Are you a small business owner looking to get a loan? You have many options. These days, the market is full of loan products designed to meet the needs of small business owners, so whether you’re looking to buy and renovate a new property, or need some cash to run your business until get your bills paid or your business. peak season begins, you can find a loan that works for you.
There are three main types of business loans available: Small Business Administration (SBA) loans, traditional bank loans, and alternative loans. SBA loans are not made by the SBA, but guaranteed, so lenders can feel more comfortable financing small businesses. Alternative loan products include business cash advances, invoice factoring loans, business credit cards and business lines of credit.
Traditional bank loans are the hardest to get, but like SBA loans, they offer lower interest rates and more favorable repayment terms. Learn more about what options you have to choose the best loan for your business.
Traditional bank loans
A traditional business loan from a bank is probably the first thing that comes to mind when you think about getting a business loan. Traditional bank loans offer the lowest interest rates and usually the best repayment terms – you can often repay a conventional bank loan over a period of years instead of months, as you could with many loan options alternatives However, repayment schedules tend to be shorter with conventional loans than with SBA-backed loans. You should also be prepared to make a lump sum payment at the end of the loan term.
Traditional bank loans are the hardest to get for small businesses. You need to prove to the bank that your business is established and profitable. You also need to convince the bank that the loan money will help you make the business even more profitable so that you can afford to pay the money back. Only about 23 percent of conventional small business loan applications are ultimately approved.
SBA loans
SBA loans are backed by the Small Business Administration, but they are made by mainstream lenders and nonprofit organizations dedicated to helping small businesses. The SBA’s support provides an extra layer of financial security for lenders, so they can afford to make more of these loans. The SBA supports several types of business loans, including microloans, 7(a) loans, CDC/504 loans, and disaster loans.
SBA microloans are small loans of no more than $50,000, available to new and established small businesses. You can use a microloan to buy inventory; machinery, tools and equipment; accessories and furniture; or supplies You can even use the money as working capital to cover your day-to-day operating expenses while you wait for cash flow issues to be resolved.
7(a) loans are the SBA’s main loan program and are therefore the most widely awarded loan. You can use the funds from a 7(a) loan to purchase real estate or build new structures; buy equipment, accessories, furniture, tools and machinery; refinance debt; starting a new business; remodel a building; or even as working capital. These loans typically have a term of 10 to 25 years, depending on why you asked for the money, and a maximum loan limit of $5 million.
CDC/504 loans are real estate loans that you can use to buy buildings, land, or machinery. You can also use one to refinance debt you’ve incurred to grow your business in the past. You’ll usually need to put 10 percent down to get one of these loans. The SBA will contribute 40 percent, while your lender will contribute the other 50 percent. These loans typically have a term of 10 to 20 years and a maximum borrowing limit of $5.5 million.
Disaster loans are available to small business owners who have had business assets and inventory damaged in a disaster. You can borrow up to $2 million to replace or repair machinery, equipment, inventory and premises.
Because they require approval from a government agency, it can take months for an SBA loan application to be approved. If you can afford to wait, that’s fine. If not, you may want to consider an alternative lender, especially if you can’t qualify for a conventional loan.
Alternative loan options
Alternative lenders can provide business financing in a matter of hours or days. Applications are usually made online. Your alternative business loan options include merchant cash advances, which allow you to borrow against your future credit card sales; invoice factoring, which allows you to borrow against your outstanding invoices; and a business line of credit, which allows you to borrow only what you need and pay interest only on the amount you borrow. Business credit cards can also provide working capital to help you manage your cash flow.
Alternative lenders often lend to business owners with lower credit scores, so you can still get the financing you need with less-than-perfect credit. Interest rates are usually higher for these loan products; Interest rates of 25 percent or more are not uncommon for products like merchant cash advances. Amortization terms tend to be short, too—you might end up with a 90-day amortization schedule instead of one that stretches out over years. However, you can usually pay off the cash advance or another alternative loan product with the money you will earn during the repayment period.
Some alternative products, such as invoice factoring, may not be reimbursed at all; that’s because you sell your bills to the lender for a fraction of their value, and the lender gets their money back by collecting the bills.
The best loan for your business will depend on what you use it for, when you need it, and what you can qualify for. Find the best loan for you and watch your business thrive.