If you are a small business owner, you might find yourself in a situation at least once when you need money to grow your business. Whether it is to expand your office space or to buy new equipment, it is essential to know the various business loan options for small businesses.
Considering the high risk and high cost involved, business lenders prefer to tread slow. However, it is a different ball game now with online lenders who have turned the business lending landscape upside down. Small business owners can now avail funds in very little time. However, it is always a bit unnerving to borrow from online lenders you are not familiar with.
Many lending companies have emerged in the past few years. It is hence very tricky for business owners to find the right business loan options for small businesses. Listed below are some questions that you need to ask yourself before deciding which lender you must choose.
• What are yours and your company’s current financial situation?
• What is the amount of money required?
• What do you need the money for?
• What is the amount of collateral that you need to put up to get the loan?
• When do you the need by? (maximum time)
• When will you repay back the loan?
Once you have answered all the questions with sincerity, you will know exactly the kind of loan your small business requires.
Here is a list of top 5 business loan options for small businesses which will help you apply for loan with confidence.
Small Business Administration (SBA) Loans
The U.S. Small Business Administration (SBA) offers six different types of loans, all designed for specific purpose and to meet the financing requirements of different types of business. All of them come with its own parameters.
There is also one loan that is designed for buying major fixed assets, such as equipment or real estate.
While applying for an SBA loan, it is important to remember that the government is not directly offering a loan.
Instead, it sets guidelines for loans designed by its partners, including microlending institutions, community development organizations, and banks. The SBA protects not just the business owners, but also the lenders by guaranteeing the repayment of the loans taken as it covers 75 to 90 percent of the loan.
If you plan to apply for an SBA loan, you can increase the chance of qualifying for a loan by following these simple techniques:
• First and foremost, have a business plan in order
• Provide collateral
• Maintain a list of SBA approved lenders with their minimum requirements
• Make sure all the required financial and legal documents are in place
Even though SBA terms are very favorable to borrowers, the extra paperwork, the long approval duration, and extra fees are the flip side of going in for SBA loan.
Since approval requirements aren’t that stringent, alternative lenders is an ideal business loan options for small businesses. The applications are available online for business owners and the approval decisions take place within hours and the fund is provided in less than five days.
While direct alternative lenders offer money to small businesses directly, lending marketplaces offer multiple loan options from various direct lenders (Example: Kabbage and OnDeck Capital) and lending marketplaces (Example: Biz2Credit and Bizfi).
Alternative lenders are an especially good business loan options for small businesses as you don’t need to have an excellent financial history. Besides, there are not too many restrictions on how use the money. The negative aspect is that interest rates tend to be much higher than those charged by the bank.
Crowdfunding is being considered by many growing entrepreneurs as it gives the freedom to small business owners to raise funds through a collective effort instead of relying on an individual or one company.
Crowdfunding does not guarantee you success, but at the same time, you wouldn’t need to worry about loan applications and collaterals. All you need to bother is about creating a unique pitch to attract investors.
Equipment financing/Equipment loan
Equipment financing is an asset-based loan. It relies on the value of an asset, which functions as collateral.
An asset is something that your business owns (equipment, vehicle, inventory). This again is one among the many good business loan options for small businesses as you don’t need a very good financial track record for availing this equipment loan.
Small business owners can avail a loan of up to 100% of the cost of the equipment and repay it with 8 – 30% interest on top. Moreover, you will need to pay only until the expected lifetime of the equipment.
Short-Term Loans and Medium-Term Loans
A term loan is just this – You borrow a lump sum of cash and use it to grow your business. You repay it on a daily, weekly, or monthly basis until the loan is completely paid off. It is a straightforward arrangement and easy to plan.
Short-term loans are for immediate emergencies but tend to be very costly with an interest rate of 14% or higher.
Medium-Term Loans are traditional term loans and are meant for more established businesses. They have long term lengths and have less interest rate than short-term loans.
The five business loan options for small businesses mentioned above are the most common loan options. Understanding how each loan functions and choosing the best option for you is critical.