It’s often assumed business loans are close to impossible to get for all but large companies. But while it is admittedly difficult for small businesses to get financing, there is a growing list of business loans that are available. Many are now outside of banks, which is opening up the entire lending industry. It’s all a matter of what you want to do with the loan and how much you want to pay to get it.
Banks are typically the first place small business owners go for credit. Banks generally offer lower rates than other sources, but they aren’t necessarily the easiest places to get loans. Big banks in particular tend to be difficult places to get business credit, often requiring that you qualify based on your personal credit profile.
Some of the business loan types available at banks include:
Term loans. This is a loan in which you borrow a fixed amount of money for a fixed term and make repayments on a monthly basis. Interest rates on term loans are generally lower than other loan types and are also usually fixed for the duration of the loan.
They are excellent loans for major business purchases, because they are usually for larger amounts of money. They’re typically used to purchase real estate, equipment or business inventory. In fact, they’re often secured by the asset they have been used to purchase.
Lines of credit. This is a revolving line of credit, similar to a home equity line or a credit card. The bank provides the credit line for a specific amount of money, and you are able to borrow against it whenever you need cash. One of the main benefits of this type of loan is it usually carries lower interest rates than traditional credit cards. In addition, a business line of credit is typically unsecured.
Lines of credit are one of the most popular kinds of business loans, because they provide the business owner with a steady source of ready cash. This type of credit can function as something like a business emergency fund.
Working-capital loans. These loans represent short-term financing that will enable you to keep your business running while you look for other sources of capital, including longer-term loans. However, working capital loans have short repayment terms and usually charge higher interest rates.
Equipment loans. These can be set up as either loans for leases that are secured by business equipment, such as computers, copy machines, machinery and business-specific vehicles like trucks.
Since they are secured by the equipment that is either purchased or leased, they’re often easier to qualify for. They have the advantage that they allow the business to spread the cost of major assets over several years, rather than having to pay for it all at once.
Small Business Administration (SBA) Loans
SBA loans can be especially beneficial to business startups, if you qualify. That doesn’t necessarily mean they are easy to get. But if you can, interest rates are typically lower than other loan sources due to the fact the loans are government guaranteed. They are often available through banks, but can also be obtained from other intermediaries.
The SBA offers several types of business loans, including:
7(a) Loans. This is the most common SBA loan type. Loan terms run up to 10 years for working capital, and up to 25 years for the purchase of fixed assets. You can borrow up to $5 million, which is a lot more than you will typically get from a bank or any other source.
Though they can be used to provide working capital, they may be even more valuable for the acquisition of fixed assets. This includes land and buildings, renovations and refinancing of existing debt, for either establishing or expanding an existing business. If you can qualify, this is an excellent loan for the purpose of starting a new business.
Microloans. These are small loans offered by the SBA specifically for upstart businesses. They can be used for similar purposes as those for 7(a) loans, except they cannot be used to purchase real estate or to refinance existing debt. Microloans are available in amounts up to $50,000, and for a term of not more than six years. These loans are typically available through nonprofit organizations, rather than banks and other lenders.
CDC/504 Loans. These loans are specifically for the purchase of major assets, such as real estate and business equipment. The typical financing formula includes a 10% contribution for the purchase of the asset from the business owner. The SBA will provide 40%, while the sponsoring lender covers the remaining 50%.
Though they are not available for working capital or the purchase of inventory, they can be used to renovate existing property or to refinance debt. They have terms of up to 20 years and are available for up to $5.5 million.
Peer-to-Peer (P2P) Business Loans
P2P lending is generally associated with personal loans, but they can also be used for business purposes. In some cases, you can take a personal loan and use it for business purposes, since the loans are usually available for just about any purpose.
However, Lending Club now offers a specific business loan program. They enable you to borrow up to $300,000 for up to five years. The loans come with a fixed rate and fixed monthly payments and will be paid in full at the end of the term. This is unlike many business loan types, which often require a balloon payment at the end of the term.
Lending Club also offers business lines of credit. These functions similar to bank business lines, in that you are granted a credit limit and can borrow against it as you need money. They carry variable interest rates, and each draw against the credit line must be repaid within 25 months.
Lending Club’s business loans and lines of credit have some advantages. For example, they don’t require business plans or projections, nor do they ask for an appraisal or title insurance. And if your loan is for less than $100,000, no collateral is required. When collateral is necessary, it’s usually a general lien against the business, as well as personal guarantees from the owners of the business. Perhaps best of all, there are almost no restrictions on how the money is used.
In order to qualify for either loan type, Lending Club requires that you have been in business for at least 24 months and have at least $75,000 in annual sales. You must also own at least 20% of the business and have a credit score of at least 660, with no recent bankruptcies or tax liens.
The downside of these loans is pricing. In addition to charging an origination fee of between 0.99% and 6.99% — which is not unusual for business loans from any source — they also charge interest rates ranging between 7.77% and 35.11%. This is generally higher than rates you can expect on loans from banks or the SBA.
Online and Alternative Business Loans
Online lenders are appearing all over the web. There are also alternative lending sources, providing funds from individual investors. The types of lenders, as well as the loans available to small businesses, are more diverse than what is available at banks, the SBA and P2P lenders.
Secured Lines of Credit. These are similar to what is offered by banks and by Lending Club, except they are secured. The collateral can be major equipment, inventory or even invoices. The advantage is the credit requirements are often not as strict as unsecured lines of credit. Interest rates on the other hand could be significantly higher.
Short-Term Lines of Credit. These loans can work for business owners who have less than perfect credit. Because they are for short-term purposes, lenders tend to be more flexible with underwriting. Interest rates are determined on a case-by-case basis and depend entirely upon the lender.
Invoice financing. These loans are essentially an advance against your business invoices. The lender will advance you a percentage of your outstanding invoices, typically 85%. The lender will hold the difference between the payment on the invoice and the amount they have loaned to you. In this case, the lender will hold 15% of the invoice amount.
The lender will charge you an interest rate until the invoice is paid. This is usually collected on a weekly basis and may be on the order of 1% per week. Once the invoice is paid in full, the lender will return the withheld 15% to you after deducting for the interest rate charge and the processing or origination fee.
This type of loan is an excellent way to get access to open invoice cash. However, it is an expensive way to obtain financing, particularly considering they are generally short-term loans.
Merchant cash advances (MCA). This is a very common business loan type offered by online business lenders. The amount of the loan is tied to your volume of monthly credit card transactions. The lender will usually loan you as much is 125% of your monthly credit card transactions.
Terms of repayment on these loans varies from lender to lender. Generally however, the lender will advance you the proceeds based on your credit card transaction volume and then take automatic payments from your account on a daily basis. This can be based on either a flat amount or a percentage of your daily credit card activity. Obviously this type of loan works best for businesses with high credit card sales, such as restaurants.
MCAs offer you an opportunity to borrow money without pledging specific business assets. And since the loans are based on credit card volume, your credit history is usually not a factor in making the loan.
The disadvantage is cost. MCAs are probably the most expensive business loans you can get. Annualized interest rates can be effectively in excess of 300% per year. For this reason, you should think long and hard before doing this kind of loan.