8 Types of Small Business Loans to Consider
Fortunately, there are a variety of small business loans to consider. Let’s dive deeper into the various types of small business loans at your disposal so you can choose the ideal option for your situation.
The Different Types of Business Loans:
1. SBA Loans
SBA loans are government backed loans that are guaranteed by the Small Business Association (SBA). Since they are secured loans, you must pledge your personal or business assets as collateral. The most popular SBA loan is the 7(a) Loan. While terms and conditions vary by loan type, loan amounts go up to anywhere between $350,000 and $5 million.
The SBA also offers Microloans, which provide financing that ranges from $10,000 to $50,000. If you’re a startup, have limited collateral, or simply need a bit of money to get up or running, a Microloan may be a good option.
There’s also the CDC/504 Loan Program, which is designed to help small businesses expand or modernize. It may help you finance large equipment or real estate purchases. CDC/504 loans usually come in larger loan amounts with a cap of $5 million and terms of 10, 20, or 25 years.
2. Business Term Loans
Business term loans are some of the most common business loan types. With business term loans, you receive a lump sum of money upfront. You repay your loan with a fixed interest rate for an agreed upon term. While borrowing amounts terms vary from lender to lender, they usually range from $25,000 to $500,000 with short or long terms.
You can use a business term loan to pay for a large business purchase like a new facility or expensive piece of equipment. There are countless lenders that offer business term loans including various banks, credit unions, and online lenders.
3. Business Lines of Credit
Business lines of credit are flexible because you can borrow as much or as little as you want up to your set credit limit, just like you could with a credit card. You’ll only pay interest on the amount you borrow and be able to draw money whenever you’d like, as long as you don’t go over your credit limit.
If you opt for a secured business line of credit, you’ll have to put up an asset like your property or inventory as collateral. The lender may seize your asset if you default on your loan. While you may take out an unsecured business line of credit, a lender can still require a personal guarantee or lien on your business assets.
Pursuing a business line credit is wise if you’re unsure of how much money you need.
4. Equipment Loans
Depending on the nature of your business, you’ll likely need money to purchase, upgrade, or replace equipment.
Equipment loans are intended to help you do so. You can use an equipment loan for special computers, medical machinery, industrial equipment, phone systems, or virtually anything else you need to operate.
An equipment loan may give you the funds you need to increase efficiency and productivity through quality equipment. Although terms vary, most equipment loans can allow you to finance about 80% of the total price of the equipment. However, you should note that you’ll likely need a 20% down payment to take one out.
5. Inventory Loans
Inventory loans are created to assist businesses with inventory costs. If you rely on inventory to operate successfully, an inventory loan may be worth it. You can use it to cover the costs of apparel or accessories for your clothing store, for example.
Some inventory loans can give you a lump sum of money upfront while others will give you a line of credit. In most cases, you’ll be able to finance at least 50% of the inventory costs upon approval.
6. Bridge Loans
Bridge loans offer short-term financing that may range from a few weeks to a few years. If you’d like to bridge the gap between your shortage of funds and business expenses, they can help. Since many business loans take weeks or even months to approve borrowers, bridge loans offer fast funds to help businesses bridge their financial needs.
A bridge loan can give you the opportunity to receive the money you need to pay for immediate expenses while you wait for longer term financing. It may be useful if your tax bill is higher than expected, you need to cover some costs during a low period, or you want to take advantage of time-sensitive opportunities to grow your business.
7. Merchant Cash Advances
A merchant cash advance can give you an upfront sum of cash in exchange for a portion of your future credit or debit card sales. They may make sense if you need money quickly as most merchant cash advances deposit funds 24 hours after approval.
While merchant cash advances offer one of the fastest forms of business financing, they often come with a high annual percentage rate (APR). If you borrow more than you can afford, a merchant cash advance can easily steer you into a cycle of debt.
8. Invoice Factoring
Invoice factoring is when you sell all or some of your outstanding invoices at a discount to a factoring company. Here’s how it works: You provide products and services to your customers as you normally would and invoice them for your work. Then, you “sell” the outstanding invoice to a factoring company. The factoring company pays you anywhere from 80% to 90% of the invoice value.
Your customers will pay the factoring company directly, instead of you. Once the factoring company has been repaid in full, they’ll pay you the remaining invoice amount less their fee. If you have cash flow issues because your customers tend to pay at different times, invoice factoring may be the right choice.
Conclusion: Shop Around for the Best Business Loan for You
Not all types of business loans are created equal. In fact, they vary significantly based on loan type and lender. Therefore, it’s in your best interest to do your research.
We suggest shopping around and comparing the pros and cons of each option available to you. Move forward with the loan that works best for your unique industry, financial situation, and future goals.
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.