6 Types of Small Business Loans for Company Financing

Embarking on the journey of starting a business can evoke a range of emotions. It’s thrilling to turn your dream into reality, but it can also be daunting due to the numerous elements involved in the process. One of the primary concerns for most budding entrepreneurs is how to cover overhead expenditures. Depending upon the nature and scale of the business, startup costs might reach up to $40,000 in the very first year. In such scenarios, small company loans become a necessity, especially for those who can’t afford to pay such hefty fees out of pocket.

 

To help you navigate the complex world of business loans, we will explore nine different options. We will delve into the eligibility criteria for small business loans, the benefits they offer, and potential drawbacks you need to consider. This will help you make an informed decision that aligns with your business goals and financial capabilities.

 

Is a Small Business Loan Necessary for You?

 

Repayment of small business loans with accrued interest is the norm. There are various types of small business loans available, each with its own set of rules and flexibility levels. Some loans are rigid in terms of their terms and conditions, while others offer more room for flexibility.

 

However, it’s crucial to note that not every startup requires a small business loan. According to data from 2023, only 34% of small businesses applied for loans. Many business owners resort to private loans, personal savings, or other financing methods. Despite this, small business loans, like those offered in Florida, remain a reliable option for new enterprises of all sizes. Numerous banks and fintech platforms offer flexible terms to help startup entrepreneurs cover the costs associated with starting a business.

 

Different Types of Small Business Financing

 

In the United States, there are several types of business loans available to young entrepreneurs. Let’s have a look at six of the most common ones.

 

1. Term/Traditional Loans

 

A term loan, also known as a traditional loan, is a bank loan that comes with a fixed repayment period. There are three types of business term loans:

 

• • Short-term loans: These loans have a repayment period of 1–2 years.

 

• • Midterm loans: These loans have a repayment period of 2–5 years.

 

• • Long-term loans: These loans have a repayment period of up to 25 years.

 

 

Traditional loans usually offer lower interest rates compared to credit cards or commercial lines of credit. However, they often come with strict qualifying restrictions. For instance, your lender might require you to have a credit score of 670 or higher and a company history of six months to one year.

 

2. SBA Loans

 

Small businesses can obtain financing through the Small Business Administration (SBA) and various banking institutions. These loans range from $500 to $5 million and can be repaid over a period of 25 years.

 

It’s important to note that the SBA backs the lender’s money, not the business loans. Since their investment is guaranteed, lenders are more inclined to lend to small business owners. The SBA offers two primary types of loans:

 

• • 7(a) loans: These are guaranteed loans with capped interest rates.

 

• • 504 loans: These are long-term loans for purchasing equipment, real estate, and other corporate assets. They come with fixed interest rates.

 

 

SBA loans are ideal for large borrowing amounts. However, like traditional loans, they come with stringent qualifying conditions. To be eligible, you must operate a business in the U.S., have strong credit, possess a comprehensive business plan, and have exhausted alternate financial resources.

 

3. SBA Microloans

 

In addition to 7(a) and 504 loans, the SBA also provides microloans of up to $50,000. These loans have a repayment duration of six years and interest rates ranging from 8% to 13%. Often, lenders require collateral to grant these loans.

 

If you need funds for repairs, expansion, inventory procurement, or other business needs, an SBA microloan might be a good fit for you. However, you cannot use microloans to pay off real estate and other liabilities.

 

4. Equipment Financing

 

Equipment financing is a specific type of loan similar to auto loans, where the equipment serves as collateral. The interest rates and repayment periods depend upon the lender and the type of equipment you’re planning to purchase.

 

Most lenders require a down payment of 10%–20% for equipment financing. This type of financing can be particularly beneficial for businesses like restaurants or agricultural operations that require expensive equipment.

 

5. Business Line of Credit

 

A business line of credit is an open line of borrowing that businesses can use as needed. This flexible form of financing is often the go-to choice for startup entrepreneurs who are unsure about the exact amount they need to borrow.

 

The terms and limits vary with each lender, and the interest rates are usually higher than those of regular loans. Most lenders require proof of monthly revenue and a certain period of business operation. Business lines of credit allow for periodic borrowing and repayment until the line of credit expires.

 

6. Merchant Cash Advance

 

Merchant cash advances are repaid through a portion of your business’s credit card sales. Instead of monthly payments, you repay the lender on a daily or weekly basis.

 

This type of loan can be a boon for businesses that rely heavily on credit card sales. The rates and terms of merchant cash advances vary among traditional lenders and fintech platforms.

 

In Conclusion

 

There are numerous options available when it comes to financing your startup or new business. Obtaining a small business loan can set the foundation for your enterprise and help you cover large expenses that you can’t afford upfront. However, choosing the wrong loan can lead to debt, so it’s essential to take your time, evaluate your options, and select a small business loan that fits your budget and timeline.

 

Fundshop is a digital platform that offers funding to new businesses across various industries, including merchant cash advances. If you’re looking for flexible financing options for your small business, Fundshop is worth exploring.