To make money, you’ll probably need to spend some money; most of the time, this means that small business owners need small business loans.
This can mean different things to every small business owner. Luckily, there are lots of different ways, methods, and means to acquire the money you need to get your business on the right track.
Here are ten different types of business loans, why you should consider them, and why they might not be right for everyone.
The SBA, or the Small Business Administration, is a federal agency created to help small business owners by providing resources, government contracting, and, most pertinent here, providing loans. SBA loans are issued by banks, but guaranteed by the SBA, and with the backing of a government agency, the lower rates and more generous terms of these loans can allow business owners to get a head start.
The biggest benefits and drawbacks of SBA loans all stem from their backing from a government agency. SBA Loans typically have lower down payments, long repayment terms, and lower interest rates compared to other types of loans covered here.
However, they’re also difficult to qualify for and the legwork is extensive and long. Frequently, banks will not give SBA loans to startups, or to those with a low credit score. They can require a certain amount of cash on hand or that founders have a certain amount of experience in the field. Your business may need to have been in operation for a certain amount of time while turning a certain profit.
That having been said, for many business owners, SBA loans are a powerful tool to acquire a larger loan at a reasonable interest rate.
Personal loans can be helpful and effective when used as a small business loan, but they maximize risk to the owner or founder. How’s your credit score? Can your score afford the significant damage you’d incur if your business doesn’t pan out?
If you’re a small business owner with a high personal credit score, going out and getting a personal loan can be a perfect strategy. They’re faster to acquire than SBA loans, don’t carry the same requirements and terms as SBA loans, and can give you more flexibility with what you do with the money.
On the other hand, while an SBA loan can be as large as several million dollars, personal loans are almost always smaller and with a higher interest rate. In addition, if your business doesn’t succeed, you’d be on the hook for the remaining loan, which could devastate the credit score you’ve been working so hard to build. In addition, if you do repay the loan on time and in full, you wouldn’t be building business credit at all – all the benefit would go to your personal score.
Term loans are exactly what they sound like: a lender provides you with a certain amount of money at a certain interest rate over a certain amount of time.
These loans can be a boon to a business for the same reason a personal loan can be a boon to an individual. As long as payments are made on time and in full, the business’s credit rating will improve, making future capital easier to acquire and pay off.
For some business owners, a loan is required only as a means to get a piece of expensive equipment. If that’s the case, an equipment loan is a smart move.
For a term loan or a personal loan, the lender may not have any collateral held against the debt; the lender of an equipment loan does. That simple fact means that lenders can afford to be considerably less tight when it comes to approving equipment loans. If the business can’t afford payments, they can just take the equipment back.
There are, of course, possible downsides to equipment loans. If the equipment in question is something like a computer (or computers), you run the risk of still making payments down the road on outdated equipment. In addition, such loans don’t allow for any flexibility in use, so if you need money for any operating expense outside of the equipment, you’re still going to need funding.
But if your big expense is a physical object, an equipment loan might be your best course.
There are numerous non-profit organizations designed to help small business owners. Applications to these lenders can be complex and difficult, but these lenders have been put in place specifically for businesses which are small, in disadvantaged areas, or unable to get help from larger, more traditional lenders.
A non-profit loan isn’t for every business. These lenders may only want to lend to companies operating for what they consider to be social good, or they may have requirements with regards to a company’s mission. In addition, these loans are typically small (under $50,000).
But there are benefits to the non-profit route. The interest rates are often extremely low and the organizations lending money may also offer resources like holistic consultations or training workshops.
If your company doesn’t need much money and fits in with a lender’s mission, it may be worth the time and research it takes to apply and earn a loan from a non-profit.
Business Lines of Credit
Business lines of credit are similar to a term loan, except that a business line of credit allows a business to borrow up to a limit and only pay interest on the amount drawn.
These terms make business lines of credit similar to business credit cards (see below), but differ in a few ways. First, a business line of credit usually requires collateral, unlike a credit card. Also, business lines of credit typically allow access to cash. They have lower interest rates, and don’t usually require monthly payments.
All these traits make business lines of credit a smart choice if you’re going to have repeated cash flow issues and will need to borrow smaller amounts more consistently.
Business Credit Cards
Business credit cards, on the other hand, operate just like personal credit cards. You pay a relatively (compared to business lines of credit) high interest rate, but pay interest only on what you borrow.
The transactions and payments on a business credit card affect your business’s credit rating instead of your personal score, and the business’s credit card’s limit tends to be much higher than a personal card.
If you’re considering whether to do a business line of credit or a business credit card, remember that the line of credit operates much more like a traditional loan. The funds are deposited as cash, you pay over the course of months, and the credit maximum is far higher.
Merchant Cash Advances
A merchant cash advance is a sum of cash provided up front against future debit and credit card sales. An MCA is typically one of the riskier propositions for both lender and borrower, so do diligent research before seeking one out. In exchange for that risk, you’ll get an extremely fast loan.
In a merchant cash advance, a lender will dole out a certain amount of cash up front. For example, you might receive an MCA of $80,000. In exchange, you agree to pay back $120,000 by paying a certain percentage (as high as 35%) of each credit card transaction.
For borrowers, that system has positives and negatives. As you make more money, you’ll be paying more to the lender, and making payments on a day by day – or transaction by transaction – basis can create issues with cash flow, particularly if your business operates primarily through credit and debit cards.
MCAs typically have higher interest rates than usual lenders as well. But they’re fast, simple, and available to borrowers with poor credit, since repayments are made through individual transactions.
Finally, there’s invoice financing, which can be useful for a business with large transactions and slow payments.
Invoice financing is the act of using unpaid invoices as collateral to receive cash from a lender. It’s quick, but the interest rates are high. Lenders will typically advance a business owners a high percentage of the unpaid invoice and hold the remainder. Then, as you accrue fees with the lender (typically regarding how long your customers take to pay), the lender will take that money from the remaining percentage of the invoice total.
If your customers are typically slow to pay, invoice financing could be an effective method of regularizing cash flow. But using invoice financing means that you’ll never see the full amount of an invoice, and slow-paying customers could cost you more than just time.
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