There are a variety of reasons why your business may wish to borrow money, and there are a variety of financing options available. While having a variety of loan options can be advantageous, it is necessary to conduct research prior to applying for a loan if there are a great number of them.
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Before you can obtain financing for your business, you must select the appropriate business loan type. Your eligibility requirements, the purpose of the loan, and your desired loan terms can all impact the type of business loan that is most suitable for you. Here are the ten most common varieties of business loans.
SBA loans
SBA loans are business loans guaranteed by the Small Business Administration of the United States (SBA). As a result of the federal government's guarantee to repay up to 85 percent of the loan amount in the event of borrower default, the lender is exposed to less risk.
Each SBA-approved lender determines the annual percentage rate (APR) it charges. Interest rates on SBA loans in 2021 can range between 2.8% and 13%. Depending on the specific loan program, the terms of repayment may extend up to 25 years.
Three of the most common SBA loans are as follows:
- SBA 7(a) loans. These are an excellent option if you wish to expand your business, obtain working capital, or acquire an existing business. Businesses that qualify can borrow up to $5 million.
- SBA 504 loans. Loans under Section 504 can help your business acquire fixed assets such as equipment or real estate. You may also use these funds to make improvements to existing property. Businesses that qualify can borrow up to $5 million.
- SBA microloans. Microloans can assist businesses in meeting their working capital requirements, purchasing inventory and supplies, and financing equipment. If eligible, you may have access to up to $50,000.
SBA loans can be one of the most cost-effective ways for a business to obtain financing, in addition to conventional bank loans. However, borrowing requirements can be stringent, and a 680 credit score is typically required to qualify. Additionally, the loan process can take weeks or even months to complete.
Term loans
Many people consider term loans when searching for small business loan options. Your company obtains a term loan from a traditional bank, credit union, or online lender. Then, you repay the funds over a predetermined time period (and often at a fixed interest rate).
If you have excellent personal and business credit, you may be eligible for a competitive interest rate on a term loan, particularly from a conventional lender. And with online lenders, application and funding processes for term loans are frequently expedited. On the downside, you may be required to provide a personal guarantee and/or collateral for this type of funding. A personal guarantee is a legal agreement you make to repay the loan with your personal funds if the business fails to do so.
Startup Loans
Before qualifying for certain business funding options, your company may need to have been in operation for at least a year. A startup business loan may be suitable for new companies that need to borrow money quickly.
There are numerous options for financing a startup business, including SBA microloans, online loans, and business credit cards. Because there is a great deal of variety, interest rates, fees, loan amounts, and terms of repayment can differ. When seeking startup financing for a business, it is important to compare multiple loan options.
Startup loans are frequently available to businesses with little to no credit history or business history. However, they can be an expensive way to borrow money at times. Positively, startup loans are typically easier to qualify for, even for new businesses. And a well-managed startup loan could assist you in establishing better business credit in the future.
Microloans
Microloans are a form of financing with small loan amounts and brief repayment terms. When compared to other types of business loans, the interest rates and eligibility requirements for SBA loans are typically lower or nonexistent.
Typically, eligible businesses can borrow up to $50,000 from nonprofit organizations. Most microlenders target underserved small business owners, such as women and members of underrepresented groups.
Microloans can provide underserved small business owners with a cash infusion to launch a new business or expand an existing one. In order to secure funding, microlenders may require a personal guarantee and collateral.
Short-term Loans
Consider a short-term business loan if your company has an immediate need for capital and prefers repayment terms of less than three years. Some online lenders may provide funding in as little as one day to businesses that qualify.
The key advantages of short-term loans are their quick funding and simple eligibility requirements. However, these loans also have some disadvantages. First, APRs can be high for some borrowers, and you may incur costly origination, prepayment, and other fees. Some lenders may also require you to agree to daily or weekly payment drafts.
Business Lines of Credit
A business line of credit is a form of financing that allows you to borrow money as needed and pay interest only on the amount you borrow. It functions in some ways like a credit card. You are granted a credit limit by the issuing bank, and as you use and repay the money you owe, you have access to the same credit line throughout the draw period.
However, eventually, the draw period may expire (typically after 12 to 24 months), and you will no longer have access to the credit line. The repayment period then begins, which can last up to five years.
If you need an open source of funding, a business line of credit can be a versatile way to borrow money. They are also useful for projects with unknown costs.
To obtain a business line of credit with the most favorable terms, however, good credit and sometimes collateral are typically required. Additionally, you may be required to sign a personal guarantee, typically for unsecured credit lines. In addition, there is typically no grace period for interest charges when withdrawing cash, unlike credit cards.
Invoice Factoring
Your company may be eligible for invoice factoring if it sells a product or provides a service to other businesses and relies on invoices to collect payments from those businesses. Using this method of financing, your company will sell its unpaid invoices to other businesses to obtain the capital it needs.
It is possible that the factoring company that buys your invoices will advance between 70% and 95% of the total value of those invoices upfront. After that, the company will collect the overdue payments from your customers, deduct a factor fee (which is typically between 0.5 and 5% per month, per overdue invoice), and return the remaining balance to you.
Your company may be able to access cash on outstanding invoices before they are due with the assistance of invoice factoring. Getting approved for this kind of financing is typically a lot less difficult than getting approved for other kinds of business loans. Having said that, during the application process, the factoring company may check the credit of your customers in order to ensure that those companies are likely to pay according to the terms agreed upon. This solution for a rapid increase in cash flow can also be expensive, particularly if your customers frequently pay late.
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