A small business’s growth is largely dependent on the ability to finance expansion and upgrades. A small business loan is available to help your business grow, even if it’s not currently expanding. It can be used to refinance existing debt, upgrade workspaces, or purchase more inventory.
Finding the right small business loan and securing it are the two most important challenges. This guide provides information on four popular small business loan options and how to obtain them.
Types of Small Business Loans
There are many types of small business loans, each with its advantages and disadvantages. Learn about the four most popular small business loan types that can benefit your business.
1. Bank Loan
The traditional bank loan has become a standard method of funding for established small businesses with stable financial statements. Small business owners can use the funds to purchase equipment, a building, or other fixed assets.
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Loan Features:
- Upfront lump sum payment
- Promise to pay back the full amount plus interest within a specified period
- Can have a floating or fixed interest rate
- Loan maturity between two and ten years
- Down payment required (20-30%)
Some traditional banks require a large down payment to reduce the overall cost of the loan.
How to Get a Traditional Bank Loan
Small business loan from traditional banks are typically higher in amount and offer lower interest rates. Most traditional bank loans have higher qualification standards. The lender will require proof of the following when you apply for traditional business loans:
- Two years of profitable business operation
- Many lenders prefer a credit score above 700
- Six-figure annual revenues
- The size of your business
- A personal guarantee or collateral may be required in some cases
You may be able to qualify if your credit score falls below the standard. A co-signer is someone who will pay your debt if you are unable to. You can also increase your chances of being approved by submitting a detailed business proposal.
2. Small Business Administration Loan
Small Business Administration (SBA) loans are structured like traditional bank loans. The main difference is that the U.S. Government backs up to 85 percent of SBA loans, allowing lenders to offer more favorable terms and fewer requirements.
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Loan Features
- Support for longer-term financing (up to 25 years)
- Upfront costs include a down payment between 10% and 30% and a fee to guarantee the loan
- Interest rate can be variable or fixed
How to Get an SBA Loan
All lenders require the SBA Form 1919, even though SBA loan requirements vary. Lenders will ask for several supporting documents, such as:
- Tax returns
- Personal financial statements
- Business licenses
- Credit reports verifying a credit rating around 640
Your business must meet the following requirements to be eligible for an SBA loan:
- Be a for-profit company
- Operate in the U.S.
- Owner equity is required to invest
Before applying for financing, consider alternative funding sources, such as personal assets. SBA lenders do not approve applications for businesses involved in gambling, speculation, pyramid sales, or investments, and the owner cannot be on parole.
3. Business Line of Credit
A business line of credit works similarly to a credit card. You can withdraw any amount of money you need within your credit limit. Instead of paying interest on an entire lump sum, you only pay interest on the amount that is withdrawn.
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Loan Features:
- More flexible than a traditional loan
- Typically smaller amounts borrowed
- Funds can be accessed via a mobile app or business checking account
How to Get a Line of Credit
Your credit approval is based on several factors when you apply for an unsecured business credit line with a lender or bank:
- Credit Score: High credit scores are associated with lower interest rates, fewer fees, and better terms. Most lenders prefer scores above 670.
- Business Experience: Most lenders prefer to see a minimum of two years in business.
- Collateral: You can use an asset as collateral if your credit rating is low or if you’d like to get a lower interest rate.
The wait time for funding is typically shorter than for other types of loans.
4. Merchant Cash Advance
If your business relies primarily on credit card and debit card sales, a merchant cash advance can be an excellent financing option. You receive an upfront lump sum, just like with a traditional loan, once you are approved. Instead of paying monthly from your gross income, you pay the MCA balance by withholding a percentage daily of your debit and credit card sales.
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Loan Features:
- Fast capital access
- No collateral required
- Flexible terms
How to Get a Merchant Cash Advance
MCAs are approved at a higher rate than any other type of business loan because they emphasize monthly sales from credit cards and debit cards rather than credit scores. By completing an application and providing the required documentation, you can apply for an MCA with many lenders. The funding company will deposit a lump sum into your business account after approval.
Consider Your Small Business Loan Options
A large amount of debt can significantly impact your business. To get the best possible loan for your business, you need to conduct thorough research and plan. With the knowledge you have gained about these four types of business loans, you should be able to find the best loan for your company and qualify for it.