Small businesses are the backbone of the economy. However, they often face challenges in obtaining financing to start, expand, or sustain their operations. Fortunately, there are various types of small business loans available to help entrepreneurs achieve their goals.
Throughout this article, we will explore some of the most common types of small business loans available and how they can support your business’s growth strategy.
Choosing the right loan can seem overwhelming at times, but there are only a few steps to consider. The first thing you will need to do is decide what purpose this loan will serve your business. Do you need to buy new equipment? Hire new employees? Refinance some debt? Repair a vehicle? An important aspect for you may be how soon you need the loan. Some small business loans take longer, while others are much quicker to process. However, there are loans specifically designed to handle many problems small businesses face.
Another step to consider is: What loan does my business qualify for? This will help you calculate and determine how much of a loan you can take out and repay.
While you are researching this, you could start eliminating or choosing lenders that meet your requirements. This step will help you narrow down which lenders are willing to work with you and that have products that your business needs.
Now, let’s explore some of the more common loan options available to small businesses.
Term loans are one of the most traditional types of small business loans. They are also the easiest to understand because of the basic elements involved. All you do is borrow a lump sum of money from a lender and repay it over a fixed period with interest.
Term loans can be secured or unsecured, meaning they may require collateral or not. You can also use them for various purposes, such as purchasing equipment, inventory, real estate, or expanding operations.
SBA loans are loans that are partially guaranteed by the Small Business Administration (SBA), a federal agency that supports small businesses. These loans are offered by approved lenders, such as banks and credit unions, and have favorable terms and rates for borrowers.
You can use SBA loans for many purposes, such as working capital, debt refinancing, disaster relief, or exporting. However, SBA loans also have strict eligibility criteria and application processes that may take longer than other types of loans.
A line of credit is a type of revolving loan that allows small businesses to access funds up to a certain limit as needed. Unlike term loans, a line of credit does not have a fixed repayment schedule or interest rate.
Instead, borrowers only pay interest on the amount they use and can replenish the available funds as they repay the principal. A line of credit can become secured or unsecured and you can best use them for short-term needs, such as cash flow management, payroll, or emergencies. In some cases, you can access a line of credit quicker than you can get a secured term loan.
Invoice financing is a type of loan that allows small businesses to get an advance on their outstanding invoices from a lender (like a payday advance from your employer). The lender pays a percentage of the invoice to the borrower and collects the full amount from the customer later. The borrower (you, the small business) pays a fee to the lender for the service.
Invoice financing can help small businesses improve their cash flow and avoid late payments from customers. However, invoice financing also involves giving up some control over the invoicing process and may affect customer relationships. This can be a risky financing option for your business.
A merchant cash advance is a type of loan that allows small businesses to get an advance on their future credit card sales from a lender. The lender (the credit card company) pays a lump sum of money to the borrower (again, you, the small business) upfront and deducts a percentage of the daily credit card sales until the advance is repaid.
An MCA can provide fast and easy access to capital for small businesses that have high-volume and low-margin sales. The downside to merchant cash advances is that they have high fees and interest rates that may reduce profitability.
Small business loans are essential tools for entrepreneurs who want to grow their businesses and overcome financial challenges. However, choosing a loan can be challenging and overwhelming. Our team at Foster Financial CPA can guide you through the process and give you the best options that help you and your business meet your goals.
If you would like to learn more about small business loans or need expert advice before choosing a loan, contact us today for a free consultation.
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