What Are the Different Types of Business Loans?
Business loan options include much more than just term loans, whereby you get a lump sum of cash upfront and pay it back with interest over a period of time.
Whether this is a short-term loan lasting a few months, or a long-term loan for a few years, they are often attractive options for business owners due to their lower interest rates and lengthier repayment terms.
That being said, term loans often have penalties attached for earlier repayment, which is not as attractive for people who want to avoid long financial commitments.
To get the best deals you’ll need a good credit history and this is where many startup businesses might want to look for other small business loan options. Some of the other best business loan options include:
Business Lines of Credit
A business line of credit (LOC) provides business owners with a revolving credit facility that can be used as needed. You repay what you owe, plus interest, which then becomes available to your business to borrow again.
This is a great option if you need a constant flow of working capital without having to reapply for another loan.
Business lines of credit are a great option to handle short-term cash flow problems and they tend to come with lower interest rates than credit cards.
The drawback is that they may come with stricter credit history requirements and in some cases, they also require a personal guarantee, which leaves the business owner responsible for the debt.
Business Credit Cards
A business credit card is another form of revolving credit for businesses, as lenders let you use the funds you need, pay it back with interest (in most cases), and make it available to you again.
The benefit of a business credit card is that it is accepted almost everywhere and it gives you a quick solution to short-term cash flow.
Business credit cards are best used for smaller expenses that you can quickly repay. This will save you on interest and help you build a good credit history.
SBA loans are backed by the US Small Business Administration (SBA) and they come with longer terms, smaller down payments, and lower interest rates.
This may sound very attractive, but there are very specific requirements that you have to meet to qualify for an SBA loan.
Your business needs to fit the definition of a small business and had to be rejected for private funding, among others. Applying for an SBA loan can take some time, but it can be worthwhile.
There are different types of SBA loans and these include 7(a) loans, microloans, CSC/504 loans, and more. SBA 7(a) loans are the most popular for working capital of up to $5 million.
SBA microloans are loans for amounts up to $50,000 and they typically don’t require a down payment. What makes these loans tricky is that they are not guaranteed by the SBA and you’ll need to offer some collateral to secure funding.
Lower interest rates
Capital availability – up to $5 million through a 7(a) loan
Down payments are generally lower
Longer repayment terms
Access to SBA resources
Benefits of SBA Loans
As it says, equipment financing gives you the finance you need to lease additional equipment for your business.
With this financing option, the term “equipment” is quite broad and it can cover anything from construction equipment to office furniture and software.
Because the equipment serves as collateral for the loan, even businesses with bad credit can qualify for equipment financing, although you’ll get much better interest rates with a good credit history.
Commercial Real Estate Loans
Commercial real estate loans allow businesses to buy real estate. There are different types of real estate loans but most of them come with long repayment terms (up to 30 years) and fixed interest rates.
When you take out a commercial real estate loan, the real estate itself will serve as collateral. That’s why aspects like the location of the property and its usability will affect the type of deal you will be offered.
Keep in mind that these loans have a long funding wait time and often have strict requirements.
Cash Flow Loans
Cash flow loans come in various types and they are designed to help out with short-term cash flow. An example is when you are waiting for a client to pay their invoice but you have bills that are due.
A cash flow loan can help you get quick cash to pay your bills while you wait for payments to come in.
Cash flow loans can come in the form of invoice financing, lines of credit, and merchant cash advances.
A microloan is similar to a term loan but smaller. Microloans generally come in amounts of $50,000 or less ($13,000 is the average SBA microloan) and they are easier to obtain than large term loans.
Microloans usually have higher interest rates and they offer a good opportunity to build your credit profile. The process is fairly quick and you can get a microloan approved in about two weeks.
How Do Business Loans Work?
A business loan is similar to a personal loan but explicitly tuned for business use. Lenders will offer different business options from start-up funds to expansion, to buying property.
The main types of business loans are from financial institutes, such as:
- SBA (Small Business Administration)
- Credit Unions
- Online Lenders
Business loans often come in installment loans, which are the same as personal loans. You borrow an agreed amount with a specific paid term and a set interest rate.
The other alternative business loans are revolving credit. They are similar to a home equity line of credit (HELOC) but for businesses.
With revolving credit, you borrow a set amount but do not have to use it all. You are generally charged interest on the amount that you have used rather than the amount you have borrowed.
A business loan’s monthly payment and interest rate are fixed for a certain period, making them ideal for small businesses and startups.
Some loans will have a floating interest rate, but most small business startups tend to fix a rate so there are no nasty surprises in the initial years of the business.
Starting and running a business can be a difficult process, emotionally and financially. For the latter, an online business loan may help relieve that pressure.
