According to the Federal Reserve, the average business loan clocks in at over $600,000. As a small business owner, that figure may make your eyes pop.
This is especially true if you’ve been turned down for a loan from one of the big banks. If you’re filling out loan applications, you may wonder if you’ll qualify for funding.
One of the keys to securing a loan is making sure you apply for the right type of financing. There are many different types of business loans. Each can help your business in a different way.
You may not need a loan as large as $600,000. There are loans designed for very small amounts. Business owners use other loans to buy equipment or finance day-to-day expenses.
Analyzing your needs is the first step to finding the right loan option for your business. This guide will walk you through seven different types of loans. With it in hand, you can evaluate your needs and decide which type of loan might be right for your business.
1. Equipment Loans Finance Machines and Devices
Whether you’re running a manufacturing business, starting a farm, or setting up an office, you need equipment.
In an office, you might need a new computer or a printer. On the farm, you may need to buy equipment for tilling the earth. A factor might need to buy several machines, such as extruders or packaging equipment.
As the business expands, you’ll need to invest in the infrastructure and equipment to support it. Growth can tax a business’s financial resources. You may not have enough cash flowing in to fund these purchases and keep operations running smooth.
Even if you do have enough in the budget, you might want to consider a loan to finance equipment. It can make upfront investments easier to manage, and there may be tax incentives as well.
An equipment loan can cover part of the purchase or the entire amount. Since the equipment itself is collateral, lenders often charge lower interest rates. The equipment provides some reassurance they can recoup their investment.
Equipment loans are often like auto loans in terms of how long you’ll have to repay them. Many lenders will impose timelines of five years or less.
2. Working Capital Loans for Day-to-Day Expenses
Most small business owners say cash flow is a top concern. In fact, poor cash flow is one of the leading causes of business failure in the US.
Almost every business can expect to hit a rough patch at some point. Maybe work slows down or clients don’t pay as fast as you hoped. Unexpected growth or expenses can also make it harder to manage those day-to-day costs.
If you need to fund payroll or you have bills stacking up in AP, a working capital loan could be the solution. This type of business loan is usually short-term. It can help you weather the storm, then get back on your feet in short order.
Working capital loans and other short-term options usually have higher interest rates. This is because the payment timelines are so short, often under 18 months.
Working capital loans may be as small as $2,500, but they can be much, much larger as well. If your concern is with your everyday business expenses, this could be the right choice.
3. Types of Business Loans for Bad Credit
If you or your business has a bad credit score, you may wonder what different types of loans are available to you. A poor credit score can make it much more difficult to get a traditional loan. Even if you do qualify for one, you may face higher interest rates or more restrictive terms.
There are some options for businesses with bad credit. One of those may be merchant cash advances. This type of business loan gives you access to cash now, based on future credit card sales.
Merchant cash advances look at future sales, not your past behavior. This is why they’re sometimes a good choice for business owners with bad credit.
The biggest drawback of merchant cash advances is usually the interest rate. Some lenders charge lower rates, but others charge more than 100 percent interest on the loan. It’s often wise to look at different types of loans before choosing this option.
Another choice might be invoice factoring. You sell your invoices to a third party, who gives you the cash up front. They then collect from your clients.
Since this cash advance draws on your account receivable, your credit score is less of a concern. It’s also a good option to increase cash flow if clients have been late paying their bills.
4. SBA-Backed Loans Help Small Business Owners
If you apply for a traditional loan, you’ll likely need to provide some guarantees to the lender. This usually takes the form of collateral. Collateral helps the lender collect if you can’t repay the loan.
Lenders often see small business loans as a risky venture. Even if you have collateral, they may not want to extend a loan to you. You may not be able to qualify for the amount you want.
The Small Business Administration could help you get a loan. The SBA backs loans for small businesses, guaranteeing at least part of them. This can assure lenders that they’ll be able to claim at least part of the loan if your business happens to default.
Getting an SBA-backed loan is like applying for a traditional loan. The loans themselves are most similar to the type of loan you’d get from a commercial bank or a similar lender. Applying for an SBA loan can even be a bit more convoluted, so you may want to enlist the help of experts.
