As a small business owner, you will likely encounter a time in the life cycle of your company when you require additional capital. Be it for a certain project or simply to weather a difficult economic period, you will probably need money in the form of a business loan. The question is not only where do you turn for loans for small business, but also what type of loan should you apply for. In this article we breakdown the various kinds of small business loans available to entrepreneurs looking to procure additional working capital.
Popular loans for small business
As with anything, doing your research regarding the various kinds of loans available is going to be important. You want to be sure the interest rate and terms are amenable to you and suit your company's needs. You also want to ensure that you and the lender are on the same page about your specific financial requirements.
Line of credit
A business line of credit is perhaps one of the most flexible loans you can get. Lines of credit can range widely in terms of how much you can qualify for. And the terms can also vary, with many falling into the 1-2 year category as far as maturity. The good thing about a business line of credit is that it is usually revolving, meaning that once you pay back the amount you borrow, you can then access the line again. And you also only pay interest on what you take out. So for instance, if you qualify for a 50k line but only use 10k of it, you will only owe interest on the 10k that you did utilize.
To qualify for a line of credit, you will generally need a credit score of at least 560 and you need to have been in business for at least a year. Though again, this could change from lender to lender.
SBA Loan
A loan through the Small Business Administration usually comes with lower interest rates than some other types of business financing. That said, these loans can take a while to get—start to finish. This is because the loan itself is guaranteed through the SBA and yet it will be disbursed via a lender qualified to handle SBA loans. So in essence, you are having to fill out paperwork and go through the underwriting process for two separate organizations.
SBA loans can range from 50k to five million. The SBA is backing the loan up to a certain percentage which makes it less risky for the lender. If a small business has previously been turned down for business financing, then an SBA loan may be the way to go.
Through the SBA, you can apply for a few different loan types depending on your needs and business industry. The most common is the SBA loan 7(a/). There are also SBA express loans that can be done in a shorter amount of time and can give you up to 350k.\
Short Term Loans
The short term is also a highly popular form of financing for small businesses. Working with some online and alternative lenders, short-term loans can often be funded within 24 to 48 hours, which is one reason for their popularity. Keep in mind the term for a short-term loan (as the name implies/) is often only between 6 months and 3 years as far as loan repayment goes. Because of this, loan amounts usually cap out at a max of 500k.
Short-term loans are frequently used by small businesses when they need money quickly. This could be for something unexpected that has come up; it could also be for weathering a slower sales season (particularly true of seasonal companies/). Some may use a short-term loan for replacing and/or purchasing equipment.
To qualify you, many lenders will want to see a history of positive revenue along with a track record of having been in business for at least two years—though this may not be the case with all lenders. Online lenders often have less stringent criteria as far as how long you've been in operation.
Merchant Cash Advance
Merchant cash advances may be an ideal solution for those businesses that do a sizable volume in credit card sales. Essentially, you are borrowing against future sales. Upon getting approved for a merchant cash advance, funds will be deposited in your account. You will then immediately start paying the money back through a percent of your daily credit sales.
This is a great option for many small businesses because it is flexible and somewhat forgiving in the sense that when sales are slower, you are paying backless. When sales are up, of course, you will be paying more toward the loan. With this type of business loan too, the risk is less than with some other loan products. And so, this makes qualifying for a merchant cash advance easier than it can be for some other loan types.
Business Credit Card
For companies just starting one of the main financing options available to them is a business credit card. While the amounts available via a card may not be as high as you can get with a loan, it is still a great way to build credit and start to establish a financial history for the company. The key to getting a business credit card is to make sure that you are paying it off each month. This again goes toward establishing a good credit history so that down the road you can qualify for other types of loan products. Another benefit to a business credit card is that the card can be used for just about any type of purchase related to the business—you are not restricted as far as what the funds can go toward. Interest rates can be higher, so pay attention to all terms before getting a credit card of this nature.
First Union Lending offers a variety of loans for businesses. Call today and let's get started!