Using this new capital wisely can be critical to a business’s success and it all starts with finding the right business funding.
How To Get a Business Loan
Have a Business Plan
Know how much you need and what you need it for.
Once you know what you need to money for you can shop around to get a clear idea of what the loan will cost you in interest and fees.
Check Your Credit Score
You can check your credit score for free. If you are a startup, lenders will often be interested in your personal credit history as your business will not have any. You will usually have to personally guarantee business loans when you are getting started.
Gather Your Documents
Now that you have shopped around and know where you would like to apply for a loan, have all your personal and business information ready to go. Traditional lenders, such as banks and credit unions, will have the most rigorous application policies.
Apply For A Loan
Depending on the lender and the amount you require, the application process can take a while. Sometimes it can take anywhere up to a month to be approved. It’s important to apply as soon as you are ready with your documentation just in case they require more information or get rejected by your first lender.
How to Qualify for a Small Business Loan
The process of getting a small business loan can seem tedious and complicated, we get it. Lenders consider so many factors and they are not always transparent in their approval process.
That’s why we help you choose the best loan for your business.
To get started you need to determine the best business loan for your specific needs. You need to know why you need the funding and how you’ll use it so that you can justify your needs to the lender.
Here are some of the factors that lenders look for when assessing your application:
- Credit. Lenders can look at your personal and business credit scores.
- Collateral. Some lenders require borrowers to offer collateral before a loan can be issued.
- Cash flow. The stronger your cash flow is, the more likely you are to obtain funding.
- Time in business. Lenders tend to favor businesses that have been around for a few years.
- Debt load. If your business has too much debt lenders might not look at it favorably.
- Industry. Certain industries can get business loans easier than others.
Lenders use your credit history and score to determine how you will handle new credit. They will often look at your personal and business credit score as part of your application.
If you have a low score, you may have limited options available in terms of business loan offers, and in general, the more your credit score increases, so do your options.
When lenders look at your cash flow, they want to know how you manage your money, whether you pay your bills on time, and what you spend your money on.
As a general rule, the longer you’ve been in business, the more likely you are to have good funding opportunities.
To build your business credit score you can start by making sure your business is a legal entity with an employer identification number (EIN) from the IRS. You should also have a business bank account.
Here are some of the requirements when you apply for a business loan:
- The business is registered and has a tax ID number
- In most cases a credit score of between 600 and 800
- Ability to offer collateral
- Steady cash flow
- Must show a profit or a three to five-year cash projection
- A plan laying out the money’s intended use
An online business loan can help you increase your working capital. This is especially helpful when you find it challenging to make ends meet.
There are various online lenders with less stringent application rules who are willing to partner with business owners.
What Influences Business Loan Rates
When looking at getting a business loan, most owners are concerned about the interest rate. Interest rates are calculated as a percent of the principal – essentially what you pay the lender for issuing your company the loan.
The best business loan rates can vary for many reasons, but they all point back to the risk the lender takes by issuing the business loan.
Some factors that can affect the best business loans rates are:
- Your business credit history
- Your credit history
- The type of business
- The length of time in business
- Business plan
- Business capital and cash flow
It’s in a lender’s best interest to connect you with a business loan that fits your needs, so consult with several lenders before agreeing to any terms.
Small Business Loans: FAQs
What is considered a business loan?
A business loan is funding that is specifically intended for business purposes. There are different types of business loans with different requirements for each.
Is it difficult to get a business loan?
In some cases, it can be difficult to get approved for a business loan, especially if you have bad credit, or if your business already has a lot of debt.
Can I get a business loan with no money?
For small businesses and startups that don’t meet the requirements for SBA loans or are unable to afford the downpayment, there are SBA microloans available.
What is the credit score needed for a small business loan?
Credit score requirements will vary according to the lender. Banks usually require a credit score of around 700 and higher for a small business loan but some online lenders may grant funding to borrowers with credit scores in the low-600s.
Business Finance: Make a Smart Decision
It is easy to get excited at the thought of additional capital being injected into your business but use caution. Make sure you understand the terms of a business loan and don’t enter into any agreement without the following information:
- The frequency and flexibility of payments
- Interest-calculation methods
- Any penalties associated with defaulting
- The business loan rates and terms
- How to reach customer service
Talk to various lenders when shopping for a business loan. With caution and patience, you can make wise decisions. It’s also important to know how you will pay the loan back.
Always borrow the lowest amount that you need unless you can be approved for revolving credit. Startup business loans can be risky to lenders as many businesses fail in their first few years.
Once you find a business loan with the best business loan rates and payment terms you’re comfortable with, it can help take your business to the next level.