Which Loan is Best For a Small Business? 8 Kinds of Loans

Which Loan Is Best for a Small Business? 8 Kinds of Loans

It can feel overwhelming to learn all the ins and outs of the various loan types available to your business. That’s even truer when you factor in the additional requirements that each small business lender might impose. The list below highlights the differences between each loan package, and you can use what you learn to help you determine which loan best suits your business.

1. Business Line of Credit

Business lines of credit are financing options that allow you to borrow up to a maximum amount set during the application process. You can draw as much or as little as you need from this revolving credit line – you’ll only pay fees on the money you use. That said, a line of credit typically won’t provide enough funding for significant expenses, though it can help cover payroll and small emergency purchases.

• Loan amount: $1,000 to $250,000
• Loan term: Generally, a short-term line of credit has repayment terms of a year or less. A long-term credit has repayment terms of longer than a year.
• Acceptable loan uses: Managing cash flow issues and covering payroll and unexpected business-related expenses.
• Qualification criteria: A minimum credit score of 500 and minimum business experience of six months.
• Pros:
  • Extra funding is available whenever you need it.
  • You’ll only have to pay off the funds you use.
  • You can more easily keep cash flowing during periods of higher expenses or lower income.
  • Properly paying off your credit line can help you build your business credit in the long run.

• Cons:
  • You’ll often pay interest rates higher than with other small business loans.
  • You might need a larger loan amount for certain growth initiatives.
  • Depending on the lender, you may incur additional fees.

2. SBA Loans

The U.S. Small Business Administration (SBA) partners with lenders to back loans designed to fund small businesses. While the agency doesn’t provide funding itself, its backing can minimize risk for banks that might not otherwise offer small business funding. The result of this arrangement is SBA loans, which include highly sought-after SBA 7(a) loans. These loans are often cited as the best financing option for any small business that qualifies. Key facts and figures about them are below.

• Loan amount: $30,000 to $5,000,000
• Loan term: 10 to 25 years
• Acceptable loan uses: You can use an SBA 7(a) loan for debt consolidation, working capital, or commercial real estate purchases. Other SBA loans may have different acceptable loan uses.
• Qualification criteria
  • A minimum personal credit score of around 650 (or 675 for commercial real estate loans)
  • Minimum two years of business experience
  • No delinquencies or defaults on government loans
  • No outstanding tax liens
  • No bankruptcies or foreclosures within past three years
  • U.S. citizenship or permanent resident status

• Pros:
  • Interests rates are typically low
  • Long repayment terms put minimal financial strain on your business
  • Various use cases

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• Cons:
  • Borrowers are carefully vetted, so the application process can be lengthy
  • Stringent prerequisites for eligibility
  • Can require collateral that introduces risk

3. Microloans

Microloans are a type of small business loan designed to help startups or similarly sized companies. These companies may not need as much money to support everyday operations. That’s why microloan amounts don’t generally exceed $50,000.

• Loan amount: Up to $50,000, with an average of around $14,000 approved in 2017
• Loan term: At most six years.
• Acceptable loan uses: You can use a microloan for most business expenses, including equipment, fixtures, and working capital. You can’t use a microloan to refinance existing debt or buy commercial real estate.
• Qualification criteria
  • A minimum credit score of 575
  • Prior financial history that demonstrates the ability to repay loans going forward
  • Collateral or a personal guarantee

• Pros:
  • Microloan funds can be distributed in approximately one month.
  • Microloans are accessible to various business owners.
  • Microloans have lower interest rates than many other financing options.

• Cons:
  • Although microloan funds are disbursed quickly, the approval process can still be lengthy.
  • Microloans restrict your spending to expenses – debt refinancing and commercial real estate purchases are not allowed.
  • Eligibility requirements may vary among lenders.

4. Same-Day Funding

Your business may find itself in a situation where it needs an immediate influx of capital. Same-day funding loan plans offer this relief with terms that provide business owners money soon after they qualify. There are several types of same-day funding loans, and each can help keep a business afloat in dire financial situations.

• Loan amount: Depends on the lender. Typical loan amounts range from $1,000 to $50,000.
• Loan term: 12 to 60 months
• Acceptable loan uses: Depending on the lender, make sure you’re able to use the funds to meet your business goals.
• Qualification criteria: Vary by lender, but typically modest
• Pros:
  • Same-day loans are made to accommodate borrowers with bad credit, so you can easily qualify for them.
  • Funds are wired directly into your checking account shortly after qualifying for a loan, making same-day funding perfect for emergencies.
  • Fast application process.

• Cons:
  • High interest rates and short repayment terms can make it challenging to pay off a same-day loan.
  • Same-day loans are generally geared toward personal rather than business use.

5. Term Loans

Term loans are traditional financing options that you’ll typically access through a bank. These loans require regular repayments at a fixed interest rate to pay off a one-time lump sum of added capital. They’re often the next-best option if you aren’t eligible for an SBA 7(a) loan.

• Loan amount: $25,000 to $500,000
• Loan term: Two to five years for a short-term loan or 10 years for a long-term loan
• Acceptable loan uses: You can use term loans for most business expenditures, including marketing, inventory, equipment, and payroll. Debt refinancing and business acquisitions are also allowed.
• Qualification criteria:
  • A high credit score (the exact number may vary by lender)
  • Minimum business experience of two years
  • Collateral, in most cases

• Pros:
  • The predictable payment schedule and fixed interest rate mean no guesswork on when payment is due and in what amount.
  • Long-term loans typically have lower interest rates than most other financing options.
  • Short-term loans may be easier to qualify for than SBA 7(a) loans.

• Cons:
  • Term loan payment schedules are inflexible. Borrowers are expected to make payments on or before the due date regardless of whether or not they have the money.
  • Qualifying for a term loan can be tough.
  • Strict borrower criteria can cause lengthy processing times for applications, particularly for long-term loans.