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Survival Loan or Growth Loan: What Does Your Small Business Need?

Running a small business isn’t easy, especially if you have cash flow challenges.

In fact, about 20 percent of small businesses fail in their first year and about 50 percent don’t make it past five years, according to the Bureau of Labor Statistics. Among the top reasons for this: 29 percent run out of cash and a whopping 82 percent experience cash flow issues.

But it’s not all gloom and doom. Far from it. For starters, small businesses make up the majority of companies operating in the U.S. and more small companies are opening than closing. And, in a 2017 poll of 16,000 firms with fewer than 500 employees, 60 percent of them expected to achieve revenue growth over the previous year.

How Financing Can Help You Succeed

Because cash flow is a major barrier to the success of a small business, a loan is often the key to survival or growth. In some cases, bank financing is the best answer. But a bank loan application and credit approval process can be lengthy. Not only that but 77% of small business owners applying for a loan through a big bank get rejected and 52% of applicants at small banks also get turned down, according to Fundera. Luckily for you, there are many other types of loans available through a host of alternative lenders.

Before deciding upon financing, however, it’s important to recognize exactly why you need funding. While every small business is unique, you can start by answering this question: do you need a loan for survival or growth?

Here’s a closer look at loans for these two different business objectives.

The Survival Loan

There may come a time in the life of your business when things take a turn for the worst. Perhaps a competitor opened a shop on the same street and is pulling business away from you. Or, maybe your suppliers raised their rates and you’re struggling to meet payroll and cover your expenses.

Regardless of your particular situation, you’ve found yourself in survival mode. You need funds right away to keep your business afloat or get you through a tough time. You can’t sit around and wait to be approved for financing at a bank. Besides, if you’ve only been in business for a year, that’s not long enough to be considered for many bank loans.

If you find yourself in this situation, don’t panic. You do have financing options, including a business line of credit.

Check out this excellent guide for applying for a business line of credit including the five mistakes you should avoid.

During the application process, you’ll need to provide basic financial details about your business, including three months of bank statements. To qualify for funding, you will also need to have a credit score of 600 or higher, $100,000 in revenue, and prove that you’ve been in business for at least six months. The best part: there is no prepayment penalty for paying off the credit early.

While you should make sure to make a smart financial decision for you business, keep in mind  that you are doing this to get your business through a rough patch as an emergency measure. You may be able to pay off your loan early or eventually get a lower interest rate loan to consolidate your debt.

A good rule of thumb is to ask yourself: Am I completely sure I can make the first 5-6 payments of this loan? If the answer is yes, it could be the starting place your business needs in your road towards recovering.

If you have a B2B business, you can also apply for invoice factoring once your company is back on track. Factoring allows you to get cash advances to pay for your invoices. With this type of financing, you don’t have to wait for your customers to pay you and you can keep the cash flowing into your business.

The Growth Loan

Now if you want to expand your business, a growth loan may be your best bet. In this situation, it’s important to shop around to find a loan that fits your business needs. You should try to optimize between the amount of capital you need, what you need it for, how much you can afford in monthly repayments, and the lowest interest rates you can get.  This combination will allow you to find the right type of loan for your business and your specific needs.

This kind of loan might require a bit more patience to secure as it  often involves a longer application process in which you’ll need to provide more extensive documentation for your business. Why? A lender will want to make sure your business is on solid footing and your credit is strong before providing you with a large loan at a relatively low rate. This way they will know you will be more likely to repay the business loan and can be considered less risky.

Applying for a growth loan actually offers an opportunity to improve and  understand of your business. You can learn a lot from the questions you are being asked, and the documents you are being asked to provide. Your lenders are asking for them because that is how they can understand if your business is stable. And this process can also help you make sure that you you have a good grasp of how your business is doing and where it is heading.  If these are things you don’t regularly know or have, this might be a good time to making them a part of your ongoing process.

On SBA Loans

Along with growth loans through a bank or online lender, you may want to consider a U.S. Small Business Administration (SBA) Loan through SmartBiz. If you qualify, you can get a loan for up to $350,000 with a 10-year repayment term.

The approval process is rigorous and you will need to show that you’ve been in business for at least two years with a minimum of $50,000 in annual sales. Funding can take up to several weeks. But, once you get the loan, you can use it to help run your daily operations, purchase equipment, hire employees, beef up your inventory and even refinance other loans with higher interest rates.

Survive and Thrive

While you may not want to take on debt, you’re not alone in your quest for small business financing. And, by borrowing cash when you need it, you may be setting your business up for long-term success.

According to the article “Debt Financing, Survival, and Growth of Start-Up Firms,” published in Journal of Corporate Finance in June 2018, business debt is associated with longer survival time and higher revenue. Authors Rebel A. Cole of Depaul University and Tatyana Sokolyk of Brock University in Ontario, Canada studied how different forms of debt financing affect the outcome of companies after three years.

“Firms using debt at start-up—in particular, business debt but not personal debt—are significantly more likely to survive, and to achieve higher levels of revenues than other firms,” stated the study.

Bottom Line

Your small business will need either a survival loan or a growth loan at different stages of your company. With the right type of funding, your small business can both survive and thrive. 

More from the BlueVine Business Blog

How To Get A Business Line of Credit and 5 Mistakes to Avoid

Invoice Factoring Basics: How To Pick A Factoring Company

This article was first published on August 14, 2018. It was updated on