Top 5 Types of Small Business Loans

small business loans

Small Business Loans come in 5 Major Types

Getting small business loans can be a daunting process for many small business owners. In addition to meeting the qualifications, the paperwork and process of applying for a small business loans can overwhelm a business owner. Traditional bank loans are simply out of reach for many business owners, so what can you do to get the needed capital to start or grow your business?

Access to capital is the Holy Grail of starting and growing a business. Entrepreneurs can obtain financing through various means such as: taking-on private or institutional investors, self-financing using personal credit cards and personal savings or obtaining loans from a lending institution. If you’re thinking about the last option (small business loans), a little education and preparation can go a long way.

If taking a loan to support your business is an option, you must decide what type of loan to apply for: the options range from a traditional bank loan to equipment financing, government-sponsored Small Business Administration (SBA) loans to invoice financing loans and other options in-between. Each of these options has unique features, requirements and a set of pros and cons. And of course, the type of loan you choose to apply for will determine your loan amount, repayment terms and interest rate and fees (known as the cost of borrowing).

Let’s take a look at some of the more popular options and loan programs available to small businesses. There are other forms of loans available, but here we will focus on 5 popular small business loan options. Fortunately, companies such as Biz2credit.com and others have streamlined the business loan application process and loan type selection using advanced technology.

  1. Small Business Administration (SBA) Loans

The SBA is a government-sponsored, government-guaranteed loan program designed for small business loans for companies who don’t qualify for a traditional bank loan. The US Government works with banks and other institutions by guaranteeing a loan given by the bank, so the banks are more flexible in their requirements when issuing the loans.

General Qualification Guidelines

  • 2+ years in business
  • 640 personal credit score
  • Approximately $100,000 in annual revenue
Application Process

 

Applicants may apply for SBA loans at many large or local banks or apply online.

 

Loan Limits

 

$5,000-$5 million

 

Loan Terms

 

5-25 years

 

Interest rates

 

Starting at 6.5%

 

Loan Approval Time

 

As soon as 3 weeks

 

Pros and Cons of an SBA Loan

Pros Cons
Lowest down payments Lengthy paperwork
Longest payment terms Longer approval times
Reasonable interest rates May require collateral
Suitable for a wide range of business purposes
  1. Term Loan

This is what most people understand about loans, it is a traditional-type loan and it is the most common choice for small business loans. You borrow a fixed or lump-sum amount of money, usually for a specific business purpose and the loan is paid back over the course of the prescribed term (1-5 years) and is mostly at a fixed interest rate.

General Qualification Guidelines

  • 3-5+ years in business
  • Significant/steady cash-flow
  • Strong personal credit
  • May require collateral
Application Process

 

Applicants may apply for term loans at many large or local banks or apply online.

 

Loan Limits

 

$25,000-$500,000

 

Loan Terms

 

1-5 years

 

Interest rates

 

Depending on credit worthiness, from 7% up to 30%

 

Loan Approval Time

 

Under a week, usually within 2-3 days

 

 Pros and Cons of a Term Loan

Pros Cons
  • Set payment structure
possible prepayment penalties
  • Suitable for a wide range of business purposes
  • Lower monthly payments than short-term loans
  • Longer payment terms than short-term loans
  1. Equipment Financing

As the name implies, equipment financing is designed to help purchase or lease (up to 100% of costs) necessary business equipment such as computers, machinery, cars, trucks or other “equipment”.

General Qualification Guidelines

  • 3-5+ years in business
  • Significant/steady cash-flow
  • Strong personal credit
  • May require collateral
Application Process

 

Applicants may apply for term loans at many large or local banks or apply online.

 

Loan Limits

 

Can be up to 100% of equipment value

 

Loan Terms

 

Generally for the life of the equipment

 

Interest rates

 

Similar to Term Loan – Depending on credit worthiness, from 7% up to 30%

 

Loan Approval Time

 

Usually 2-3 days

 

 Pros and Cons of Equipment Financing

Pros Cons
Quick access to cash Equipment could be obsolete by the time the loan is fully repaid
Limited paperwork Tax Issue – Might need to depreciate equipment, so you can’t deduct full cost each year
Equipment serves as collateral
  1. Business Line of Credit (BLoC)

A business line of credit is a revolving credit line established with a lender for a specified amount (similar to a credit card), the difference being that the borrower has access to cash when needed. A BloC may have a lower interest rate or APR.

A Bloc can generally be used for any reason at any time according to the terms of the arrangement.

General Qualification Guidelines

  • 6+ months in business
  • $50,000+ in annual revenue
Application Process

 

Applicants may apply for term loans at many large or local banks or apply online.

 

Loan Limits

 

Broadly speaking between $10,000 and $1 million+

 

Loan Terms

 

Generally from 6 months to 5 years

 

Interest rates

 

Similar to Term Loan – Depending on credit worthiness, from 7% up to 25%

 

Loan Approval Time

 

Hours to a few days

 

 Pros and Cons of Business Line of Credit (BLoC) Financing

Pros Cons
Only pay interest on funds drawn Might need to provide updated documents upon each draw
Capital is available when needed May require collateral
Suitable for a wide range of business purposes Higher rates for lower credit scores
Bad credit is acceptable
Excellent way to build your credit score
  1. Invoice Financing

Invoice financing, also known as “accounts receivable financing” is a loan type that in essence helps you collect (borrow) money against outstanding invoices and pay your lender a fee for that service. It is technically selling your accounts receivable to support cash-flow. Invoice financing has become very popular, mainly due to the large (and growing) number of firms engaged in this type of lending. This type of financing is similar to a merchant cash advance where the business owner receives a lump sum payment for a percentage of future credit card sales. These types of loans have become popular in the restaurant industry where there is a high percentage of credit card sales. Restaurants use these financing programs when they don’t meet the requirements for a typical restaurant loan.

General Qualification Guidelines

  • 3+ months in business
  • $50,000+ in annual revenue
Application Process

 

Applicants may apply for term loans at many large or local banks or apply online.

 

Loan Limits

 

Broadly speaking between 50% to 90% (85% is common) of the total (collectable) invoice amounts.

 

Loan Terms

 

When client pays their invoices you receive the remaining amounts (not advanced, known as the “reserve amounts”) less applicable fees.

 

Interest rates

 

This type of funding generally uses a “factor fee” which is generally 3%+ of the percentage/week outstanding

 

Loan Approval Time

 

Hours to a few days

 

  

Pros and Cons of Invoice Financing

Pros Cons
No need to wait for invoice payment Can have higher fees than traditional financing
Invoices serve as collateral Fees based on time for invoice to be paid off
Based on credit of the invoiced business Costs can be variable
No need to wait for invoice payment
Timothy Kelly
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