The Top Types of Business Loans for Different Industries
If you’re a driven individual who is a current or aspiring entrepreneur, you likely need some money to start or grow your venture. Fortunately, there are a number of business loans at your disposal.
The types of small business loans you take out will highly depend on your industry and the nature of your business, which we’ll explain further in this post. Before starting the loan application process, we suggest evaluating different types of business loans.
The Best Small Business Loans for Different Types of Businesses
Every business is unique. Therefore, a small business loan that’s ideal for another company may not necessarily be the best option for you. The following components can affect the type of loan that you should select:
- Your industry
- How you run your company
- Your current financial situation
- Your business’s long-term goals
To make this task a bit easier, we’ll dive deeper into the best small business loans for different types of businesses:
The Best Loans for Food Service Businesses
Whether you own a restaurant, fast food joint, catering company, or food truck, having access to financing can be very beneficial.
- Equipment loans: The reality is that running a food service business requires a great deal of equipment. Often, this equipment can cost thousands of dollars that you may not have on hand.
With an equipment loan, you can purchase stoves, ovens, freezers, and any other equipment your business needs to operate. However, you should keep in mind that if you default on an equipment loan, your lender will be able to repossess your equipment.
- Working capital loans: While many business loans are taken out to buy long-term assets like equipment, working capital loans are designed to finance the everyday operations of a business. A working capital loan can help you order food and beverage ingredients, make payroll, and avoid cash flow gaps that are common in the food service industry.
- Traditional bank loans: Most people are surprised to find out that banks will lend money to food service businesses. Although a bank loan isn’t the quickest way to obtain financing, it may come with a low interest rate. If your credit report reveals that you have good or excellent credit and you don’t mind waiting to apply for a small business loan, this may be a good option.
The Best Loans for Hotels and Hospitality Companies
If you own a hotel, bed and breakfast, or resort, you are in the hospitality industry and should consider these types of loans for small businesses.
- Construction loans: With a construction loan, you can finance the hefty costs that come with building or renovating a hotel or other hospitality business facility. If you select this type of loan, you’ll work with your business lender to create a draw schedule.
Every time your construction project hits a new milestone, you’ll be able to “draw” money from it. For example, you may initially draw money so that the land can be cleared and developed. Your second draw may arise when the foundation is poured, and so on.
- Bridge loans: Hence their name, bridge loans are designed to bridge the gap between when you start a project and finish it. If you take out a bridge loan, you can expect a higher interest rate as it is considered to be a riskier financing option.
While terms vary from lender to lender, most bridge loans last about 36 months. A bridge loan is essentially a short-term loan you take out against your current property so you can finance the purchase of a new property like a hotel for your business venture.
The Best Loans for Startups
If you’ve recently opened a business, it’s known as a startup. One of the keys to a successful startup is securing the financing you need to get up and running. Here are a few examples of loans that can be used to fund startup ventures.
- Business credit cards: Most of the business credit cards you can use to afford startup expenses offer rewards programs. While the credit limit you get approved for will depend on your credit history, you may be able to land tens of thousands of dollars of available credit.
In addition, some business credit cards come with a 0% intro APR offer where you won’t have to pay interest for a certain period of time and can pay for large startup purchases interest-free. There’s no shortage of business credit cards available so do your research and find one that meets your unique needs.
- Franchise startup loans: If your startup involves buying a franchise, you may want to go with a franchise startup loan. Since it costs a lot of money to open a franchise such as a Subway or McDonalds, a franchise startup loan can be an invaluable resource.
Keep in mind that while lenders are usually more lenient when it comes to lending money to franchise owners, you’re not guaranteed funding. Your lender may ask to review your franchisor’s disclosure document (FDD) to determine the success rate they can expect.
The Best Loans for Service Industries
If your small business provides an intangible value such as customer service, experience, or management, you’re in the service industry. Since you likely have less inventory and construction costs than those in other industries, these loans are worth considering.
- Small business lending: If you’ve provided services to your customers and are awaiting payments, small business lending is a great option. Essentially, its purpose is to assist you with business cycles as it allows you to repay your loan once you’ve been paid for the services you offered.
Fora Financial offers business financing to many small business owners in the service industry. This option can make your life easier when you’re experiencing cash flow shortages.
- Working capital loans: The purpose of a working capital loan is to help your service company pay for its everyday operations. For example, if you own a tax firm and you tend to experience capital shortfalls outside of tax season, a working capital loan may make sense. This type of loan is a wise move for small businesses that often experience ebbs and flows or are sensitive to economic conditions and may struggle when it is down.
- Professional practice loans: A professional practice loan may be the way to go if you provide medical, legal, or accounting services. It can help you afford marketing and advertising campaigns or initial equipment. Also, you can use this financing to acquire another professional practice.
The Best Loans for Retail Businesses
The retail industry is diverse. If you’re in it, you likely purchase products in bulk from various manufacturers and then sell them consumers for a markup. Whether you sell clothing, electronics, furniture, or anything else, you may find these types of business loans beneficial.
