Types of Small Business Loans
Starting or growing a small business often requires more money than you have on hand. For many business owners, a loan can provide the extra cash they need. But with so many different types of loans, how do you know which one is right for you?
In this guide, we’ll break down the main types of small business loans. Each loan type has its benefits, so by the end, you’ll have a better idea of what could work best for your business.
Explore small business term loans to learn more about securing funds for long-term projects.
Term Loans
A term loan is one of the most common ways businesses borrow money. With a term loan, you get a lump sum of money upfront and then repay it over a set period, or “term.” This term could range from a few months to several years, depending on the loan details and the lender.
Key Points:
- Loan Amounts: These are usually large to cover big expenses.
- Repayment Terms: Can be short-term (a few months) or long-term (years).
- Interest Rates: Either fixed or variable, depending on the lender.
- Requirements: Often requires a good credit score and sometimes collateral.
Best for Businesses that need a lot of money for a big project, like expanding or buying expensive equipment.
SBA Loans
SBA loans are loans backed by the U.S. Small Business Administration (SBA). The SBA works with approved lenders, like banks and credit unions, to offer loans with better terms than many other loan types.
Key Points:
- Loan Amounts: Varies widely to meet different funding needs.
- Repayment Terms: Often longer than regular loans, sometimes up to 25 years.
- Interest Rates: Usually lower because the government backs them.
- Requirements: You need to meet SBA eligibility, such as annual revenue and credit score.
Best for: Established businesses looking for long-term funding with low interest rates.
Short-Term Loans
Short-term business loans are loans you repay quickly, usually in less than a year. These are good for business owners who need money fast for temporary expenses.
Key Points:
- Loan Amounts: Usually smaller than term loans.
- Repayment Terms: Normally, a few months to a year.
- Interest Rates: Often higher than long-term loans.
- Requirements: Generally easier to qualify for, so it’s a good option for those with lower credit scores.
Best for Businesses needing quick cash flow for seasonal expenses or restocking inventory.
Lines of Credit
A line of credit works like a business credit card. Instead of receiving all the money at once, you get access to a set amount of funds. You can take out as much as you need and only pay interest on the amount you use.
Key Points:
- Loan Amounts: Varies; many offer between $5,000 and $250,000.
- Repayment Terms: Flexible; you can borrow, repay, and borrow again up to your credit limit.
- Interest Rates: Usually variable.
- Requirements: Usually requires a decent credit score and sometimes collateral.
Best for: Businesses that need flexibility to cover ongoing expenses or unexpected costs.
Equipment Loans
If your business needs new equipment, an equipment loan might be the right choice. These loans are specifically for buying equipment like computers, vehicles, or machinery. The equipment itself often serves as collateral, which can make it easier to get approved.
Key Points:
- Loan Amounts: Covers the full or partial cost of the equipment.
- Repayment Terms: Often tied to the expected lifespan of the equipment.
- Interest Rates: This depends on your credit score, but it can be favourable.
- Requirements: Usually based on creditworthiness and the type of equipment.
Best for :
Businesses need to buy or lease expensive equipment for their operations.
Merchant Cash Advances
A merchant cash advance (MCA) gives you cash based on your future sales. You receive a lump sum of money upfront, and the lender takes a percentage of your daily sales until you repay the advance. This option is often costly but accessible for business owners with poor credit.
Key Points:
- Loan Amounts: Based on monthly credit card sales.
- Repayment Terms: These are tied to daily sales so payment amounts can vary.
- Interest Rates: Often very high.
- Requirements: It is more flexible, but high fees make it expensive.
Best for :
Businesses with a high volume of credit card sales who need quick cash but have trouble qualifying for other loans.
Invoice Financing
With invoice financing, you get a loan against the value of unpaid invoices. This is helpful if you’re waiting on customers to pay but need cash now to keep the business going.
Key Points:
- Loan Amounts: Based on the total value of unpaid invoices.
- Repayment Terms: Usually short, as you pay back when invoices are paid.
- Interest Rates: Often lower than merchant cash advances.
- Requirements: Lenders may look at your invoice history and business credit.
Best for:
Businesses with delayed payments need cash to keep things running smoothly.
Personal Loans for Business
Some business owners choose to use personal loans for their business, especially if they don’t qualify for a regular business loan. Since these loans are based on personal credit, they can be easier to get approved for.
Key Points:
- Loan Amounts: Typically smaller than business loans.
- Repayment Terms: Usually 1-5 years.
- Interest Rates: Varies based on personal credit score.
- Requirements: Based on personal credit instead of business performance.
Best for :
New business owners or those with limited business credit history who need quick, smaller amounts of cash.
How to Choose the Right Loan for Your Business
Here are some questions to consider:
- How much money do you need? A large project might require a term loan, while smaller needs could be met with a line of credit.
- What’s your repayment ability? Can you handle short-term repayments, or would a longer-term be easier?
- What’s the interest rate? Always compare rates from different lenders.
- Do you meet the eligibility requirements? Your credit score, annual revenue, and business age may affect eligibility.
By understanding the types of small business loans, you’ll be better prepared to find the right financing. With the right loan, you can get the funds to grow your business and reach new goals!
Find the Perfect Small Business Loan for Your Needs
At Elite Finance Team, we’re here to help you understand your options for small business loans. Discover the best loan types to support your business growth, manage cash flow, or fund a big project.
