For small businesses, having access to credit is key to their survival. According to research by Semrush, 66% of small businesses deal with financing challenges, of which 43% admit to mainly struggling with covering operating expenses.
When compared to larger and more established firms, small businesses face difficulty in accessing capital. Traditional financiers such as banks usually set tough conditions such as the need for security, and due to their minimum capital base, small firms are viewed as high-risk ventures. Depending on the type of financing needs and how the business qualifies, there are other loan options that a small business can consider applying for.
What Loans Are Available for Small Businesses?
The market offers a myriad of loan options, usually at competitive rates and terms, to boost starting or growing small businesses. The following is an overview of 5 common types of small business loans.
1. SBA Loans
Small business administration (SBA) loans are partly backed by the government to enable small businesses to have access to capital from lenders such as traditional banks. There are three key types of SBA loans, including SBA 504 loans, SBA 7(a) loans, and SBA microloans.
2. Business Lines of Credit
A business line of credit is a form of a revolving line of credit that allows a business to borrow up to a set limit and pay interest on the amount of money borrowed. Unlike a normal loan, a line of credit is considered a more flexible source of capital for small businesses.
3. Equipment Loans
Equipment loans are for buying business equipment that helps achieve operational efficiency, which is vital for small business owners. They can be offered by either banks or nontraditional lenders.
4. Term Loans
A term loan is also an alternative financing option for small businesses for expanding or improving their operations, such as the purchase of new equipment. The lender loans the borrower, who then repays at a fixed or floating rate of interest.
5. Invoice Factoring and Invoice Financing
The two loan options are also known as accounts receivable financing. Invoice financing allows a business to use unpaid invoices as collateral in exchange for a cash advance. While invoice factoring is simply a lender purchasing the unpaid invoices and paying the borrower a percentage of the outstanding invoice amount upfront.
What Is the Right Loan for My Business?
When deciding on a loan to borrow, it’s vital for the small business owner to take into account some factors, but not limited to:
- The purpose of financing
- The amount needed
- The interest rate and repayment terms, including the collateral, if any
- The business’s financial history and position
Overall, the above-highlighted loan types all serve small businesses in financing their expenses and increasing their working capital to scale their operations. However, a small business owner needs to familiarize themselves with how each one works to make the best financing decision.
- SBA loans: An SBA loan is best suited for small businesses as they offer some of the lowest rates on the market at friendly terms. Since part of the loan is guaranteed by the government, which can reach up to 80% to 90% of the loan, it makes it easy for small businesses or startups to access capital from lenders who would usually turn them down. An SBA loan can be used to purchase equipment, inventory, and real estate or to secure working capital.
- Business lines of credit: Lines of credit are typically attractive to small business owners who lack collateral. They can access revolving credit limits to meet pressing cash flow needs such as payroll or bills.
- Equipment loans: Eventually, a business will need to replace or upgrade worn-out or damaged equipment. Equipment loans, especially with nontraditional lenders, have a fast approval rate and a flexible repayment schedule depending on the lender. In addition, unlike banks, a business with poor credit can be eligible, which is useful during a serious cash crunch.
- Term loans: Small businesses also prefer term loans due to their low cost and favorable repayment terms. They are usually borrowed to cover the cost of purchasing an asset such as equipment to help improve productivity. The process of applying is also not complicated and enables the borrower to access a lump sum amount in the initial stage.
Invoice factoring and invoice financing: If a small business is struggling to secure a bank loan, they can consider invoice factoring and financing to meet their urgent capital needs. If the business lacks collateral, invoice financing offers a great solution as unpaid invoices act as security for the loan. Further, the approval is not as stringent as traditional loans, and usually, one can access up to 100% of the invoiced amount. Invoice factoring works best for a business that doesn’t want to expend resources and time chasing creditors but instead allows the lender to take charge in return for advancing a percentage of the unpaid invoices.
SBA 504 Loan
The current market has evolved to offer small businesses the capital they need and have the right to for growth. In particular, SBA loans have risen to be very enticing to small businesses as it caters to them.
One of the popular SBA loan programs is the SBA 504 loan, which is a long-term financing option for big business purchases such as equipment or real estate.
They are provided through the Certified Development Companies and are backed by the government. A borrower can access an SBA 504 loan of up to $5 million per project, although some other projects can qualify for $5.5 million.
In terms of loan structure, Business Finance Capital (BFC), an SBA- vetted Certified Development Company provides 40% of the financing, the lender offers 50%, while the business owner, who is the borrower, puts a down payment of 10%. The term length varies from 10, 20, to 25 years at a fixed rate.
An SBA 504 loan should be a serious funding consideration for any small business as it will turbocharge its expansion and growth. Accessing up to 90% of project costs and putting a down payment of just 10% is a good deal.
Further, the application and approval process is straightforward and nonrestrictive. This means any small business in the U.S. can access the loan. In addition, the longer repayment periods and fixed rates allow businesses to spread out the risk of running out of capital.
Qualifying for an SBA 504 loan is simple as long as the small business meets the following requirements:
- Operate as a for-profit business based in the United States
- Have a tangible net worth of less than $15 million
- Has earned an average net income of less than $5 million for two years before the application
- Meet the SBA definition of small business size standards
How to Apply
Before applying for an SBA 504 loan, the small business owner needs to identify a Certified Development Company which issues the loan, such as BFC. The CDC will take charge of processing the application where they can prequalify a business for speedier approval.
In turn, the borrower provides personal information such as name, address, date of birth, plus additional documentation. The documentation required for approval includes:
- Business tax returns and individual tax returns for three years
- SBA application forms
How to Pay Back the Loan
As established, when paying back the SBA 504 loan, the borrower is offered longer-term periods from 10 years for working capital or equipment to 25 years for real estate purchases at a low fixed rate. Just like any other loan, there is a laid-down payment process.
BFC accepts prepayments for SBA 504 loans every month. The borrower needs to submit a 15-day written notice to facilitate the prepayments indicating the date of payment, which is the 3rd Thursday of every month.
We’re Here for You
Navigating through the workings of an SBA 504 loan can seem overwhelming. Having a partner working with you will make the entire process fulfilling and prepare you to receive one of the best financing options for your small business.
BFC is a leading financier for SBA 504 loans and has seamlessly put up structures to help small businesses secure much-needed capital to expand their revenues and profits. Start the discussion with our loan experts today.