Choose Your Best Business Loan
Are you a small business owner looking to get a loan? You have a lot of options. These days, the market is bristling with loan products designed to meet the needs of small business owners, so whether you’re looking to buy and renovate new property, or just need some cash to tide your business over until your invoices are paid or your busy season starts, you can find a loan that will work for you.
There are three main types of business loans available: Small Business Administration (SBA) loans, traditional bank loans, and alternative loans. SBA loans aren’t given out by the SBA, but are guaranteed by it, so that lenders can feel more comfortable funding small businesses. Alternative loan products include merchant cash advances, invoice factoring loans, business credit cards, and business lines of credit.
Traditional bank loans are the hardest to get, but, like SBA loans, they offer lower interest rates and more favorable repayment terms. Learn more about what options you have so you can choose the best loan for your business.
Traditional Bank Loans
A traditional business loan from a bank is probably the first thing that comes to mind when you think of getting a business loan. Traditional bank loans offer the lowest interest rates, and typically the best repayment terms – you can often repay a conventional bank loan over a period of years rather than months, as you might with many alternative loan options. However, repayment schedules are typically shorter with conventional loans than they are with SBA-backed loans. You should also be prepared to make a balloon payment at the end of the loan term.
Traditional bank loans are the hardest for small businesses to get. You have to prove to the bank that your business is established and that it turns a profit. You also have to convince the bank that the loan money will help you make the business even more profitable so that you can afford to pay the money back. Only about 23 percent of conventional small business loan applications are ultimately approved.
SBA loans are backed by the Small Business Administration, but they’re given out by regular lenders and nonprofits aimed at helping small businesses. SBA backing provides an extra layer of financial security for lenders, so they can afford to give out more of these loans. The SBA backs a few different kinds of business loans, including microloans, 7(a) loans, CDC/504 loans, and disaster loans.
SBA microloans are small loans of no more than $50,000, available to new and established small businesses. You can use a microloan to buy inventory; machinery, tools, and equipment; fixtures and furniture; or supplies. You can even use the money as working capital to cover your daily operating expenses while you wait for cash flow problems to resolve.
7(a) loans are the SBA’s main loan program, and are therefore its most commonly awarded loan. You can use the funds from a 7(a) loan to buy real estate or build new structures; purchase equipment, fixtures, furniture, tools, and machinery; refinance debt; start a new business; remodel a building; or even as working capital. These loans typically have a 10 to 25 year term, depending on what you borrowed the money for, and a maximum borrowing limit of $5 million.
CDC/504 loans are real estate loans that you can use to buy buildings, land, or machinery. You can also use one to refinance debt you incurred from growing your business in the past. You’ll usually have to put down 10 percent to get one of these loans. The SBA will put up 40 percent, while your lender will put up the other 50 percent. These loans typically have terms of 10 to 20 years and a maximum borrowing limit of $5.5 million.
Disaster loans are available to small business owners who have had business assets and inventory damaged in a disaster. You can borrow up to $2 million to replace or repair machinery, equipment, inventory, and premises.
Because they require the approval of a government agency, it can take months for an SBA loan application to be approved. If you can afford to wait, that’s fine. If not, you may want to consider an alternative lender – especially if you can’t qualify for a conventional loan.
Alternative Lending Options
Alternative lenders can provide business funding within a matter of hours or days. Applications are typically done online. Your options for alternative business loans include merchant cash advances, which allow you to borrow against your future credit card sales; invoice factoring, which allows you to borrow against your outstanding invoices; and a business line of credit, which allows you to borrow only as much as you need and pay interest only on the amount you borrow. Business credit cards can also provide working capital to help you manage your cash flow.
Alternative lenders will often lend to business owners with lower credit scores, so you can still get the funding you need with less-than-perfect credit. Interest rates tend to be higher for these loan products – interest rates of 25 percent or more are not uncommon for products like merchant cash advances. Repayment times tend to be short, as well – you may find yourself on a 90-day repayment schedule rather than one that stretches out across years. However, you can usually pay back your cash advance or other alternative loan product using the money you’ll make during the repayment period.
Some alternative products, like invoice factoring, may not need to be repaid at all – that’s because you sell your invoices to the lender at a fraction of their value, and the lender gets their money back by collecting on the invoices themselves.
The best loan for your business will depend on what you’re using it for, when you need it, and what you can qualify for. Find the best loan for you and watch your business thrive.