most common lines of credit are:
Line of credit: This is a set amount of credit generally given to you by a bank or a credit card company that you can use as you need. This type of a loan is generally used by businesses to help ease cash flow problems.
Working capital credit: Bankrate.com estimates the average length of this loan is around 90 days. You provide the lender with an estimate of your working capital needs based on previous performance and they lend you the money. You have to be very accurate with this type of loan; if you do decide to take it, you will have to make sure that you produce the revenue needed to pay the loan back within the 90 days.
Letters of credit: This is a loan on paper, not in actual fact. The loan gives you a letter that promises a third party that you will have the funds available should you receive an order. This is most commonly used by contractors or businesses with long-term projects that require a hefty capital investment.
Alternate Finance Sources
If your company's current financial situation will not allow for loans or lines of credit, you may want to consider these alternate finance sources:
Credit card advances: This type of loan is for businesses that accept credit card payments. The loan is based on a formula that uses past credit card sales and predicted credit card sales to determine the amount of the loan. This loan requires some diligence, since you will be required to pay the loan based on the predicted sales.
Factoring: This loan is most commonly used with businesses that have a 30-day turnaround on their invoices. The third party provides the business with a cash payment for the value of the invoice minus a 3 percent to 5 percent fee. Once the original pays the invoice in full, the company will release the fee to the vendor.
SBA Loans
The SBA provides a variety of loans to help businesses continue to trade. Some of the loans offered by the SBA are:
7(a) Loan: The most commonly used basic loan. The loan must be provided by participant lenders (both bank and non-bank). The SBA guarantees the loan against payment default only.
CDC/504: These loans are for nonprofit organizations and require that the organization provide jobs or economic development.
Microloans: These loans are for start-up, newly established or growing businesses. Depending on the lender, the loan may require collateral and a personal guarantee.
Special Purpose SBA Loans
The SBA also provides special-purpose loans for businesses that need help with growth or working capital. The special-purpose loans provided by the SBA are divided into export and other business areas.
Export Loans:
Export Working Capital
Export Express
International Trade Loans
Other Business Areas:
CAIP Program: For businesses that are in an area negatively affected by NAFTA
Employee Trusts: Designed to help businesses fund stock ownership plans
Pollution Control
CAPLines: Provides assistance with working capital
It is important to remember that almost every loan is going to look at your past performance, predicted future performance and your company's credit history.
