Are you a small business owner looking for a loan? You have many options. Today, the market is booming with loan products designed to meet the needs of small business owners, so whether you’re looking to buy a new property and renovate, or just need some cash to revive your business until your bills are paid. As the busy season begins, you can find a loan that works for you.
There are three main types of business loans: Small Business Administration (SBA) loans, traditional bank loans, and alternative loans. SBA loans are not issued by the SBA, but guaranteed by it, so that lenders can feel more comfortable financing small businesses. Alternative credit products include merchant cash advances, payday loans, business credit cards and lines of business.
Traditional bank loans are harder to get, but, like SBA loans, they offer lower interest rates and more flexible repayment terms. Learn more about what options you have so you can choose the best loan for your business.
Traditional bank loan
When you think about getting a business loan, the first thing that comes to mind is a traditional business loan from a bank. Traditional bank loans offer the lowest interest rates and especially the best repayment terms – you can often pay off a conventional bank loan in months because you have access to so many alternative loan options. However, repayment schedules are shorter with conventional loans than with SBA-backed loans. You should also be prepared to make a balloon payment at the end of the loan term.
The hardest part for small businesses is the traditional bank loan. You must prove to the bank that your business is established and will turn into a profit. You also have to convince the bank that the loan money will help you make the business more profitable so that you can repay the money. Only about 23 percent of typical small business loan applications are ultimately approved.
SBA loans are sponsored by the Small Business Administration, but are also offered by regular lenders and nonprofit organizations dedicated to helping small businesses. SBA support provides lenders with additional financial security, so they can afford to make more of these loans. The SBA supports a few different types of business loans, including microloans, 7(a) loans, CDC/504 loans, and disaster loans.
SBA microloans are small loans of up to $50,000 available to new and established small businesses. You can use micro loans to buy goods; Machines, tools and equipment; Furniture and household items; or supplies. You can use the money as working capital while you wait to solve cash flow problems.
7(a) loans are the SBA’s primary loan program, and therefore are the most frequently offered loans. You can use the money from the 7(a) loan to buy real estate or build new structures; Purchase of goods, materials, furniture, equipment and machinery; debt recovery; Starting a new business; Renovating a building; or even as working capital. These loans have terms ranging from 10 to 25 years and a maximum loan amount of $5 million, depending on who you borrow the money from.
CDC/504 loans are real estate loans that can be used to purchase buildings, land or machinery. You can also use one to refinance any debt you’ve incurred in the past while growing your business. You usually have to put 10 percent down to get one of these loans. The SBA puts up 40 percent, and your lender puts up the other 50 percent. These loans have terms ranging from 10 to 20 years and a maximum loan amount of $5.5 million.
Disaster loans are available to small business owners whose business property and equipment have been damaged in a disaster. You can borrow up to $2 million to replace or repair machinery, equipment, fixtures, and premises.
Because they require government agency approval, an SBA loan application can take months to be approved. If you can wait, that’s fine. If not, you may want to consider an alternative lender – especially if you don’t qualify for a conventional loan.
Alternative loan options
Alternative lenders can provide business funding within hours or days. Applications are usually done online. Your alternative business loan options include merchant cash advances, which allow you to borrow against your future credit card sales. which allows you to borrow against your invoices; And the business line of credit, which allows you to borrow only as much as you need and pay interest only on the amount you borrow. Business credit cards can give you working capital to help you manage your cash flow.
Alternative lenders often lend to business owners with low credit scores, so you can still get the financing you need with less-than-perfect credit. Interest rates for these loan products tend to be high – interest rates of 25 percent or more are not uncommon for products like merchant cash. Repayment periods are shorter, too—you may find yourself on a 90-day repayment schedule that stretches over several years. However, you can usually pay back your down payment or other alternative loan product using the money you earn during the repayment period.
Some alternative products, such as invoice financing, may require no fees at all – that is, you sell your invoices to the lender for a small price, and the lender collects on its own invoices to recoup their money.
The best loan for your business depends on what you use it for, when you need it, and what you qualify for. Find the best loan for you and watch your business grow.