Fortunately, there are a variety of loan options available that may be suitable for your business. In this guide, we'll walk you through the key factors to consider when choosing a loan for your small business and discuss some of the different types of loans available, including bank and SBA loans, business lines of credit, term loans, and equipment financing.
What Types of Loans Are Available to Small Businesses?
Small businesses have many financing options with different term lengths, qualification criteria, and rates. When choosing a loan, it’s important to consider both your short-term and long-term needs. Make sure you understand how much money you need, what you will use it for, and how quickly you need it.
Below, we’ll list some of the most common types of business loans.
Traditional loans are one of the most popular types of business loans, with repayment terms of up to 10 years, which is longer than many other types of business loans. Loans can either be secured or unsecured; secured loans have collateral, while unsecured ones ask only for a personal guarantee from the owner.
Interest rates offered with traditional loans are often more competitive than those of other kinds of business lending. However, it can be difficult to qualify for this type of loan if you have a limited credit history. Interest rates and loan terms vary from bank to bank, so it's important to shop around and compare rates before making a decision.
The Small Business Administration (SBA) provides loans with longer terms, lower down payments, and lower interest rates than most other types of business financing. They offer various loan products for businesses in different industries and at various stages of development. SBA loans often require extra paperwork, but they can be a great source of funding for companies that don’t qualify for traditional financing.
Business lines of credit
Lines of credit allow businesses to access quick capital when needed using a revolving balance. Similar to a credit card, with business lines of credit, businesses can borrow up to an agreed amount, and the lender will only charge interest on the amount of money actually borrowed.
Lines of credit can be helpful if your business experiences fluctuating cash flow. However, the interest rates may be higher than other types of loans, and you may be charged additional fees. Business lines of credit may also impact your credit score, which could make it more difficult to obtain traditional financing in the future.
These loans involve making payments over a fixed period and are used by businesses that want to borrow a large sum of money for a specific purchase or investment. This can be helpful for businesses that need to make a large purchase or want to expand their operations. Term loans also have fixed repayment terms, which can make budgeting easier.
These loans are typically used for working capital and provide short-term relief for businesses that need money quickly. These are helpful for covering unexpected expenses or taking advantage of an opportunity. The approval process is more accessible than traditional bank loans, and no collateral is required. However, interest rates are often higher than other types of loans, and repayment terms are short.
This type of loan allows businesses to finance new equipment purchases without having to pay upfront costs. It is often used for large purchases such as machinery and vehicles. The loan amount is usually up to 100% of the equipment value, and the term is determined by the life expectancy of the equipment. Collateral is not needed, because the equipment itself is the collateral.
Merchant cash advances
Merchant cash advances (MCAs) are a type of small business financing that allows businesses to access a lump sum payment in exchange for a portion of their future credit card sales. MCAs can enable businesses to access quick capital when traditional financing options aren't available. Approval is based on sales, so businesses with low credit scores may still qualify. However, MCAs typically have shorter repayment terms and higher interest rates than traditional loans, which makes them more expensive in the long run.
Invoice financing is a type of loan product where businesses borrow against their unpaid invoices. The lender pays the business upfront, usually up to 90% of the invoice amount, and then collects payments from the customer when they are due. No collateral is required for this type of loan, but the interest rates tend to be higher than traditional loans. In addition, the repayment terms depend on when your customers make their payments, so it’s essential to keep track of this detail.
Crowdfunding has attracted a lot of attention in recent years, as it enables businesses to raise funds without the need for a lender or a strong credit history. While there have been some notable successes, it’s important to keep in mind that crowdfunding campaigns can take a lot of time and effort, and there’s no guarantee you’ll reach your goal.
How to Apply for a Business Loan
Here is a general guide to best practices when choosing and applying for a small business loan.
First, you will need to assess your current financial situation and decide how much you need to borrow. You should also consider whether you want a lump sum loan or revolving credit and how long you’ll need to pay the loan back. Then, search for lenders that offer the loan type you need.
After you have chosen a lender, fill out the application and submit it with all the required documents. The lender will review your application and request additional information if needed. Once approved, it will provide you with the loan agreement, which outlines the terms and conditions of the loan. Finally, sign the contract and receive the funds.
What to Do if You're Denied a Business Loan
If your loan application is denied, don’t give up. There are a few steps that you can take to increase your chances of getting approved for the loan. First, assess why the loan was denied and consider whether you need to make changes before reapplying. For example, you may need to increase your credit score or provide additional collateral. Consider working with a loan guarantor or looking at alternative financing options such as unsecured business loans or merchant cash advances.
Strategies for Managing Your Loan
Once you have received a loan, it is vital to manage it responsibly. Here are a few strategies that can help you stay on top of your loan and keep it in good standing.
- Make sure your payments are made on time each month to avoid late fees and possible damage to your credit score.
- Monitor your loan balance and consider making early payments if you can.
- Consider refinancing your loan or consolidating multiple loans to reduce interest rates and lower monthly payments.
- Set up automatic payments so that you don’t miss deadlines.
How to Repay Your Business Loan
Repaying a business loan typically involves making regular monthly payments over an agreed period. There are a number of software services, such as Mint and QuickBooks, which can help you manage your loan repayments. These will enable you to break payments down into principal, escrow, and interest and manage regular payments.
It’s important to make sure that you are able to make your payments on time every month in order to avoid late fees and other penalties. If you’re having trouble making payments, you should reach out to your lender as soon as possible to discuss alternate payment plans or repayment options.
How to Get the Most out of a Loan for Business Growth
Getting the most out of a loan for business growth will involve taking an active role in managing your finances. First, have a plan to ensure that the money you borrowed will actually grow your revenue over time, whether it’s through hiring more sales staff or buying equipment that will lower production costs. You should create and stick to a budget that takes into account all of your expenses, including loan payments, so that you can stay on top of repayment.
Thoroughly research lenders and terms before you commit to any loans so that you understand what you’re getting into and can negotiate with lenders if necessary. Finally, make sure that the funds are used for their intended purpose and not diverted elsewhere.
By following these tips, you can make sure that a loan is beneficial in helping your business grow and succeed. With careful management and planning, a loan can be an invaluable tool for business growth.
A business loan can be a great way to get the funds you need to grow your business, but it’s important to do your research before applying for a loan and ensure that you’re getting the most out of the funds. By taking an active role in managing your finances and researching lenders, you can maximize the benefits of a business loan and lay the foundation for future success.