Business loans for small businesses allow you to obtain cash to start, expand, or keep your business operating. Various kinds of small-business loans can be used to meet a wide range of requirements, including creating a franchise, buying property, or obtaining cash if you have piles of unpaid invoices.
With a myriad of options and a variety of companies available, There's no universal solution to finding the best finance option. To aid you in locating the most suitable choice for your business, Commercial Lending USA Select looked at five different kinds of loans: personal loans, equipment loans, commercial microloans, real estate loans as well as franchise loans.
We assessed each small-business loan using a variety of aspects, including the minimum and maximum amount of loan and repayment timeframes, loans, credit score, Better Business Bureau rating, and the business requirements required to be able to apply. (Read More: Startup Business Loans with No Revenue 2023)
The loans listed on this list come from private lenders. It could be a person or an entity that isn't an individual institution like a bank or credit union. All in all, many lenders are putting off traditional loans and focusing more on Paycheck Protection Program loans, which means fewer alternatives than you would expect.
What are the various types of small-business loans?
There are many loan options to meet various business needs. This article will provide a brief overview of the nine different types of small business loans.
Term loans are among the most popular kinds of small business loans. They're an amount of cash in one lump, which you pay back over a specific time. The monthly payments will likely be fixed and include an interest rate on top of the principal amount. Using the term loan to meet various requirements, including everyday costs and equipment purchases, is possible.
SBA loans
Small Business Administration (SBA) loans are attractive for entrepreneurs looking for an affordable government-backed loans. The downside is that SBA loans have a reputation for their lengthy application process that could delay the time you get the money. Approval and getting the loan could take up to three months. SBA loans can be an alternative if you do not require funds quickly and wish to take advantage of reduced interest rates and charges.
Credit lines for business
Similar to a credit card, business lines of credit supply customers with a revolving credit limit, which you typically access via the checking account. You can spend as much as you want up to the maximum credit limit, pay the balance, and then withdraw additional funds. It is a great option when you need clarification on the amount of cash you'll require since there are no interest charges on the amount you take. It contrasts the term loan, which will require you to pay interest on the entire loan regardless of whether you use a part or the whole amount. Many business credit lines need to be secured, meaning you don't require collateral.
Equipment loans
If you are looking to fund large equipment purchases but don't have the money to make it happen, an equipment loan might be a good option. They are designed to assist you in paying for expensive equipment, vehicles, or any other item worth keeping, like furniture or computers. Most of the time, the equipment you buy is used as collateral if you ca unable to pay back the loan.
Invoice factoring and invoicing financing
Small-scale business owners struggling to pay on time may consider the option of invoice funding or invoicing factoring (aka the financing of accounts receivable). With invoice factoring, you can sell invoices not paid to a lender and receive an amount of the invoice's value in advance. In the case of invoice financing, you can use the unpaid invoices as collateral to receive an amount of money due. The primary distinction between the two is that the factoring option gives the business purchasing your invoices control over the collection of payments. In contrast, financing needs you to collect revenue to repay the loan.
Commercial real estate loans
Commercial real property loans (aka commercial mortgages) can assist you in financing properties that are either new or already in existence, such as office, warehouse, and retail spaces. These loans are similar to term loans and can enable you to purchase additional commercial property or expand an existing location and refinance existing loans.
Microloans
Microloans are loans of a smaller amount which can offer the amount of $50,000 or less. Because the loans are deficient, they could be an ideal choice for startups or those requiring little money. Non-profit organizations and government organizations like the SBA offer a lot of microloans. Still, you might need collateral (like business equipment and real estate assets) to qualify for these loan programs.
Cash advances from merchants
Similar to traditional advance cash and merchant cash advances, these types of cash advances are available at an expensive cost. This cash advance will require the borrower to pay back future sales. As a payment for the lump amount of cash, you'll pay it back using a proportion of your purchases from your credit card or weekly transfer from your account at the bank. Although receiving a merchant cash advance is possible, the high-interest rates make this type of loan hazardous. Contrary to invoice financing/factoring, cash advances rely on the sale of credit cards as collateral instead of invoices that still need to be paid.
Loans to franchises
Being a franchisee will aid you in reaching your goal of owning a business quicker and less complex than beginning from the ground from scratch, but you'll require capital. Franchise loans will provide the cash needed to pay the upfront cost of opening a franchise so that you can start up and running. If you're the one who takes the loan from an intermediary, some franchises can provide financing for new franchisees.
What information do I require to submit a request for a small-business loan?
If you plan to submit the application form for a small-business loan, you'll need to have your personal and business details on hand. You should enter any (or all) of these details:
- Information about your details (like your address and name)
- Identification number for tax purposes (which can be either the employer identification number (EIN) or Social Security number (SSN) (sometimes both)
- Name of the business
- Contact number and address for business.
- Type of industry and structure of the company
- Many years in the business
- The number of employees
- Revenue from business operations for the year
- Estimated monthly expenditure
When applying for a loan, you may require supporting documents, including your business plan and bank statements, financial statements, and tax returns. There's also a possibility that your credit rating will also be analyzed to allow a lender to evaluate your creditworthiness.
What credit score is needed to get a small-business loan?
It is generally required to have a fair or average credit score (580 to 669) to get small business loans. However, this will differ according to the lender.
You'll have higher chances if your credit scores are excellent or very excellent (670 -799) and exceptional (800 to 800). Like all credit cards, the better your score on credit, the higher the interest rates and charges you'll be charged.
Lenders are focused on your credit score when determining standards for minimum credit scores, but they can also look at your business's credit score. However, lenders don't specify any criteria for business credit scores.