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: