Financing a small business on your own can be challenging, especially finding the right funding option when loan markets are tight.
Loan Options for Small Business Capital
Once you figure out how much you need for your business and what the loan can cost, you can explore the funding options available for you.
Term Loans
A term loan is a type of traditional loan that can be used to help a small business expand. Term loans provide an upfront cash deposit and monthly repayment arrangements for a set amount of time.
Most business term loans require your small business to be well-established. Banks prefer to fund a small business that has been in existence for two years or more before approving a business term loan.
A financial institution may require collateral for a business term loan. For example, suppose you use the funds from a term loan to buy expensive business technology or vehicles.
In that case, the bank may regard the machinery or vehicle as sufficient collateral for the loan.
Conversely, if you need funds for working capital, the bank may need real estate under the company’s name or its owner.
Additionally, the bank may need you to give assurance that your company will not apply for any other term loans until the loan is fully repaid. The loan application and the approval process may come with a costly service charge.
Micro-Loans
Microloans are usually described as any loan less than $50,000. Microloans are an excellent method for business owners to access funds because many financial institutions do not hesitate to grant lower loan amounts.
This type of business loan can be used for payroll, inventories, and business equipment, just like any other business loan. They can also help fund and support the cost of extra help during busy seasons and pay expenses during slow months.
You can apply for micro-loans as a sole proprietor or with co-owners. You’ll need to apply for business financing. Microlenders typically assess your credit history in the context of your entire application, so you don’t need flawless credit to qualify for one.
According to the Association for Enterprise Opportunity (AEO), hundreds of microlenders in America have accommodated 250,000-300,000 small businesses every year.
They lent more than $2 billion countrywide over the last ten years, despite charging somewhat higher interest rates than banks.
Another good thing is that microlenders frequently serve as counselors and mentors to small businesses, assisting them in developing business plans, marketing strategies and understanding their operations before taking debt.
SBA Loans
An SBA loan is a type of small business loan that is partially regulated by the government through the Small Business Administration, mitigating some of the risks for the lending institution.
Small business owners are not directly lent money by the agency. Instead, it establishes rules for loans issued by its partner lending institutions, community development organizations, and micro-lending organizations.
According to the Congressional Research Service, the SBA microloan program is intended for startups and beginning businesses, with startups acquiring 30% of all SBA microloans provided in the fiscal year 2020.
While applying for an SBA loan is relatively straightforward, getting one approved is not that easy. If you’re not attentive in your application, you could be turned down and lose millions of dollars in reasonably-priced, government-backed funding.
Franchise Loans
A franchise loan is a type of financial aid provided by banks and other financial institutions to help borrowers fund their business ventures. Therefore, this is indeed ideal for starting franchise businesses.
Franchise loans are secured against the assets of the store or restaurant that you want to purchase from a franchisor. The bank’s estimate, not the franchisor’s, will be used to evaluate the franchise’s market value.
Equipment Loans
An equipment loan is a frequent financing option for companies that require a piece of equipment or vehicles but do not have the financial resources to pay for them outright. Most of the time, the instant profits from newly bought equipment can be utilized to repay the loan’s monthly payments.
The equipment serves as security for the loan. If you cannot repay the loan, the lender will repossess the vehicle.
For startups, getting an equipment loan is possible. Alternative lenders who provide equipment funding for startups are available. In addition, you may be able to get a loan from a lender who is more flexible than traditional banks.
Personal Loan
When other types of business financing don’t work for you, a personal loan may be an alternative. You can get it from a credit union, online lender, or a bank. It can be used for various purposes, the most common of which is to fund a business.
Personal loans are easier to qualify for and require minimal documentation than small business loans. However, compared to small business loans, personal loans don’t usually grant large loan amounts.
Some personal loans can be used to start or expand a business. However, before asking for a personal loan, make sure the lender does not have any limitations on business use. Lending sites like creditninja.com have eligibility criteria so clients can see if they qualify for a loan.
Final Thoughts
You can get overwhelmed by various small business loans, and choosing the right one could be pretty challenging. However, once you figure out the amount of funding you need, you can go with the best option that suits your interests and preferences.
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