In general, small business loans help businesses access the money they need to operate and grow. However, there are several types of small business loans, and it is important to find the one that best suits your needs.
SBA loans are small business loans guaranteed by the Small Business Administration, including the SBA 7 (a), 504, CAPLines, Export, Microloan, and Disaster loan programs. These loans typically range from $ 30,000 to $ 5 million and come with low interest rates and extended repayment terms, up to 25 years. That said, the qualification requirements are more onerous than for other unsecured government loans, and the application process generally takes longer.
Common types of SBA loans include:
- SBA Loans 7 (a). With maximum loan amounts of up to $ 5 million, the SBA 7 (a) loan program is the main offering of the SBA. Loans are commonly used to purchase real estate, but can also be used for working capital, debt refinancing, and the purchase of business supplies. Current interest rates, as of October 7, for SBA 7 (a) loans range from 5.5% to 11.25%.
- SBA 504 loans. Available up to $ 5 million, SBA 504 loans are to be used for major capital assets, such as existing buildings or land, new facilities, and long-term machinery and equipment. As such, 504 loans cannot be used for working capital, inventory, or other common business uses. SBA 504 loan rates are lower than those imposed by the 7 (a) program and range from approximately 2.81% to 4%.
- SBA microloans. SBA microloans range up to $ 50,000 and are intended to help small businesses start or grow. This may involve using funds for working capital, inventory, machinery, equipment, and other accessories and supplies needed to do business. The rates generally range from 8% to 13%, but this varies depending on the lender.
Term loans are a traditional form of financing that is repaid over a set period of time. Typically, short-term loans range from three to 18 months only, while long-term commercial loans can be extended for up to 10 years. While some term loans are designed for specific uses, such as equipment or inventory financing, term loans can traditionally be used to finance most large business-related purchases. Business term loans are generally available up to around $ 500,000, and annual percentage rates (APRs) start at around 9%.
Unlike a term loan which is paid in a lump sum, a line of credit is a fixed amount that a business owner can access on a revolving basis. This means that the borrower can draw on the line of credit for a specified period of time, usually up to five years. If the borrower prepays part of the line of credit, they can access it again until the end of the drawdown period.
Once the drawdown period is over, the borrower enters the repayment period and can no longer access the revolving funds. Rather than paying interest on the full amount, as with a term loan, a business owner accessing a line of credit only pays interest for what they actually use.
Lines of credit are a good option for businesses that want to access cash as needed for expenses such as unexpected expenses and other cash flow issues. Borrowing limits typically range from $ 2,000 to $ 250,000 and have APRs of 10% to 99%.
Factoring and invoice financing
Invoice factoring is the sale of unpaid invoices from a business in exchange for a lump sum payment in cash. Invoices are sold to a third-party factoring company at a discount, so you won’t get paid in full for the invoices. And, once you sell an invoice to a factoring company, the factoring company takes responsibility for the collections.
However, this form of financing can be an effective way to quickly access cash without having to wait the 30-90 days that customers usually have to pay bills. For this reason, invoice factoring is a useful strategy when you need short-term financing or help managing your cash flow. Typically, invoice finance amounts can go up to $ 5 million with APRs between 10% and 79%.
Merchant cash advances
Merchant Cash Advances (MCA) allow business owners to access a lump sum of cash by giving the lender – often a merchant service company – a portion of future sales receipts. Unlike a traditional business loan, a merchant cash advance and related fees are repaid on individual company sales or through automatic clearing house payments (ACH) on a daily or weekly basis.
As part of this strategy, a business owner borrows a fixed amount of money at a factor rate typically between 1.2 and 1.5. To repay the loan, the business must repay the advance with a fixed percentage of daily credit card sales over an estimated repayment term. A merchant cash advance can be a good option for businesses with high volume sales who need quick access to cash, without qualifying for a traditional business loan.
Equipment financing is a form of small business loan that helps businesses purchase the equipment and machinery needed to start and maintain a business. This flexible funding can generally be used for everything from office furniture and electronics to manufacturing equipment.
Equipment loans are secured by the items purchased, so the amount of a loan depends on the value of the equipment and the amount of the down payment. However, the best equipment finance companies offer terms and limits of up to 25 years and $ 1 million or more.
Interest rates on equipment financing may be lower than those offered by other types of financing and typically range between 8% and 30%. As with other small business loans, rates vary depending on the creditworthiness of the lender and the borrower.