Selecting the right type of loan for your small business requires careful consideration. You may find yourself overwhelmed with the sheer volume of qualifying requirements, including loan-to-value ratio assessments, your credit score, and time in business. A loan-to-value ratio is an assessment related to the risk of lending that lenders look at before approving a loan. Selecting an inappropriate business loan type may mean poor value or undesirable interest terms
As an illustration of the above, a startup business loan requires several years of financial history, the owner’s stake in the business, and credit history. Whereas applying for a business acquisition loan presents fewer time-constraining aspects, i.e. an existing cash flow and a credit history. As we move through defining these various options of business finance support, you’ll develop a broad understanding of the best option for you.
The 13 Most Popular Types of Small Business Loans
The table above highlights specific points of the loans we’ll cover but is by no means a complete representation. As a business owner, you know the value of cash flow and the bargaining power that comes with it. These loan options provide different mechanisms to access and repay borrowed funds. We shall elaborate on their particular benefits, limitations, and challenges below.
1. Business Acquisition Loan
Acquisition of an existing business is a considerable task to undertake as an individual and a multinational organization. This is due to the length in the process when initially applying for the loan, and finally, the performance of the loan. The requirements for application may seem daunting and range from your strategy for the business, the valuation of the business, and also negotiating the agreement. Business acquisition loan requirements and the available amounts vary depending on the lender you choose. Some are guaranteed by the SBA, providing an incentive for this loan type.
you interested to know more about business acquisition loans? Read our full review.
2. Business Lines of Credit
A business line of credit is a broad term that includes secured and unsecured lending and also, but not limited to, invoice factoring, based on the credit card process, but with a few notable differences. Typically, a fixed repayment term is attached to this product, making interest rates competitive.
Are you interested to know more about business lines of credit? Read our full review.
3. Commercial Real Estate Loans
Commercial real estate lending is typically tailored to corporations and businesses that own income-generating property assets. Applying for these business loans requires careful consideration and adequate time. Typically, they offer longer payment terms and lower interest rates.
Are you interested to know more about commercial real estate loans? Read our full review.
4. Equipment Financing
Often businesses find that machinery and software-based equipmnet develop your businesses production and performance levels. These items can be expensive to purchase, and obtaining a small business loan will accelerate the process. Business owners with lower credit scores can apply as the equipment provides the collateral against the funded amount. This type of financing option is a famous asset-based avenue.
Are you interested to know more about equipment financing? Read our full review.
5. Franchise Financing
Franchises provide you with established business processes and a track record. Applying for a business loan from the franchisor is an option. Loans amounts vary greatly through franchisors. Some may provide between 25% and 100% of the loan amount, and others may only require your first repayment after the first year of operation.
Are you interested to know more about franchise financing? Read our full review.
6. Merchant Cash Advance
Cash advances for businesses provide funding to existing businesses with cash flows that warrant a loan. Although the premise is that you are advanced cash, merchant advances are technically loans set against the business's credit and debit card sales.
Are you interested to know more about merchant cash advances? Read our full review.
7. Microloans
Microloans are small business loans limited to $50,000 or less. The typical interest rate for microloans is between 12% and 18%. This finance option is a popular offering due to the low loan amounts. Microloans are provisioned by non-profit companies and other philanthropic organizations.
Are you interested to know more about microloans? Read our full review.
8. SBA Loans
The Small Business Administration offers business loan assistance through government-endorsed guarantees to small business applicants. Typically, the SBA offers three programs with varying terms. Versatility is a core function of the SBA, providing an environment for small business owners to flourish. Loans can be used to purchase business property, including furniture and fixtures.
Are you interested to know more about SBA loans? Read our full review.
9. Secured Business Loans
Secured business loans require collateral to be offered by the borrower to offset the lender’s risk. Subsequently, borrowers with lower credit scores apply for these types of loans. Any asset owned by the borrower can be ceded as collateral when needed.
Are you interested to know more about secured business loans? Read our full review.
10. Unsecured Business Loans
Unsecured loans don’t require any collateral. This means that the applicant has a good credit score and a favorable business track record. These business loan types provide lower interest rates. Applicants are typically required to sign a personal guarantee.
Are you interested to know more about unsecured business loans? Read our full review.
11. Business Startup Loans
Startup loans are directed at funding new and emerging business ventures. These loans are critical for small businesses to purchase items for working capital. Working capital items included are office furniture, equipment, and other business expenses. You can find these opportunities through the SBA, equipment financing loans, microloans, and the like.
Are you interested to know more about startup business loans? Read our full review.
12. Short-Term Loans
Short-term loans are characterized by their amortized repayments, including a percentage of interest, over the fixed term. You can access them from banks and via other lending institutes. Depending on the applicant’s credit history, interest rates can be highly competitive.
Are you interested to know more about short-term loans? Read our full review.
13. Invoice Factoring
If you find that you need a quick injection of cash flow with fast processing times, invoice financing will be a great idea. This option forms part of asset-based lending. The basic idea is that you sell your outstanding invoices to a lender, who, in turn, provides a cash advance. The outstanding invoices act as collateral. The borrowed sum is a percentage of the total outstanding invoice sum.
Are you interested to know more about invoice factoring? Read our full review.
Bottom Line
The Small Business Administration provides millions of dollars of funding-guarantees to companies intent to continue operations, or to startup. Various niches and industries benefit from these business loan types.
The landscape for creating a business is more accessible now than it ever has been. Almost three-quarters of American small businesses will require funding at some stage. There’s a loan available for every business, and many lenders and types of loans available for your business.