- Inventory loans: An inventory loan can help you purchase products for your small business. Without it, you may have trouble keeping your shelves stocked during busy seasons or purchasing products in bulk at discounted rates.
If you take out an inventory loan, the products or inventory you buy will serve as collateral for the loan amount, meaning if your retail establishment doesn’t sell the products and is unable to repay the loan, the lender will take them back. Since collateral is involved, inventory loans are typically easier to qualify for than other options.
- Business lines of credit: If your goal is to find a business loan that offers flexibility as well as a high monetary value, a business line of credit may be worth considering.
Essentially, a business line of credit is a credit card with a very large credit limit. The most significant benefit of a business line of credit is that you can borrow up to a certain limit and only pay interest on the portion of the money you actually borrow.
Therefore, if your startup gets approved for a $100,000 line of credit and you end up using less than half of it because you land a better deal on retail products, you’ll save money on interest. This isn’t usually an option with a traditional small business loan.
The Different Types of Loans for Small Businesses
The most common types of loans for all types of small businesses are standard bank loans and SBA loans. Here’s some more information on each one:
Standard Bank Loans
A standard bank loan is a traditional loan that you obtain from a bank. If you have a high credit score and don’t mind waiting up to six months or even more for approval, a standard bank loan may be a good fit.
It can allow you to get lock in lower interest rates than other lending options and leave you with lower monthly payments while allowing you to save a significant amount of money overall.
Although you’ll have the option of a short or long-term bank loans, short-term loans are recommended if you are a new business owner and are unsure of how things will work out. Keep in mind that if you get a standard bank loan, you may also require collateral like your house or car that the lender will take if you default.
There are a number of banks that offer these loans, so it’s a good idea to consider all of your options. You’ll find that while big banks tend to have strict lending rules, smaller banks in your local area may be more flexible and willing to work with you.
So, if you’d like to gain access to a higher amount of capital and secure lower rates, a standard bank loan may be a viable option.
However, if you can’t wait for an approval or don’t have good credit, you should consider other funding options. You may also want to avoid a standard bank loan if you don’t want to put up collateral.
Small Business Administration (SBA) Loans
The Small Business Administration works with banks and other online lenders to help small business owners secure funding. Due to the fact that SBA loans are backed by government agencies, they help lower the risk for lenders who are issuing the loan.
SBA loans also come with a variety of advantages you may find beneficial. For example, they offer longer term lengths of up to 10 years, interest rate caps, and lower down payment requirements. Also, as an SBA loan holder, you can enjoy access to various business tools such as seminars, courses, and networking events that can help you expand your knowledge as a business owner.
Compared to other types of small business loans, SBA loans are difficult to qualify for. If your business has two years of business history, you have a personal credit score of 640 or higher, and you’ve earned at least $100,000 in annual business revenue, your business meets the minimum requirements for an SBA loan. You’ll also need to provide paperwork such as your business plan, statement of purpose, and financial documentation for yourself as well as your co-owners and anyone else associated with your business.
In the event you can’t obtain an SBA loan, don’t worry; you may be able to in the future if you take these steps:
- Improve your personal credit
- Grow your business revenue
- Establish a longer business history
Alternative Business Financing Options
A few alternative small business loan options we haven’t discussed include:
- Merchant Cash Advance: With a Merchant Cash Advance (MCA), you’ll receive a lump sum of money in exchange for a percentage of your future credit card sales.
If your small business has a steady stream of credit card payments, you may want to consider this option. The greatest advantage of an MCA is that it can help you meet your short-term business obligations without putting pressure on your cash flow.
In addition, this is one of the fastest ways to secure funding and your payments will be taken straight from your account so you don’t have to worry about any late fees. On the downside, MCAs often come with high rates and restrictive terms you should familiarize yourself with before signing on the dotted line.
- Invoice Factoring: Although invoice factoring is less popular than other types of business financing, it has been around since the Roman empire. It involves a factoring company buying the receivables generated by your unpaid invoices.
Essentially, this type of business financing is a transfer of assets rather than a loan. It can give you the chance to get fast financing in a week or less and a viable option if you have average or bad credit.
In addition, it serves as a way for you to pay your employees and vendors and reinvest in the operations and growth of your business earlier than you’d be able to if you had to wait for your customers or clients to pay their invoices in full.
At Fora Financial, we offer a variety of business tips to help current and aspiring business owners like you succeed.
Frequently Asked Questions
What is an SBA loan?
An SBA loan is a loan from a lender that is backed by the Small Business Administration. It offers a number of noteworthy perks including longer term rates, interest rate caps, and lenient down payment requirements.
How do I know which loan is right for my small business?
Your business’s industry, as well as its current situation and future goals can help you decide on the ideal small business loan. This guide breaks down the various loan options available for common industries so it’s a good idea to read it.
Does my credit matter if I want a business loan?
In most cases, your personal and/or business credit will be evaluated before a lender extends you a small business loan. The good news is that some types of business financing such as business lines of credit, for example come with more lenient credit requirements than others like SBA loans.
Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.