Small business startups require significant financing.
Fortunately, small-scale entrepreneurs can access a wide range of funding options.
Alternative lenders, for instance, will allow you to qualify for an unsecured business loan that does not need collateral and a wide range of documentation ranging from equipment to merchant cash advance financing.
With that said, we shall provide you with the basics of a small business loan, and hopefully, by the end of this guide, you’ll determine which funding option is ideal for your business.
Types of Loan Lenders
Small Business Administration Loans
These types of loans provide various loan programs aimed at meeting the financial requirements of different types of businesses.
The SBA creates guidelines for loans made by its various partners that include; micro-lending institutions, community development organizations, and banks. It decreases the risk of lenders by guaranteeing loan repayments will be made.
The various types of SBA loan types come with their own stipulations and parameters. Although the loan terms are more favorable, they tend to have strict requirements and require additional paperwork.
Conventional Bank Loans
The advantage of conventional bank loans is that they have a low-interest rate, and the approval process is quicker as there is no federal agency involved.
However, these types of loans have a shorter repayment time as compared to the SBA loans and, in most cases, require balloon payments. More so, it is challenging to be approved for a conventional bank loan.
Alternative lenders have gained tremendous popularity among small business owners due to their non-stringent approval requirements.
These lenders are excellent options for businesses without a long financial history and provide online applications giving funding in a matter of hours. However, these loans are significantly high as compared to those offered by the bank.
Types of Loans
The SBA provides four kinds of small business loans currently;
Microloan Program. These involve minor loans for new and rising small businesses. You can use this loan for buying inventory, furniture, machinery, supplies, and equipment. The loan cannot, however, be used for purchasing real estate or paying existing debts.
The SBA avails the funds to non-profit intermediary lenders who then make funds available to intermediary lenders at an average of $13000 to $50000. The maximum repayment period is often six years with the terms depending on various factors.
7(a) loan program. 7 (a) loan program is the most common and necessary flexible type of loan. These loans are used for a variety of purposes, including debt refinancing, working capital, constructing a new building, purchasing equipment, and so on.
Disaster Loans. The SBA offers low-interest disaster loans to all types and sizes of businesses. This loan can be used to replace or repair business assets that were destroyed during a disaster. Qualified businesses can access up to $2 million disaster loan.
Equipment and Real Estate Loans. These loans are provided by the CDC/504 Loan Program, which includes long-term, fixed-rate financing for major assets such as real estate and equipment. The funds can be used for buying machinery, land buildings, and refinancing debt. The maximum loan is $5.5 million, with maturity terms of 10 to 20 years.
Loans from Alternative Lenders and Conventional Banks
Alternative lenders and banks provide loans similar to SBA and additional funding options that the SBA does not offer. These include;
Lines of Credit: This loan provides small businesses with cash for day-to-day cash-flow needs. With this type of loan, you can take what you need and pay interest only on the amounts you have used. The good thing about these loans is that they are unsecured and do not require collateral.
Working Capital Loans: These credits provide a temporary solution for businesses that need capital to fund operations. The loans help small businesses to keep their operations going as they look for other ways of boosting revenue. However, working capital loans have shorter repayment terms and higher interests.
Merchant Cash Advance: the loan is given to a small business based on the capacity of its monthly credit card dealings. The businesses can characteristically get a loan of about 125 percent of their sum of monthly transaction payment. The loan is easy to obtain and is repaid from credit card sales. However, the huge downside is the high-interest rates that run as high as 30 percent.
Invoice Factoring: alternative lenders offer these loans as advance money for outstanding invoices. The lender then collects the invoice money in addition to the fee. This is a perfect option for small businesses seeking to get finances upfront for the unpaid invoices.
We hope that this guide has helped you understand the details of small business loans and how to go. However, you should assess your business needs before you go on to apply for a loan. This will help you decide the best type of loan for your business.