Understanding Different Types of Small Business Loans
It’s a well-known fact that small business owners struggle to secure funding from traditional lenders. In fact, More often than not, banks are hesitant to lend to small businesses because of certain risks associated with small businesses (i.e. lack of collateral, less profit on smaller loans, lack of credit history, etc.). Fortunately, banks aren’t the only source of additional working capital.
Alternative lenders offer small business loans to small businesses. The qualifications and the requirements are less stringent than banks, so there’s a great chance you’ll qualify for a loan. If you’re looking to apply for small business term loans, it’s best to understand different financing options.
1. Business Line of Credit
If you’re looking for flexibility, you might want to look into a business line of credit (LOC). It’s the most useful type of loan for small business owners since it can be used as an emergency fund, working capital, supplies, and inventory, etc.
With a LOC, lenders assign you to a credit limit which you can withdraw funds from as needed. Unlike traditional loans, you don’t have to repay the entire credit limit; you only have to pay for the interest of the money you’ve withdrawn.
2. SBA Loans
The Small Business Administration (SBA) created SBA loans specifically for small business owners who are looking for competitive yet non-traditional financing options. The SBA guarantees up to 85% of the loan, which lowers the risk for lenders and allowing them to offer lower interest rates, longer repayment terms, and higher loan limits compared to traditional loans.
Contrary to popular belief, the Small Business Administration is not the one that lends the money. There are SBA-approved financial institutions (banks or alternative lenders) that offer SBA loans. There are several types of loans you can choose from depending on your need, such as the 7(a) loans, CDC/504 loans, SBA microloans, and more.
3. Equipment Financing
If you need to upgrade your equipment or add new ones, equipment financing may be the best loan for you. As the name suggests, equipment financing provides business owners with the resources they need to acquire the necessary equipment.
Most people think that the term “equipment” only applies to heavy equipment like backhoes, forklifts, and trucks. However, you can use equipment financing to purchase vehicles, computers, payment processing software, and other less obvious types of equipment. If the item you’re looking to purchase will help equip your business, chances are, you’ll qualify for equipment financing.
4. Asset-Based Loans
When applying for traditional business loans, lenders mainly consider your cash flow and credit. On the flip side, asset-based loans primarily rely on your collateral rather than cash flow and credit.
Asset-based loans are great for companies that need to maintain liquidity to keep up with daily business expenses. You can use the funds as additional working capital, acquire new equipment, replenish inventory and supplies, or refinance debt.
5. Business Term Loans
A business term loan is the most common type of loan. In fact, it’s the first thing that comes to mind if you’re looking to borrow money for your business. With business term loans, lenders will give you a lump sum of cash which you will repay regularly over a period of time. This type of loan has fixed interest rates, so you don’t have to worry about payment fluctuations.
There are three different types of business term loans:
• Short-Term Loans (six months to one year repayment period)
• Medium-Term Loans (one to three years)
• Long-Term Loans (three to 10+ years)
The terms of the loan depend on your creditworthiness, cash flow, and collateral. You can use the funds for just about anything as long as it’s for the benefit of your business.
6. Invoice Financing
If you need working capital and you have pending invoices, you can check out invoice financing. Invoice financing allows business owners to trade their pending invoices for upfront cash. Lenders often give them 80% to 90% of the total invoice value, while the remaining percentage will be given once your customers pay their invoices.
Aside from the upfront cash, another benefit of invoice financing is that it relieves you of the burden of tracking down your customers to collect pending debts. Instead, your lender will do the payment collection for you.
Check Out Any of These Loans Today!
Small business owners need financing to keep their business going. But with multiple financing options to consider, many business owners may find the entire process overwhelming.
