Small business owners have many types of loans available to them. These loans can be used to start a business, buy new equipment, and keep a business running during slow seasons. All of the loans listed here are reliable and great, but some are more useful than others in specific situations.
Small Business Administration Loans
The Small Business Administration is run by the US government. However, the loans do not come directly from the government. Instead, banks and credit unions work with the SBA to create reasonable loan terms for business owners.
The SBA offers several small business loans, but the 7(a) Loan is by far the most popular. Most small business owners in the United States should be able to qualify for the 7(a) Loan, so long as the business/business owner fits the SBA’s definition of a “small business”, they have already tried to pay for their needs before applying for a loan, have equity, and express the need for a business loan.
Once approved, the 7(a) Loan can be used for both long and short-term business payments and goals. This includes adding money to working capital, buying new equipment, and starting construction projects.
Line of Credit
A line of credit works in a similar way to a credit card, just (usually) without a physical card. A set amount of money is established in the loan terms. This is the credit in the line of credit. Once this amount is established, the business owner can spend the money as he or she pleases, so long as it sticks to the terms agreed upon in the loan paperwork.
The lender can use all of the money in the line of credit, or part of it. He or she will only be charged interest on the part of the line of credit that he or she uses. For example, if a business owner has a $10,000 line of credit, he or she can spend up to $10,000. However, if the business owner chooses to spend only $5,000, then he or she will only have to pay the interest on the $5,000, rather than $10,000.
Lines of credit are most often given by banks and credit unions. To get one, lenders will need to apply within the bank/credit union itself or use an online lending group like Lendio. Each lending institution will have its own terms for who does and doesn’t qualify and what the interest rates will be.
Accounts Receivable Financing
One lesser-known business loan is an accounts receivable financing loan. This type of loan is usually taken out when a business is going through a slow period or is otherwise financially distressed. This is not usually used to buy new equipment or property. This is an emergency loan, more or less, as the interest rates are higher than most other types of business loans.
Accounts receivable financing is backed by unpaid invoices– as in, invoices that the business’s clients still need to pay the business, not invoices the business needs to pay to vendors. These invoices will act as collateral. Because of this, the more money in unpaid invoices a business has, the more money it is likely to qualify for.
If the interest rates are high, why would a business owner apply for this type of loan? Well, this loan has one of the shortest approval and payout timelines compared to similar business loans. The application is usually quick. This means a business owner can get his or her money as fast as possible.
Taking out small business loans requires a decent amount of paperwork, not matter what type of loan the business owner intends to take out. Before applying to any of these loans, a business owner needs to have all of his or her financial records in order, including recent tax forms. The more paperwork the business owner has on hand, the faster the application process will be, and the faster he or she will get his or her money to improve the business!