A Beginners Guide to Small Business Loans

Are you contemplating getting a business loan to boost your business or expand into a new market? Fortunately, there are various financing options for companies looking for small business loans. Options range from online loans to traditional lenders.

However, every company is unique. Therefore, it’s essential to determine your business’s financial needs before looking for a lender. Your business’s financial needs will guide you to find the best loan based on your company’s position.

Whether you manage a start-up business or an already-established company, many loan products are available for you. Ensure you check different lender’s repayment terms and interest rates and choose a loan product that best suits your needs.

Below are the different types of small business loans available to companies today:

A Term Loan

This loan is one of the most common types of business financing. If you apply for a term loan, the lender will give you a large sum of money upfront, and they will require you to repay the loan within a prearranged period with interest. Most businesses often opt for online lenders who offer loan terms of up to $1 million.

Online lenders also process the loans faster than other traditional small business lenders such as banks. A loan term also allows the borrower to borrow a higher amount of money than other loan types.

Unfortunately, there are also numerous disadvantages of using term loans. One significant drawback is that the loan may need personal collateral or guarantee such as business equipment or real estate properties.

On the other hand, if you cannot repay the loan or you default, the lender could sell the real estate property to recover their money. Additionally, most online lenders offering term loans often have higher processing costs and interest rates than traditional lenders.

Term loans are the best business loan options for companies planning to expand. They are also great for solid businesses looking for quick funding.

Business Lines of Credit

Some small businesses turn to a business line of credit for financial assistance. A business line of credit offers small companies, and startups access to finances based on their set credit limits. If you prefer this type of business loan, you can access the funds and pay interest on your specific drawn amount.

Business lines of credit offer borrowers more flexibility than other types of loans, such as term loans. They also don’t require collateral and are unsecured. However, these types of loans may have added costs like draw and maintenance fees. You will also need a strong credit score and proof of revenue to qualify.

Business lines of credit are excellent for companies in need of money to handle unforeseen expenses. They are also ideal for businesses that require short-term financial help and seasonal enterprises.

Business Equipment Loans

An equipment loan will assist you when you are looking to purchase office equipment for your company. This equipment may also include financing for semi-trucks. Semi-truck financing is business loans that help businesses purchase vans, light trucks, and cars for business purposes.

When you apply for an equipment loan, the equipment you want to buy will act as collateral, while its lifespan will match the loan’s repayment term. The loan’s interest rate is determined by your business’s strength and the equipment’s value. If your business finances and credit score are strong, you can get very competitive interest rates.

However, you may be required to save up for a deposit on the equipment you want to purchase. Business equipment loans are ideal for companies looking to upgrade or buy new office equipment immediately.

Small Business Administration (SBA) Loans

The Small Business Administration secures SBA loans for businesses. These loans are offered to borrowers by selected lenders such as banks. The repayment term on an SBA loan depends on the use of the loan.

Most loans have a repayment period of 7-25 years. If you apply for a loan to purchase office equipment, you will have a repayment period of up to 10 years, while working capital loans have repayment periods of 7 years. Likewise, an SBA loan for purchasing real estate property may have a repayment period of up to 25 years.

SBA loans have the lowest loan rates in the lending market with favorable repayment terms for business. Another advantage of SBA loans is that you can qualify for a loan of up to $5 million. However, the application process is extensive and rigorous, making it challenging for most small businesses to qualify.

An SBA loan is best for companies looking to refinance their current debts or expand their businesses. It’s also great for companies that don’t mind the long wait time.

Debtor in Possession (DIP) Financing

There are numerous types of small business loans, and debtor in possession (DIP) financing is one. DIP loans are available for companies that are operating under the bankruptcy reorganization process; Chapter 11. These types of business loans help companies oversee the management of their assets and maintain control of their property during the reorganization period.

For this reason, DIP loans are among the most valuable loans that help ensure business longevity. DIP financing is excellent for businesses going through bankruptcy restructuring and requires debt funding solutions. Unfortunately, such companies often don’t qualify for traditional loans from banks and other financial institutions.

DIP financing helps businesses that have filed for bankruptcy explore other options to ensure business continuity. This gives companies more opportunities than liquidation. Check out this article to understand more about debtor in possession financing and how it works for small businesses.

Now You Know the Types of Small Business Loans Available for Your Company

There are many options for business financial assistance in the market today. However, before you start exploring the small business financing options, it’s essential to determine your company’s financing needs.

Do you need a loan to purchase office equipment or refinance your loans? Do you need money as soon as possible?

Different small business loans have various application requirements and terms of use. Thus, it’s essential to understand your needs and apply for the right loan accordingly.

Did you enjoy this post? Check out other articles on our website for more business tips.

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Written by Paul Watson

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