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3 Types of Small Business Loans

admin | June 16, 2022

Whether you’re starting a new business or are ready to expand, you’ll likely find that you need some extra capital at some point. Small business loans are designed to give entrepreneurs that extra financial boost they need to push their company to the next level. While you’ll find multiple loan options are available to small business owners, there are three main types that you’ll want to explore for meeting your company’s financial needs.

Business Term Loans

This is one of the most traditional types of loans that you can use for a variety of purposes. This loan type works best when you are wanting to make an investment within a specific area of your business. For example, you might be ready to purchase real estate or acquire another business.

With a business term loan, you’ll receive a specific amount of money once you are approved. Then, you’ll pay this loan back over a period of time along with interest. A typical term loan’s repayment period can span anywhere between one to five years. Provided that you have good credit, you can also achieve a lower interest rate compared to other types of loans, which helps you lower the cost of securing additional capital over time.

Business Lines of Credit

After investing the majority of your available capital in a start-up, you might be concerned about how you’ll handle the occasional rough patch. If you have a company model that requires waiting on customers to pay for large purchases, then you could hit a lull in your company’s cash flow that makes it hard to cover expenses. Or, you may need to address seasonal cash flow changes to keep your business afloat until the profits start increasing again.

A business line of credit serves as a cash cushion that you can tap into during times of financial drought. With this type of loan, a lender will provide you with a set amount of funds that you can draw from any time you need it, much like a credit card. You can choose from fixed and revolving types of credit when you apply for this type of financial assistance, and you have several options for boosting your company’s creditworthiness in the eyes of a lender. For instance, some lenders offer short-term lines of credit that minimize risk for new business owners who haven’t established their company yet.

SBA Loan

The U.S. Small Business Administration offers government-backing for loans that lenders issue to small business owners in a similar way as other federal agencies back home loans. Since the bank or other type of lender knows that they can recover some of their losses if a borrower doesn’t pay, they are more likely to offer a loan to someone who is just starting their company.

You’ll still need to have good credit to secure this type of loan, but you might prefer it due to its larger loan amounts and longer terms. On the higher end, you could secure loans in amounts as high as 5 million dollars with payment terms extending to 25 years.

Exploring loan options helps you to secure funding that can leverage your business to the next level of success. As you do, make sure to focus on maintaining a strong personal and business credit history that makes you an ideal candidate for lenders. Then, remember to strive to get the lowest interest rate and only take out as much of a loan as you know that your business can realistically repay.

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