At some point in the business life-cycle, nearly all businesses face a need for funding. In the small business arena, affordable financing can be secured for a myriad of reasons, including working capital, new equipment, expansion, or inventory.
The advancement of technology in the lending marketplace has made the availability of small business loans much greater than in previous decades, but that presents some problems for small business owners.
Determining which loan is best-fit for your specific business needs can be a challenge when you aren’t aware of all the options available. Here we break down the three most common types of small business loans to help you make an informed decision for your next financing endeavor.
1. SBA Loans
The Small Business Administration (SBA) offers a handful of loan programs, made available through select lenders. SBA loans can assist a variety of businesses in reaching their funding needs, but each has specific guidelines for qualification and amount.
Each SBA loan is backed by a government guarantee which reduces the risk – and cost – of the loan, but additional SBA requirements often need to be met to gain approval.
Currently, the SBA offers the following common loan programs through its lending partners:
Microloans
Loans ups to $50,000 can be used to fund working capital, inventory, equipment, or supplies, but may not be used to finance real estate or pay off existing debt. Loan repayment terms vary depending on the amount of the loan and the needs of the small business borrower, but repayment does not extend past six years.
7(a) loan program
The primary lending program through the SBA is also the most common. Loan proceeds can be used for just about any small business need, including debt refinancing, and the maximum amount available is $5 million. Repayment terms are extended up to 10 years for working capital loans, and 25 years for fixed asset loans.
Real estate and equipment
The SBA also offers loan programs for long-term, fixed-rate financing for the purchase of major assets, like real estate and equipment. In most cases, the SBA loan covers 40%, the lender contributes 50%, and the borrower takes on the remaining 10% from assets. Loans cannot be used for working capital or inventory, and the maximum amount available is $5.5 million with a 10- or 20-year repayment term.
2. Conventional Bank Loans
Outside of SBA loan programs, banks and credit unions also offer conventional business loans to well-qualified business owners.
Installment or term loans can be secured with or without collateral, and repayment terms vary based on creditworthiness, length, and amount funded. Working capital, inventory, equipment, real estate, and office renovation are all common conventional loan types.
Bank and credit union business loans often carry stringent requirements surrounding the strength of the business and time in operation, but the interest rates charged on conventional loans are typically lower.
Businesses best qualified for bank loans are those that have significant assets to pledge, either held in the business name or personal assets the business owner is willing to attach to the loan.
3. Alternative Small Business Lending Platforms
Business owners now have the option of using an alternative lending platform to help fund common business needs. Small business loan matching platforms such as Fundera by NerdWallet, are found (mostly) online and use various business models to help fund loans ranging from $5,000 up to $2 million in most cases.
With some, business owners may have the ability to access a crowd of investors through marketplace lending platforms, or they can compare a variety of loan offers from an alternative lender’s partners.
The application process is convenient and simple as it is completed online, but qualification requirements vary from lender to lender. Some may ask for a personal guarantee, meaning personal assets are pledged as collateral for the loan, while others may require the business to be in operation with positive revenue for a certain period.
Alternative business lenders are best suited for businesses that are not able to qualify for a conventional bank loan or an SBA loan program.
Final Thoughts on Where to Obtain Small Business Loans
Before making a decision about which small business loan is right for your needs, make sure you understand the credit and collateral requirements necessary to secure the loan.
If you have a strong history of revenue and solid credit, an SBA loan or a conventional bank loan is probably your best bet for affordable financing. If you’re newer to the business world or cannot qualify for a bank or SBA loan, alternative lenders offer a solution for your business funding needs.
