Growth often means investment. That’s the simple truth of being an entrepreneur. And for many entrepreneurs, the most sensible solution to expand the facility, invest in new machinery, or upgrade equipment is to turn to various lending options.
If you’re getting ready for the next step, here’s a quick overview of five common lending products that help entrepreneurs, along with how they work, and their pros and cons.
1. Business line of credit
What it’s for: Ideal for meeting short-term needs without destroying cash flow. For example, when there’s a new client or a seasonal uptick, you may need the cash to cover upfront costs such as labor and supplies before the income rolls in.
Pros: A line of credit offers quick, fast cash whenever you need it. This is a revolving loan you can tap to replenish your cash accounts, without having to reapply for a new loan.
Cons: These loans are often secured by accounts receivable and inventory. In addition, it is a short term loan that is expected to be paid down at the end of each cash cycle.
2. Term loans
What it’s for: Most commonly used to help finance or improve real estate, or purchase machinery or equipment. These loans can also provide working capital for businesses that are rapidly expanding.
Pros: Typically has longer terms and more competitive interest rates, making this an attractive option for long-term needs. Using a term loan to purchase real estate to house your business may have tax benefits.
Cons: Typically requires a 20-25% down payment.
3. U.S. Small Business Administration (SBA) 7(a) loans
What it’s for: Ideal for business acquisitions, franchises and start-ups, along with permanent working capital loans. Can also be used for real estate and equipment.
Pros: Provides financing for entrepreneurs and projects that typically would not qualify for conventional financing. Because they are partially guaranteed by the government, they’re less risky to lenders. They can be used when the collateral or down payment is insufficient to meet the requirements of a conventional term loan. This allows up-and-coming entrepreneurs the opportunity to finance their young businesses or assist the sale of a business in which much of the value is intangible. Down payments are often lower and terms longer than conventional financing.
Cons: Generally utilize variable interest rates that are higher than conventional term loans. Increased documentation to fill out and longer approval periods ... but not if you choose to work with an SBA Preferred Lender, available at Minnwest Bank.
4. U.S. Small Business Administration (SBA) 504 loans
What it’s for: Purchases of owner occupied real estate and purchases of equipment.
Pros: Down payments can be as low as 10% and long term interest rates that are competitive with conventional loans. Terms can be up to 10 years for equipment or 25 for real estate.
Cons: Cannot be used for investment property the business must occupy at least 51% of the building. Increased documentation to fill out and longer approval periods (being a preferred lender does not affect 504 loans as they must go through a CDC).
5. Leasing
What it’s for: New equipment, particularly if it usually needs upgrading and updating every few years, such as a vehicle or technology.
Pros: This option makes it possible to meet your equipment needs for less upfront cost. Offers a lot of flexibility, so when the lease is up, you’re free and clear to swap the old stuff for the next upgrade.
Cons: Over the long run, leasing can be more expensive than purchasing.
An important step in the process is working with a knowledgeable, caring lender based in your community to help you understand these offerings and what they mean for your business. Working with the commercial lenders at Minnwest Bank helps you make the best-informed decision for the future and reach your potential.
Explore your options and talk to one of our lenders today about our business financing options.