It can be difficult to determine which type of loan is best suited to your needs and budget. Fortunately, there are many viable options out there today that offer varying terms and rates for every kind of business. Understanding the different types of loans available and their pros and cons is essential in order to find the best one to fit your individual needs. Let's dive in to some loan options to consider.
The SBA has multiple loan programs, but the most popular is the SBA 7(a) loan. With a 7(a) loan, the loan itself is partially guaranteed by the SBA, but an SBA-approved lender is the party that actually delivers the financing. You can borrow between $20,000 and $5 million from the SBA, with a maximum term of ten years.
Part of what makes the SBA 7(a) loan so popular is that it offers interest rates below the current market rates. The one downside to SBA Loans is that they tend to have a long, drawn-out application process, which makes this option less ideal if you are in a pinch and need financing soon. The loan process often can take up to three months, so while the SBA Loans are great, they are not the right place to seek emergency funds.
FURTHER READING: A Guide to SBA Loans: How Do They Work?
Term loans are one of small businesses' most basic, flexible, and common loan types. You can use a term loan for almost any aspect of your business, including everyday expenses, equipment purchasing, and even marketing expenses.
These are usually issued fast, with turnarounds sometimes as little as one day. The interest payment on a term loan is tax-deductible, making it an attractive choice. You will most likely need to include something for collateral to secure the loan. They can have a duration of as little as three months, and over three years, depending on the terms you agree to when you get the loan. However, sometimes you can extend the term loan duration after the fact.
Interested in a business term loan? Consider Funding Circle; they look for an established business owner who’s been in business for at least two years, with strong annual revenue and strong business credit, and at least a 660+ FICO credit score.
Microloans are smaller loans that are less than $50,000; usually, they average about $13,000. If you have a one-time expense for your business, these can be a great choice to get the money you need. Some microloans are through the SBA, and nonprofits or government programs may offer others. Microloans usually require collateral.
Merchant Cash Advance
Technically, a merchant cash advance is not a small business loan, but it works similarly. When you get a merchant cash advance, you request financing based on your future revenue. In a way, you are putting up your future sales as collateral. The amount you can get from a merchant cash advance depends on your average monthly credit card sales, and the terms are usually anywhere from 90 days to over two years to repay. A merchant cash advance can be a risky type of financing because you can only partially predict the future, and the interest rates for these loans are often high.
Working Capital Loans
A working capital loan is a short-term loan to help a small business cover its everyday expenses. You can use it to pay another debt, cover payroll, hire new employees, invest in marketing, and more.
We're partnering with Accion Opportunity Fund (AOF), a non-profit financial support system that provides business owners – predominantly entrepreneurs of color, immigrants, and women - with access to capital, networks, and coaching.
AOF working capital loans are ideal for small businesses and sole proprietors that meet the following criteria:
- At least one year in business
- Annual revenue of at least $50,000
- Located in all U.S. states except Montana, Vermont, Tennessee, North Dakota, South Dakota, and the District of Columbia
- 570+ FICO credit score
Line of Credit
A line of credit is structured similarly to a credit card. You receive a specific credit limit, which you can draw from when necessary. It ensures you have funds if an emergency happens, like a piece of equipment needing replacing. You do not need to offer collateral to qualify for a line of credit, but these can be difficult to qualify for.
Business Debt Consolidation Loan
A business debt consolidation loan is a loan that allows you to merge the balances on your business loans, cash advances, and lines of credit. Doing so will enable you to only make a single monthly payment instead of having to make multiple payments for each thing. These can be beneficial, but they also come with some risks. You may not be able to secure a lower interest rate on your consolidation loan, and consolidating could extend the length of your loan, so you pay more interest over time.
Debt consolidation is similar to refinancing your business loans. Still, when you refinance loans, you replace one loan with another, which is different from consolidating your debts into a single loan.
A commercial equipment financing loan is the way to go if your business needs equipment. Businesses can only use this type of loan to buy equipment, though you cannot use them for anything else. You can secure up to 100 percent of the cost of the equipment you buy with the loan. Often lenders will require you to use the equipment you are buying as collateral for the loan, but the interest rates for these loans can be favorable.
FURTHER READING: Business Equipment Financing Loans
Commercial Mortgage Loan
A commercial mortgage loan is a loan to purchase real estate for your business. These loans are advantageous for starting a new business or buying a new location for your existing small business. These can be expensive upfront, and lenders often require good credit. Some will also require the company to have been running for two years, making this a difficult loan to obtain when you start your business.
Startup Business Loan
A startup business loan is designed for a completely new business. They can give you up to $750,000 to help you start your business from scratch. Businesses can use a startup loan for equipment, inventory, payroll, etc. These loans can be challenging to qualify for, especially if you have low credit or few things to offer as collateral.
Business Credit Card
Business credit cards work similarly to personal credit cards. Based on specific criteria, you qualify for a certain limit, and you must make monthly payments. You can use credit cards for many continuing expenses, including utility bills, office supplies, and travel. If you have multiple employees who can spend on behalf of your company, a company credit card can be handy. The interest rates may sometimes be better with credit cards compared to other financing options, but many credit card companies offer purchase rewards.
Personal Loan for Business
When starting, you are able to use a personal loan to finance your business, which many small business owners do. Personal loans are often necessary because many lenders will only give business loans if you have a business history to prove you can repay the loan. However, there can be a considerable risk to the owner's personal assets, and sometimes it can be hard to qualify for a personal loan. They are usually only available for up to $50,000, so if you need more, you might have to seek other financing options.
FURTHER READING: Business Loan Interest Rates vs. Personal Loan Interest Rates: Which is Lower?