Ever dreamt of starting your own business but worried about funding? Or maybe your existing business needs a boost? You’re not alone. Many small businesses struggle to secure financing, so they opt for small business loans for secure funding. Navigating the various loan options available can feel overwhelming. 

With the right financing strategy, you can access the working capital required to turn your vision into reality or take your business to the next level. This article provides a clear overview of different small business loan types to help you find the best fit for your needs.

What is a Small Business Loan

A small business loan is a financing tool for startups or businesses needing funds to expand. Lenders, such as banks or online financial institutions, provide the business with a lump sum of capital.  

In return, the business agrees to a repayment schedule that typically involves fixed monthly installments over a predetermined period. These payments include both the granted loan amount borrowed and the accrued interest. There are many loan options to pick from. But before choosing one, check on your business’s financial situation first. You may seek advice from a financial institution like the services from Credibly, as they can match you with suitable loan funding options.

Traditional Loan Options

Small business owners start financing by exploring conventional lending sources offering established loan structures.

1. Term Loan

A term loan is comparable to a personal loan but specifically designed for businesses. This loan gives you a lump amount of money upfront that you pay back with interest in regular payments over a fixed period, usually 2-5 years. Interest rates can be variable or fixed.

2. Revolving Credit

Unlike installment loans, where you borrow a lump sum and repay it in fixed amounts over time, revolving credit offers greater flexibility. Revolving credit works like a business credit card, granting access to a pre-approved borrowing limit. You can tap into this line of credit as needed, only paying interest on the amount you borrow.

Regarding payment terms of installment vs revolving credit, revolving credit is short-term, often under one year, while installment loans typically last between 2 to 5 years.

3. Equipment Loan

Equipment loans specifically finance the purchase of major things like machines, vehicles, or software a business needs. With the purchased equipment acting as collateral, you can take advantage of better loan terms and interest rates than regular small business loans. Equipment loans are usually mid-term installments paid back over 3-5 years.

4. SBA Loan

An SBA loan is backed partially by the government through the Small Business Administration to encourage lending to small businesses. Banks and lenders offer these loans in partnership with the SBA, featuring long repayment terms over ten years, typically along with low, fixed interest rates. SBA loans require good credit and collateral.

5. Commercial Real Estate Loan

Commercial real estate loans allow small businesses to buy or build office spaces, retail stores, or warehouses from which they operate. Terms depend on the type and size of the property but are generally long-term.

Alternative Financing Options

In addition to traditional lenders, small businesses today can get funds from more diverse sources, such as online companies and other financial models.

1. Merchant Cash Advance

A merchant cash advance quickly gives you money upfront based on a portion of your future credit card sales, but the fees and rates are much higher than a small business loan.

2. Invoice Factoring

Invoice factoring means selling your outstanding customer invoices to another company for immediate cash, but you sacrifice a percentage of what those invoices are worth.

3. Invoice Financing

Invoice financing borrows money against unpaid customer invoices instead of selling them entirely. You repay after customers pay their bills along with interest fees.

4. Microlending

Microlending offers small business loans from non-profit groups trying to help small companies or startups. The loan amounts are lower, and repayment periods are shorter than bank loans.

5. Merchant Cash Advance (MCA)

It’s like a loan for businesses, but instead of getting a lump sum, you receive an advance on your future credit card sales and repay it with a portion of each sale.

6. Crowdfunding

This is like raising money from a large group of people online, usually for a creative project or cause you care about.

7. Collateral-Based Loan

This type of loan requires you to offer something valuable, like a car or house, as security. If you don’t repay the loan, the lender can take that thing to get their money back.

Reasons to Seek Small Business Funding

Here are four reasons why your business might need funding: 

1. Starting Up: When you first start your business, you’ll need funds for permits, insurance, equipment, and maybe even a website. This money helps you get your business off the ground.   
2. Keeping Things Running: Every business needs money to cover everyday costs, like rent, supplies, and paying employees. This is called “working capital.” Keeping your business running smoothly can be tricky if you don’t have enough working capital. 
3. Business Expansion: Maybe your business is doing well and wants to expand. This could mean opening a new location, hiring more people, or creating new products. Funding can help you cover the costs of growing your business. 
4. Making New Stuff: If you have a great idea for a new product or service, you’ll need money to bring it to life. This could include costs for research, development, and manufacturing. 

It’s a good idea to explore your options and find the type of funding that’s right for your business. However, be aware of different factors when choosing a loan to assess whether securing financing through a business loan is the best option for your thriving business.

Consider These Factors When Choosing a Loan

When finding the right financing for your business, compare options closely, looking at important details like cost, timing, and flexibility.

• Loan Purpose: What do you need the funds for? Choose a loan that matches with your needs, like working capital, equipment purchase, or real estate acquisition. 
• Qualification Requirements: Review the eligibility criteria for each loan option to ensure your business meets the requirements, such as credit score, financial history, and business plan. 
• Loan Amount: Determine the money you need and choose a loan option that adequately covers your requirements. 
• Repayment Terms: When assessing repayment provisions, carefully weigh both the duration of the loan and your capacity to submit timely installments without straining cash flows.
• Interest Rates and Fees: Compare interest rates and associated fees from different lenders before deciding. Lower interest rates and minimal fees translate to lower total repayment costs.

Conclusion

With various financing options now available, small business owners have an unprecedented opportunity to secure the necessary capital to turn ambitions into reality. By educating yourself on the pros and cons of traditional and alternative lending solutions, you can make informed funding decisions tailored to your growth goals and cash flow capabilities.

Partner with patient lenders willing to support your journey in responsibly scaling your venture. The rewards of entrepreneurship come to those willing to learn, adapt, and explore new territories.