There are plenty of great business ideas out there. Maybe it’s a life-changing mobile app or a service with the potential to make everyone’s life a little bit easier. Regardless of what it is, even though a smart business idea might be free to come up with, it will likely cost money to execute.
No matter how fantastic an idea may be, in most cases it can’t become an actual business without the working capital to get it off the ground. Turning an abstract plan into a viable business strategy that’s able to turn a profit or catch an investor’s eye can sometimes be far from an overnight project, and most aspiring entrepreneurs will require some form of financial support to stay afloat.
So if you’re not yet ready to pitch investors and don’t have the personal funds to bootstrap your business, you may want to learn about the ways a small business loan can help you turn your business idea into a reality.
It’s important to note that small business loans are for more than just startups. Whether you are looking to hire more employees, purchase more equipment or inventory, or just scale your idea from your bedroom to a coworking space, small business loans can provide the capital to make it happen.
In 2018, the average Small Business Administration (SBA) loan from the 7(a) loan program was for $417,316 . If you find yourself wondering how much money your business might need in order to get to the next level, you may want to begin by taking a thorough look at the needs of the business you are trying to grow.
This might look like defining your goals and accomplishments so far, analyzing your future goals, and mapping out what kind of capital you need to close the gap.
Do you need heavy equipment or specialized technology? How much space or staff will you employ? These are some of the questions you may want to ask yourself when considering the kind of financial support your small business is currently lacking.
It’s generally recommended to look at all aspects of your proposed business in order to get a clear understanding of the bigger financial picture.
The next step may be to look at past sales projections and confirm that you can afford the loan payments and fees associated with that loan amount. Though loans can be a big help, you may want to ensure that your investment in your business is one that you’re able to handle.
Like most financial decisions, a small business loan is not one you should take lightly. There’s more to the loan than just the loan itself—the rates and fees that can be associated with a small business loan might make it much costlier than you expected.
If you find yourself in a position to take on a loan to help you scale and strengthen your business, then it may be a sound decision. Still, you may find that by examining your specific situation and getting clear on your goals and expectations may help.
Since every business is different, it might be a good idea to consider the main reasons why you may be looking to take out a small business loan in the first place and understand how it could possibly help you get where you’re trying to go.
Why Choose a Small Business Loan?
A small business loan may be right for you if:
• You want to build business credit, potentially allowing you to qualify for larger loans in the future.
• You want to scale your business.
• You want to make your business more efficient with new equipment.
• You have the financial foundation to manage your loan debt.
Small Business Loan Rates and Fees
Here are some common fees associated with small business loans:
Lenders incur certain fees when processing your application (e.g., credit checks and property appraisals). This fee covers those costs.
Lenders use origination fees to cover their administrative costs, such as phone calls, emails, and interviews necessary to finalize a small business loan. This fee varies from lender to lender.
Check Processing Fee
If you make your loan payments via check, you may be charged a fee to cover the time and personal labor it takes to process a check. You may want to keep this in mind when deciding how you’ll make your loan payments.
If you’re taking out a loan through the Small Business Administration (SBA), you’ll likely have to pay a guaranty fee. While the SBA guarantees loans, it doesn’t make loans, and thus generally assesses a fee for its involvement.
Late Payment Fee
Like many loans, small business loans typically charge a fee when you make a late payment. You may want to ensure you set up a plan to make your loan payments on time.
The process of underwriting can be tedious. Your lender needs to comb through your business’ finances and review market research and historical trends. The underwriting fee covers the cost of performing this task.
Some lenders charge you for paying your loan off too early. They may do this for a variety of reasons, but one might be because they lose money in interest charges when you pay your loan principal before it’s due. This is an important fee to be aware of when mapping out your payment plan.
Additional Funding Options
If these fees don’t sit well with you, there are other options to consider that may make funding your business more accessible to you.
Family and Friends
Many people start their business with money borrowed from family and friends. Using them as initial investors can help you stay out of commercial debt, meaning that you can wait to apply for a small business loan when you might need to borrow a larger sum.
However, going into business with loved ones could be a risk in that it might potentially sour the relationship if things go south.
A number of small businesses have successfully been funded through sites like Kickstarter , GoFundMe , and Indiegogo . A great idea with a strong marketing plan could generate enough excitement and financial support to get things going. However, crowdfunding sites require a percentage of the funding received and there could be a risk of idea theft or plagiarism.
Credit cards have been used as a quick route to getting capital for your business without a lengthy application process. However, interest rates may be high and carrying significant credit card debt could potentially impact your credit score.
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Getting Your Finances Ready for Small Business Ownership
Getting ready to open your own small business or scale your current business? Of course, everyone’s situation is different, but there are ways to make sure you’re prepared for the ups and downs of small business ownership.
First , you may want to ensure that you are diligently saving an emergency fund with at least three to six months of expenses. If you have a family or dependents, you may want to consider saving even more to cover various family emergencies (knock on wood).
You may also consider taking care of existing credit card debt so that you aren’t carrying any when you start your small business. Paying down your credit card debt could potentially mean one less thing to worry about when you’re trying to make your business turn a profit.
If you are carrying a higher rate or variable-rate credit card debt, consolidating with an unsecured personal loan could also help you pay it off faster and at a potentially lower interest rate. (Although it’s important to note here that personal loans cannot be used for business expenses.)
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.