SBA loans are issued by commercial banks and large financial institutions, but they may not always be the right choice. The average amount of an SBA loan is just over $100,000. That’s a far cry from the average business loan amount reported by the Federal Reserve.
Pros and Cons of SBA Loans
SBA loans can range from a few thousand dollars to millions. They’re often paid back over a period of years. Some loans will have five-year terms, while larger loans may be amortized over 25 years.
Rates with SBA loans vary, much as they do with commercial lenders. The SBA can usually secure lower rates than you could get on your own though. They usually start at around 5 percent.
The biggest drawback of SBA loans is how long they can take to fund. Like traditional loans, it may take a while for the funds to materialize in your account.
The SBA has three different programs, each with their own uses. One type of loan may be good for buying real estate or equipment. A loan from another of their programs may be better suited to working capital.
If you need a large loan for purchasing equipment or real estate, there may be other options. You may want to explore other avenues as well, such as peer-to-peer lending or crowdfunding. These options can help a growing business continue to expand.
5. Types of Business Loans for Small Amounts
If you looked at the average SBA loan and thought, “That’s far too much,” consider other types of loans for business. You may want to explore options for smaller amounts.
Microloans are among the newer types of small business loans, but their popularity is growing. The SBA runs a microlending program. It reports the average amount of these loans is around $13,000.
This is a far cry from the $600,000+ that the Federal Reserve reports as the average business loan amount. Microloans may be the right choice if you’re looking for a small amount in short order.
What can you use a microloan for? The answer is almost anything your business needs. Many business owners use them like working capital loans and other short-term loans, in part because the amounts are small. You can usually repay them quickly.
A microloan may be a good option if you need funds for a specific purchase or investment. They might be the right choice if you need some liquid funds to support day-to-day operations.
In some cases, you may also want to consider a small personal loan.
6. Commercial Real Estate Loans for the Dream Office
As a business owner, you need a place to work. Many US businesses launch as a from-home operation. They grow into larger offices or warehouses as time goes by.
If you’re finding your current space cramped, you might think about investing in commercial real estate. Maybe you’re tired of paying rent for your storefront. The right investment opportunity has just cropped up on your radar.
The problem is funding this purchase. Commercial real estate can be pricey, and your business may not have the income to let you buy outright. What’s a business owner to do?
You can consider a commercial real estate loan to help you manage. They usually start over $200,000 and climb to around $2 million. Like mortgages, they’re long-term loans, designed to be paid back over decades.
The good news is a commercial real estate loan typically has a low rate of interest to go along with it. The property you buy acts as collateral for the lender, so they have some assurance they can collect.
Whether you’re looking to buy or renovate a property you own, a commercial real estate loan could be right.
7. Business Lines of Credit for Flexibility
We’ve discussed plenty of different types of small business loans. This last one is the only one that gives you access to revolving credit.
Revolving credit is different than a traditional loan. As you pay the loan amount back, the funds become available for you to use again.
A business line of credit thus offers you more flexibility. If you know you’re going to need ongoing funding, this could be the best choice for your business.
Unlike working capital loans and other short-term options, business lines of credit can float the business through rough patches and growth. If you’re short one month, the funds available through a line of credit could help you make it through.
During the next strong sales month, you can pay back the funds you borrowed. They’re then available for you to use the next time you need them.
You can get a line of credit for your business in almost any amount, from under $10,000 up to $1 million. Term lengths and interest rates vary widely, so be sure to shop around for the best deal for your business.
A World of Choices
As you can see, there are many types of business loans you can choose from. The key is always to assess your business’s needs and pick the right kind of loan for you.
Not all loans and lenders are created equal, so don’t be afraid to shop around. Even if you know what kind of loan will work best for the business, keep looking. You may be able to find a lender with a better interest rate or more favorable terms.
This list isn’t exhaustive either. Be sure to explore all your financial options when it comes to funding your business. Having the right financing is often the most important ingredient in business success.
Get the Funds You Need
If you know which of the types of business loans you need, get in touch with us today. We can help you refine your choices and get started with a loan that does more than meet your needs. With the right financing in hand, you’ll be set to take on new challenges in your business.