There is an array of business loans to choose from that fits your start-up biz needs and demands. However, seeking the appropriate funding sources for your business may not be straightforward; it can be complex. Funding may come from investors, grants, and loans. Each source has its own set of rules and application processes.
Here are 6 types of business loans you can consider for your business.
1. Business line of credit
This type of loan is similar to that of a credit card. Access to funding is through withdrawal and repayment within the confines of your credit limit. A business line of credit tends to be lower than small business loans ranging from $1,000 to $250,000. Ideally, this option is an add-on infusion for cash flow management, sudden purchases, and inventory purchase for your business. Line of credit is available from traditional banks and online lenders.
2. Small business administration (SBA) loan
SBAs are government-sanctioned lending firms accessible to small businesses from private agency lenders. Company and personal assets of borrowers serve as collateral in this kind of loan. SBA is subcategorized into three.
- The 7a loan program. It is the umbrella SBA loan program that assists small businesses. The loan amount ranges from over $300,000 to $5million.
- The microloan program. Microloans for small businesses provide the lowest funding amount ranging from $10,000 to $50,000. Microloans are ideal for startups with limited assets for collateral and companies that only need a small financial boost to operate.
- The 504 loan program. The 504 or CDC loan is typically larger. This loan program offers long-term and fixed-rate financial infusion for expansion, renovation, or scaling a business. Typically, financing is utilized for real-estate and large equipment. Flexible terms of payment are available and capped at $5million.
3. Accounts receivable factoring
Accounts receivable loan program is a business loan that utilizes sales as credit terms for immediate cash on hand. In this type of loan, the uncollected invoice is sold to a third party (factor) as advance payment. This loan program infuses cash flow right now while the startup acquires long-term and more stable sources of financing. However, it can be costly with yearly interest rates of up to 25% with the inclusion of other charges.
4. Merchant cash advance
A merchant cash advance is an infusion based on credit card sales deposited into your account. A merchant cash advance is quick and upfront but has a higher factor rate from 1.2% to 1.5%.
5. Working capital loan
A working capital loan is designed to infuse cash for growth, expansion, and day-to-day operations. It can also pay debts and cover emergency expenditures. A requirement for this loan is a sparkling credit history. It has low rates between 3% to 7% per annum and flexible payment terms.
6. Business term loan
The business term loan is a lump sum of capital infusion paid back within one to five years in regular payments at a fixed interest rate. Some requirements are a stable financial statement and pristine credit scores. It is generally within the range of $25,000 to $500,000 with yearly interest rates between 7% to 30%.
A typical business funding alternative for startups is a business loan. Unfortunately, a handful of small businesses encounter challenges gaining adequate funding. As an owner, loan options should be clear to tailor-fit the loan application to your business plan. Loans are to infuse cash to sustain and scale operations, and it should not be detrimental to your startup.
