There are several types of business loans that you can choose from.
Small Business Term Loan
A small business term loan is a lump sum loan. Term loans are paid back at a fixed interest rate, with regular repayments. Repayment terms vary by lender, but small business term loans are typically paid back in about 5 years. When you take a small business loan, you will normally have to specify the intended purpose of the loan during the application process.
Like some long-term personal loans, small business term loans follow an amortization process. That means your repayments will start going towards the loan’s interest. Once the interest is paid off, your payments will go towards the loan’s principal.
- Amount Range: $500 to $5.5 million
- APR Range: Varies with lender
- Best Used For Renovations, Business acquisitions, Estate purchases
Small Business Lines Of Credit
Small business lines of credit are a form of rotating business credit. You may borrow money from your line of credit, up to the specified limit you agreed to with your lender. When you draw funds, you will have to repay them. You may continue drawing funds as much as you choose to, as long as you don’t hit your credit limit.
Small business lines of credit are often compared to credit cards, which are another form of rotating credit. You are responsible for tracking your credit limit and paying back the funds you draw on time.
- Amount Range: $2,000 to $250,000
- APR Range: 8% to 80%
- Best Used For: Boosting supplies, increasing inventory
Working Capital Loans
Working capital refers to the capital used to pay for the day-to-day operating expenses a business incurs.
Many small business loans are taken to pay for large, long-term asset purchases or investments. Working capital loans, on the contrary, are taken to pay for the regular day-to-day expenses your business incurs, including mortgage and rent payments, utility bills, payroll, and other debt repayments.
Because of the nature of this form of borrowing, working capital loans typically carry shorter terms. They are also usually lent out in smaller amounts.
- Amount Range: Varies with lender
- APR Range: 3% to 99%
- Best Used For: Managing cash flow gaps
If you have sent out invoices that are now long overdue, invoice financing is a potential course of action. Invoice financing is a form of business financing that is meant to help businesses recoup part of the balance of unpaid invoices.
Invoice financing takes place when you borrow against your unpaid invoices. Upon approval, the lender will send you funds, which you pay for with a fee. That means you will not be paid for the entire balance of your outstanding invoices. Instead, the lender will give you part of the balance, which you will pay back after your customer pays their overdue invoices.
People find invoice financing as a relatively quick business financing option, but it is normally more costly than the other alternatives. The fee you pay the lender to take your invoice will depend on the usual factors, such as your business credit score.
- Amount Range: Maximum of $850,000
- APR Range: 10% to 84%
- Best Used For: Improving cash flow, paying employees and suppliers
Invoice factoring is similar to business financing, with the largest difference being who collects your business’s unpaid invoices.
With invoice financing, as discussed above, the customer (your business) retains control (and responsibility) for collections.
With invoice factoring, the lender purchases your unpaid invoices from you at a discount. After they buy your invoice, they take responsibility for collection.
Both of these options will see you receiving a portion of your overdue invoices’ balances. The portion will depend on the lender and your business’s borrowing qualifications.
- Amount Range: $50,000 to $3,000,000
- APR Range: 0.5% to 4% monthly
- Best Used For Short-term liquidity, improving working capital
The US Small Business Administration (SBA) does not offer loans to small businesses. However, some lenders offer loans that are approved by the SBA, and thus normally packaged as “SBA Loans”.
The SBA sets special guidelines to which all SBA-guaranteed loans are subject. Lenders are restricted in their use of these loans in a few key ways:
Lenders can only give SBA loans to businesses meeting specified requirements
SBA loans come with maximum maturity dates
SBA loan interest rates are limited according to the SBA guidelines
Compared to other small business loans, SBA loans are harder to qualify for, but their interest rates come with low maximum limits for borrowers.
Make sure you meet the SBA loan eligibility requirements before exploring SBA loan options.
- Amount Range: Maximum of $5 million
- APR Range: Varies with the amount
- Best Used For: Buying a business, Start-up costs, Refinancing debt
Equipment loans are small business loans with the purchased equipment serving as collateral. Small businesses normally take these loans to pay for business equipment. This can vary according to business needs, but small business equipment loans are often taken to pay for business vehicles or machinery.
For example, a small logistics firm may take a truck loan to purchase a new truck. The truck they purchase with the loan will serve as collateral until the logistics firm pays back the loan.
- Amount Range: $5,000 to $5,000,000
- APR Range: As low as 7.5%
- Best Used For: Purchase of equipment and machinery
Small Business Credit Cards
Small business credit cards are similar to personal credit cards. But they differ in ways that make them more appropriate for business use. They are also meant to be used for strictly business purposes.
Business credit cards typically have higher credit limits. They also normally come with points/rewards benefits tailored more towards business needs. There are many different business credit cards available, so you can compare a wide range of rates, credit limits, and other features.
- Amount Range: Up to $50,000
- APR Range: 12% to 22%
- Best Used For Working capital, emergency cash
Merchant Cash Advances
A merchant cash advance (MCA) is not a loan, strictly speaking. What they are is a lump sum payment to a merchant (business). The borrower will then pay back the sum through a portion of future credit and/or debit sales. In this way, they differ from traditional loans, where you have regular repayment terms.
MCAs are paid back automatically while you continue making card sales. Those repayments will cease once you’ve repaid your MCA.
- Amount Range: Up to $500,000
- APR Range: Up to 200%
- Best Used For: Growing a business
Microloans (or microloans) are small loans. By business standards, a microloan will typically range from $500 to $100,000.
Microloans have emerged among the larger trends of microfinance. Technology has enabled the business financing process to become more efficient, enabling lenders to process loan applications faster. This allows many lenders to efficiently and cost-effectively offer very small business loans.
- Amount Range: Up to $50,000
- APR Range: 7.75% to 11.75%
- Best Used For Working capital, inventory, supplies