Business Credit
3 business scenarios that need money to make money
For small businesses that are planning to expand, long-term business loans are often the perfect fit for their needs. Unlike intermediate-term loans, these loans provide a large amount of capital up front and are paid back on a regular basis - usually monthly or quarterly - over a number of years.
Long-term loan options are best for companies that are investing in the long-term growth of their business, such as by expanding office space, buying real estate, or purchasing equipment.
Generally, long-term loans are made for amounts of $25,000 or more, with terms up to 10 to 20 years. These loans are best for businesses that are able to afford a down payment, and financial records that show solid revenue or growth. Unlike shorter-term loans, these loans usually require collateral. In return, a long-term loan offers a lower interest rate than many short-term financing options.
Here are some examples of business loans to consider when looking for longer-term financing:
The SBA's 7(a) and CDC/504 loans are designed specifically for businesses seeking to expand by financing new equipment, buying real estate or renovating a current property. These loans have terms that last up to 25 years, depending on what the business is seeking to finance; loan amounts range from $5,000 to $5 million. SBA Loans offer low interest rates of 6% to 13%, but the application process and approval may take as long as six months to complete.
A business line of credit is a great option for small businesses that need on-going access to capital, and function much like a credit card. Loan terms can range from as short as six months to up to 10 years. Lines of credit require a minimum payment each month, but otherwise let the borrower use the remaining amount of credit available.
Business lines of credit often have a variable interest rate of the prime rate plus 1% to 32% - as a result, changes to the prime rate can impact payment amounts dramatically. These loans are best for established companies that are seeking financing for amounts up to $3 million, although for larger loans some type of collateral is required. Approval can be as fast as two business days, however lines of credit are generally only approved for businesses that have at least $60,000 in annual revenue and have been in business for more than a year.
For businesses with a consistent revenue stream, an equipment and construction loan may be the best option for purchasing business equipment or undertaking a new construction or renovation project. The equipment itself serves as collateral, and financing is often available for up to 100 percent of its value. For construction loans, the collateral requirements may vary, but generally the structure or property itself serves as collateral.
Equipment and construction loans are made for amounts of $5,000 up to $1.5 million, and terms range anywhere from six months up to 10 years. Application time periods are 4 to 10 days, and interest rates vary from 7 to 30%, depending on collateral, loan time, and the business's credit history.
These last two long-term loan types are generally the shortest long-term loans available, with repayment in 5 to 7 years maximum. For new businesses that don't have a long-term financial history, peer-to-peer and personal loans are a viable option for funding.
Peer-to-peer loans are financed by a group of investors that all claim a percentage of the interest owed on the loan; these loans are also often funded in as little as two weeks. Interest rates vary from 6% to 36%, and the borrower is also required to pay a fee to the lenders as well. However, these loans can be for as much as $500,000; approval and interest rates are based on the borrower's personal credit score if the business' financial history is short or non-existent.
Personal loans for business are similar, in that they use the borrower's personal credit score and history to determine interest rates - in both cases, the higher the credit score, the lower the loan's APR. Although personal loans can have terms of up to 7 years, they are more often used for shorter terms and for lesser amounts. Personal loans for business can be awarded within 24 hours, for amounts up to $35,000 with interest rates ranging from 4% to 36%.
For businesses that are looking to expand their operations over the long-term, there are many long-term funding solutions available. In all cases, being able to offer proof of personal or professional financial stability lowers the interest rate and opens the door to more affordable financing for growth.
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