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Whether you’re seeking cash flow, expanding your team, covering an emergency, or purchasing equipment, small business loans and leases offer you the capital you need. Read this guide to learn more about the different types of business loans.
How to Get a Small Business Loan
Business loans used to be available only from established banks, with lengthy applications and the highest qualifications. This made getting funding difficult for many small businesses. Now small business owners have more access to capital than ever, thanks to banks, government-guaranteed loans, and online lenders. Generally, if you have good credit, strong revenue, and 5+ years time in business, you're likely to qualify for a small business loan-and one with good terms and rates.
Even if you don't have ideal qualifications, there may still be options for you.
SBA Loans
Small businesses can qualify for SBA loans at low fixed rates when they cannot qualify for a bank loan. In general, these government-guaranteed loans take longer to fund and require a lengthy application, so businesses must meet strict requirements to qualify. Even further, sometimes SBA loans require collateral. Your business' size, age, and goals will determine which SBA loan program you should apply for.
Business Term Loans
Loans for small and medium sized businesses can be customized to fit your business's funding needs. The amount and the terms of the online loan typically range from several months to three years. Small businesses use term loans for specific investments such as purchasing real estate, growing their businesses, refinancing debt, etc. Online lenders provide term loans faster with fewer requirements than traditional lenders.
Business Lines of Credit
A business line of credit allows a company to borrow funds. Unlike a traditional loan, you only pay back the amount you draw each time. This is sometimes referred to as a revolving credit line because you can draw on it again and again. The efficiency gained using business lines of credit is one of the greatest advantages. Secured business loans are backed by collateral, like assets or cash, while unsecured loans are backed only by your personal guarantee. Line of credit interest rates can be lower than bank loans, but go up if payments are late or the credit limit is exceeded.
Small businesses use business lines of credit to access cash when unexpected expenses arise. For young, less established businesses, short-term bridge loans might be better suited, while medium-sized credit lines might be better suited for companies with good credit. A credit line's max amount and introductory period are determined by your business's revenue, credit rating, repayment history, and repayment terms.
Equipment Financing
Purchasing new or used equipment can be financed through an equipment lease or loan, which can be up to 100% of the value of the equipment you're looking to purchase while keeping your payments low and affordable. A business equipment lease or loan is an asset-based structure in which the equipment itself is used as collateral. Terms range from 24 - 84 months depending on the asset class and overall strength of the business. Payments are made monthly.
Down payments of $0 down to 25% may be required for equipment loans. The higher your down payment, the lower the interest rate you're likely to receive. Overall, equipment financing rates typically start at 5.9%, based on the lender, your business’s qualifications, and the equipment you’re purchasing. Many lenders offer equipment financing terms from two to seven years, with some lenders offering terms as long as 10 years, if you make timely payments. Also, some lenders may base loan terms on the anticipated life of the equipment, so if you default, they will still collect their losses.
Equipment leasing is also an option. Although there are some differences between equipment financing and leasing, the main difference is that an equipment loan makes you the owner of the equipment at the end of the repayment period. When leasing equipment, you have the option to buy it at the end of the lease term which allows more flexibility. While the rates you receive will vary, these rates are generally affordable. In addition, you may also be able to save money on the cost of your equipment and your taxes by taking the Section 179 business tax deduction.
Invoice Financing
Generally, invoice financing lenders will advance capital up to 85% of the invoice value, and you will be paid 15% (less fees) when your invoices are fulfilled. This makes invoice financing an easy loan to qualify for, especially if you have invoices to serve as collateral. The costs can be hard to gauge upfront since they depend on when the customer pays. Finance for invoice-based businesses is generally limited to B2B and not really applicable to most B2C businesses.
