Small Business Loans
A common challenge faced by small businesses is not having enough funds to cover the expenses that come with operating and expanding a business. However, wanting more working capital may not necessarily mean a business is struggling. Small business loans can be used to cover startup costs, purchase equipment or inventory, refinance debt, business expansion, and more. Regardless of the reason, traditional banks, online lenders, and credit unions can fund small businesses.
Types of Small Business Loan
Fortunately, small businesses have loan options to choose from. Depending on what you are looking for and how much funding you need, you can find a small business loan that checks all your boxes.
The Small Business Administration (SBA) works with a network of approved financial institutions that lend money to businesses. An SBA loan is partially guaranteed by the government. This means that if a business is unable to pay back its loan, the SBA will cover its guaranteed portion. For example, 7(a) loans, 504 loans, and microloans. These range from small $500 loans – to large $5.5 million loans. Eligibility for an SBA loan depends on the one you choose. Generally speaking, they require the business to be located and operating in the U.S., be officially registered and have invested their own money into their business.
Business Term Loan
A term loan is a deal between a borrower and a lender. The lender gives the borrower a certain amount of cash up front. Which is repaid through small monthly payments over time plus interest. This loan is beneficial for business owners looking to make large purchases. Term loans can be offered in short, intermediate, or long-term loans which can range from less than a year to 25 years.
Business Line of Credit Loans
A business line of credit loans works similarly to credit cards. You will receive a certain credit limit and you can borrow as much money as needed without exceeding the limit. This credit loan may be useful for any business expense. However, these lines of credit are typically smaller than other small business loans – making them more useful for emergencies or smaller purchases.
Small Business Loan Alternatives
Merchant Cash Advance
A merchant cash advance is where a business sells its future revenue at a discount to an alternative financing company. This service is not a loan. This company will be giving you a lump sum which will be repaid by a percentage of your credit or debit card sales. Normally, if the withdrawals are fixed, the company will deduct the same amount of money from your account on a monthly, weekly, or daily basis. However, if the withdrawals are variable, the company will look at your credit card statements and deduct a percentage from the sales of that month/day. Meaning, they will deduct less money if your business does not perform as well.
Invoice factoring is another financing option where a business sells its outstanding invoices to a factoring company. Instead of having to wait 30-90 days for invoices to be paid, a factoring company can advance up to 80-90% of the invoice total within days. Your customers will then pay the factoring company directly. Once the total value of the invoice has been paid by your customers, the factoring company will pay you the remaining invoice amount minus their fee.
Equipment financing is a type of financing offered by alternative finance companies that entails purchasing materials needed for your business. These materials can be any tangible asset such as machinery, medical equipment, office furniture, or computers. This type of financing is important for startup businesses or those looking to expand. Depending on the finance company, they can pay around 80-90% of the equipment cost. Finally, businesses make monthly payments to the finance company until the loan amount has been fully paid off.