Have you started the process of researching business loans for small businesses? Perhaps, you’re going to start by making a visit to your local bank to apply for a Biz loan?
Not so fast!
The first step in obtaining financing is understanding the different types of loans for small business to determine which one is right for you. Not all loans for businesses are created equal, and each type offers distinct advantages and disadvantages that you need to weigh before you start the application process. Here are some of the most common types of loans available for small businesses.
The Small Business Administration (SBA) offers several types of loans for small businesses. These loans are partially backed by the government, but are issued through a bank using regular banking guidelines.
· The SBA 7 is the most common type of small business loan, and up to $1 million can be borrowed. Typically, the SBA guarantees no more than 75% of the loan value, and the maximum amortization is six years.
· The SBA MicroLoan is to purchase computers, equipment, and other items to launch a business. You can borrow up to $25,000 for up to six years. Interest rates will not exceed the prime plus 4%.
· The SBA 504 is for purchasing real estate, and is designed to increase the level of employment at a company. The guarantee value can be as high as 90% of the appraised value of the property.
· The SBA Fastrak Loan is offered through some of the larger national banks without the need for approval from the SBA. Banks can approve this type of loan up to $100,000, and the SBA will guarantee up to 50% of its value.
Line of Credit
Also called operating loans, working capital loans or overdraft protection, these loans are flexible with your day-to-day cash flow needs. The amount you are able to borrow typically hinges on your accounts receivable. This is typically not the type of loan you want if you’re going to be purchasing inventory. Cash businesses such as retail stores typically do not qualify for this type of funding.
The most traditional type of loans for small businesses, term loans are offered by both large national, as well as smaller community banks. Term loans have monthly principal and interest payments with the principal amount decreasing each month. This type of loan is usually used for purchasing long-term assets such as computers or equipment and the amortization period will often be less than five years.
In some cases, it may make sense to lease rather than buy equipment. In these situations, these items are owned by a financial institution or third party and provided to you for a set period of time. The value determined will vary depending on the resale value and the type of asset.
Many small business owners think of credit cards as a type of loan. And, they can definitely be a convenient way to pay for necessary business items like office supplies and travel expenses. However, because the interest rates are so high, they should only be used if and when they can be paid off quickly.
Alternative Business Loans
While not quite like traditional loans for small business, alternative business loans can be particularly useful when you need funds quickly to purchase inventory or to hire help during a busy season. Kabbage is a provider of this type of small business funding that enables a business to be approved for funds in just minutes and to access it via PayPal when they need it.
By considering what you specifically need funds for and evaluating how you will pay off any debt incurred, you can quickly determine the best type of loan for your small biz that you need. And, as your business evolves, you may find that the type of financing you need may change dramatically. So, it’s good to keep an open mind and a watchful eye out for financing options to take advantage of the best funding opportunities to help your business grow.