Small Business Financing

Types of loans, how to secure a loan, accounting for loans

Small business financing is a necessary part of running a small business. Unless you're independently wealthy, and most of us aren't, you'll need to finance many purchases in your small business.

Some of those small business financing needs are:

*purchasing a commercial building
*purchasing an apartment/condo complex
*purchasing equipment
*purchasing a business vehicle
*purchasing computer or phone equipment
*buying a business that's already up and running
*buying out a competitor
*paying overdue bills
*financing a large advertising campaign
*expanding your building or territory
*buying out a retiring partner
*and the list goes on...

There are as many types of small business financing as there are uses for the funds. I'm going to go over some of these here.

Types of small business financing

Make sure your potential asset has an assessed value more than the loan amount you're hoping to get. And a projected income high enough to cover your loan payments and other expenses associated with running your business.



Merchant Account Loans
These loans are based on sales collected via credit cards. So if you accept credit cards for payment, here is an option for you. There is usually a threshold amount, like $3000 a month. A finance company will give you a loan based on your credit card sales and then will deduct your payments from your credit card receipts. Of course, you have to use their credit cards to get the loan.

Accounts Receivable Factoring
This type of loan is based on your receivables. A finance company will buy your receivables for a discounted price. Then when your customers pay their bills, the finance company gets those payments.

SBA Loans
These are banks loans that are backed by the U.S. Small Business Administration. You must complete a regular bank application, plus abide by the regulations of the SBA. These loans are to help small businesses obtain financing, but these are not start-up loans, you must already be in business.

Lines of Credit
Lines of Credit are revolving loans that pay out funds as you need them, and you pay interest payments on the funds borrowed, and principal payments as you can to pay down the loan. Lines of Credit are great resources for slow sales periods. Just make sure you apply for one of these before you need it, as it's easier to get a loan when you business is healthy.

Equipment Leasing
Sometimes it makes sense to lease an asset rather than buy. From a small business accounting point of view, the payments are lower, and the whole payment is a business expense, rather than just the interest. You also don't have an asset or a liability on your books either. Typically in most equipment lease agreements there is a small purchase buyout, for example, a $1 purchase option at the end of the lease.

Getting a loan

There are many things they can ask you for, but the main items are:
*3 years of Financial Statements
*a Personal Financial Statement
*a Business Plan with financial projections
*Bank Statements


You can get more information on Financial Statments by clicking here.

You can get a Personal Financial Statement form from the bank, and this lists your personal assets and liabilities.

A Small Business Plan is a report that gives background information on your business, like the management, competition, business purpose and goals, and this report also provides a financial projection, which shows what you think your sales and expenses will be for 3 to 5 years into the future.

The bank will use this information to decide whether your business is a good risk or not.

Accounting for loans

Once you have obtained a loan, you will receive the loan proceeds, and can deposit this into your business checking account.

When you post this check (either in a basic accounting software system or in a manual system) you will post an increase to your cash, and you will post an asset, either Equipment, or Vehicle, etc.

You will then be making monthly payments of principal and interest.

For more on how to account for loans, click here on my Accounting for Loans page.


So in summary, there are many options for small business financing, from loans on your credit card sales or accounts receivable, to regular bank loans, to financing a purchase.

Use these resources wisely to grow your business, but don't become burdened under a heavy debt load.