What Types of Small Business Loans are Available?

When it comes time for small businesses looking for capital there are many different types of small business loans available from traditional term loans SBA loans equipment financing more.

What Types of Small Business Loans are Available?

When it comes to financing a small business, there are a variety of loan options available. From traditional term loans to SBA loans, equipment financing, and more, there is a loan type to fit the needs of any business. Term loans are one of the most common types of small business loans and are a lump sum of cash that is repaid over a fixed term. Monthly payments are usually fixed and include interest in addition to the principal balance.

You have the flexibility to use a fixed-term loan for a variety of needs, such as daily expenses and equipment. Commercial real estate loans (also known as commercial mortgages) can help you finance new or existing properties, such as an office, warehouse, or retail space. These loans act like term loans and can allow you to purchase a new commercial property, expand a location, or refinance an existing loan. The Small Business Administration (SBA) offers several loan programs that can help small businesses access capital.

Since the federal government guarantees to repay up to 85% of the loan amount if the borrower fails to make payments, it reduces the level of risk involved for the lender. In addition to traditional bank loans, SBA loans can be one of the most affordable ways for a company to obtain funding. However, the requirements for applying for a loan can be extensive, and you usually need a personal credit score of 680 to qualify. The loan process can also take several weeks or even months to complete. Term loans are what many people think of when looking for small business loan options.

With a term loan, your company borrows money from a traditional bank, credit union, or online lender. You then return the funds over a fixed period of time (and often at a fixed interest rate). Fast funding and easier qualification conditions are the main benefits of short-term loans. However, these loans also have some disadvantages. First, APRs can be high for some borrowers and you may face expensive fees, such as origination, prepayment penalties, and so on.

You may also have to accept daily or weekly money orders with some lenders. Starter loans are often available to businesses with little or no established credit or time in business. However, they can sometimes be an expensive way to borrow money. On a positive note, start-up loans tend to be easier to apply for, even when it's a new company. And a well-managed start-up loan can help you create better business credit for the future.

However, over time, the drawing period may expire (often after 12 to 24 months) and you'll no longer be able to access the credit line when that happens. At that point, the repayment period begins, which can last up to five years. Business lines of credit can be a flexible way to borrow money if you need an open source of funding. They can also work well for projects with indeterminate costs. If your company offers a product or service to other companies and uses invoices to collect payments, it may meet the requirements for invoice factoring. With this type of funding, your company sells its outstanding B2B invoices to a third party.

The factoring company that buys your invoices could advance between 70 and 95% of their total value up front. From there, the company collects outstanding payments from its customers, deducts a factor fee (usually 0.5% to 5% per month, per outstanding invoice) and refunds the difference. When you back up a loan with your invoices as collateral, your customers don't know. This may be preferable to working with a factoring company that calls its customers to collect and alerts them to the fact that their company is taking advantage of their accounts receivable to obtain financing. However, financing bills can still cost a lot of money, as lenders typically charge 0.5% to 5% per week until you collect your bills and repay the loan. You can get a working capital loan from some online lenders and traditional financial institutions.

These financing options may be available such as SBA loans, term loans, lines of credit, or bill factoring. Because of the variety of options, the terms of your loan can also vary greatly. For example, APRs can range from 3% to 99% with this type of funding. Some working capital loans have qualification requirements that are easier to meet than those associated with SBA loans. If you have a FICO score lower than 600, you may still be eligible for funding.

However, lenders may offer you less attractive loan terms. Equipment financing is another option for small businesses looking for capital. Because the presence of collateral reduces the lender's investment risk, it may be able to set competitive interest rates. APRs typically range from 8 to 30%, and the loan amount varies depending on the cost of the equipment your company needs and other factors. Lenders can offer repayment terms of up to 25 years for this type of loan. If you have good credit and are buying an asset with a favorable loan-to-value (LTV) ratio, you may be able to secure a low APR. Some lenders offer commercial real estate loans with interest rates as low as 3%.

A lender will also want proof that you have industry experience related to your small business. Microloans are another option for small businesses looking for capital. Many microloans are offered through non-profit organizations or the government such as the SBA; however you may need to provide collateral (such as business equipment, real estate or personal property) in order to qualify for these loans. Borrowers pay various loan fees including application fees; appraisal fees (if a loan is secured by assets such as real estate); and perhaps even credit check fees. A business line of credit works like a credit card allowing you withdraw and return money on your own terms as long as you stay within your credit limit and make payments on time; however factoring companies may review their customers' credit during application process in order ensure those companies are likely pay as agreed. It's important compare several loan options when looking for business funding startups; business lines credit are flexible option that allows you...