In the dynamic landscape of the United States economy, small businesses stand as the backbone, driving nearly half of the private workforce and igniting two-thirds of all new job creation. For visionary small business owners, obtaining a business loan isn’t just about securing funds—it’s about fostering growth, capitalizing on opportunities, and propelling their ventures forward. Whether it’s jumpstarting a new project, expanding operations, or ensuring smooth day-to-day operations, the right business loan can be the key to unlocking untapped potential. With a deep understanding of the intricate world of business financing, entrepreneurs wield the power to navigate confidently, strategically selecting the perfect financial lifeline for their enterprises.
What Is a Business Loan?
Business loans represent a form of commercial financing accessible to qualified businesses through various channels such as traditional banks, online lenders, and credit unions. These funds serve to support essential aspects of business operations and expansion, spanning from covering working capital needs and acquiring equipment to facilitating substantial investments like real estate acquisitions.
How Do Business Loans Work?
Business loans offer financing to business owners either through a lump sum payment or a credit line. In return for this financial support, your business commits to repaying the borrowed amount over time, along with interest and associated fees. Depending on the loan type, your lender may stipulate daily, weekly, or monthly repayment schedules until the loan is settled in full.
Furthermore, business loans come in two forms: secured and unsecured. Secured loans necessitate collateral—assets of value that the lender can seize in case of default—such as real estate, equipment, cash, or investments, to secure the loan. On the other hand, unsecured loans do not mandate collateral. Instead, you typically provide a personal guarantee, assuming personal liability if the business fails to fulfill its debt obligations.
Uses of Business Loans
You can use business loans for many different purposes. When applying for financing, however, you will usually need to let the lender know how you intend to use the funds. Common uses include:
- Startup costs
- Commercial real estate purchases and/or remodeling
- Cash flow for everyday expenses
- Debt consolidation or refinancing
- Equipment purchases
- Inventory purchases
- Business acquisitions
- Business expansion
- Business franchising
- Marketing and advertising
- Refinancing
Indeed, absent from the list is personal expenses. It is crucial to understand that lenders typically do not permit the use of business loans to cover personal costs such as residential home purchases, personal vehicle acquisitions, or any other transactions unrelated to genuine business needs.
Exploring Your Options
Below, you will discover seven types of common business loans worth considering for your company’s financial needs. Employing a business loan broker can streamline the process of finding the most optimal option.
SBA Loan
An SBA loan, backed by the U.S. Small Business Administration (SBA), entails the SBA guaranteeing a portion of the borrowed sum, mitigating risk for lenders. Consequently, lenders may extend financing to businesses they might otherwise decline.
SBA loans often offer competitive interest rates for well-qualified borrowers, ranging from $30,000 to $5 million, with repayment terms extending up to 25 years. However, navigating the notoriously intricate qualification requirements may prove challenging, potentially involving months of waiting for approval. A personal credit score of at least 680 is generally recommended.
Term Loan
Business term loans involve borrowing a set amount repaid over a fixed period. These loans are obtainable from traditional banks or online lenders. Newer businesses might find online lenders more accommodating due to their flexible qualification criteria.
Term loans typically span up to 10 years, with loan amounts reaching approximately $500,000 and starting APRs around 9%. Your business’s track record, annual revenue, and creditworthiness (including personal credit), influence the loan terms available to you.
Working Capital Loan
A working capital loan, often comprising term loans, lines of credit, or invoice factoring, provides short-term financing to cover day-to-day operational expenses such as payroll. Seasonal businesses, especially, may benefit during slow periods when managing cash flow becomes challenging.
Loan terms for working capital loans vary based on the specific financing type and borrower risk. Generally ranging from $2,000 to $5 million, these loans often come with higher interest rates and fees to offset lender risk.
Business Line of Credit
A business line of credit provides a flexible borrowing solution for situations where the exact funding requirement isn’t initially clear. Similar to a credit card, borrowers can access a credit line ranging from $2,000 to $250,000. What sets it apart is the ability to reuse the credit limit as it is repaid during the draw period. Moreover, interest accrues solely on the borrowed amount, not the entire approved limit.
Unlike business credit cards, a business line of credit has a draw period that typically lasts between 12 to 24 months. Once this period concludes, the repayment phase begins, requiring settlement of any outstanding balances along with accrued interest. The repayment duration spans from six months to five years, during which the credit limit becomes inaccessible for borrowing purposes.
Merchant Cash Advance
A merchant cash advance (MCA) offers swift access to short-term financing for businesses in urgent need. In exchange for a lump sum, typically from a merchant services company, business owners pledge a portion of future sales receipts. Repayment occurs either through individual sales or via automatic clearing house (ACH) payments on a daily or weekly basis, along with applicable fees.
Despite its convenience, MCAs entail higher costs due to streamlined processes and less stringent qualification criteria. They typically impose a factor rate ranging from 1.2 to 1.5, resulting in a higher payback amount than the initial advance. For instance, a $10,000 MCA with a factor rate of 1.2 would necessitate a total repayment of $12,000.
MCAs can be beneficial for businesses with robust sales volumes requiring rapid access to funds, especially if traditional loan avenues are inaccessible.
Invoice Factoring
Businesses utilizing an invoicing system to bill other businesses may qualify for invoice factoring. This financing method involves selling outstanding invoices to a factoring company, which then advances a portion of the unpaid invoices—typically ranging from 70% to 95%. Subsequently, the factoring company assumes responsibility for collecting the outstanding invoices. Upon collection, the factoring company remits the remaining balance to your business, deducting factoring fees, which typically range from 0.50% to 5% for each month an invoice remains unpaid. Invoice factoring proves advantageous for startups and new businesses lacking a robust credit profile.
Equipment Financing
Equipment financing facilitates the acquisition of essential equipment for your business, encompassing items ranging from electronics to large manufacturing machinery. Loan amounts correlate with the equipment costs, with lenders typically financing between 80% and 100% of the equipment expenses. However, they commonly require a down payment of 15%. Terms for equipment financing span from three to 10 years.
When securing a business loan, you borrow funds from a lender and gradually repay the amount along with interest. Small business loans serve various purposes, aiding in business expansion, bridging seasonal cash flow gaps, mitigating expenses during downturns, and more. In general, business loans are most suitable for companies strategizing significant growth initiatives. If you’re ready to elevate your business to the next level, reach out to our team today—we’re here to assist you at every stage.