A Business Owner's Guide to the Different Types of Business Loans
In their year-end Quarterly Banking Profile report, the FDIC reported that commercial and industrial (C & I) business loans rose 3.2 percent. That means companies were borrowing over $70 billion to finance their operations.
With statistics like these, it’s hopeful that the US economy will bounce back after the costly effects of the recent worldwide pandemic. Are you too, starting up your own entrepreneurial dream? Then this article is for you.
Learn more here on the types of business loans that are available today. Do some homework today, and you’ll find the best business funding options that can bring your company to life.
Types of Business Loans
There are many loan options available to finance your business in the market today. These options range from public or governmental to private loans. Here’s a closer look at each source:
Private Bank Loans
You can find private loans at either a bank, credit union, or other lending institution. Private loans are commonly used for financing buildings, equipment, or product development costs. Private loans must be repaid within a specific date.
Examples of different private business loans used today include the following:
Business Lines of Credit
Business lines of credit allow banks to finance specific amounts for a small business, with the understanding that the business owner will pay back the full balance before their following billing cycle begins.
If the business owner can't pay back these amounts, then they pay interest and service fees on any outstanding balances. Business lines of credit are a good way for small companies to build their business credit history.
Sometimes a bank offers equipment loans to help companies buy the equipment they need to manufacture or deliver their products.
An equipment loan is secured against the machinery that the company eventually buys. Lenders can seize the equipment if a borrower doesn’t pay back the loan. Both borrowers and lenders sign a loan agreement that spells out these rules and lists the equipment purchased.
Merchant Cash Advance
Merchant cash advances also provide flexible business financing options for a company that shows consistent credit card or point of sale (POS) sales.
Lenders send the borrower funds in exchange for a percentage of that borrower’s regular credit or debit card sales. The lender may request a short-term repayment schedule or charge a fee for their services.
A merchant cash advance isn’t the same thing as a loan. Company owners don’t pay monthly fees nor have repayment schedules. A merchant cash advance lender usually receives around five to 15 percent from every sale until the cash advance amount is paid off.
Crowdfunding platforms help companies raise funding by tapping private investors, friends, or family members to invest in their business. Crowdfunding will provide business owners with their own online site to describe their company’s product line and request funding.
Crowdfunding works in three different categories. These categories are called, donation-based funding, rewards-based funding, or equity-based funding.
Donation-based crowdfunding is a gift. It doesn’t provide any financial returns to the contributor for their “donation.”
Rewards-based crowdfunding offers an investor either services or products from the requestor as a way to reward their investment. Equity-based crowdfunding allows the donor to become a co-owner of the business.
Public or Government Loans
A government-backed loan doesn’t directly lend funds to a company. Instead, they create policies for a micro-lender to negotiate with a potential borrower. The government guarantees these loans, which then reduces the risk to a lender.
Small Business Administration (SBA) loans are popular government-guaranteed loans available in today’s financial market. The SBA is the governmental agency that works with a pre-approved lender to offer business financing assistance to a “small” company.
A “small” company is defined as a business that hires less than 250 employees and sees less than $750,000 in annual revenues.
There are a variety of SBA loans that small businesses can use to grow their operations. Some small business loans include:
The 7(a) loan usually awards $2 million per borrower. The SBA can ensure 7(a) loans for an amount of $1.5 million or no higher than 75 percent of the total loan amount.
These small business loans are a good way for small companies to pay for their start-up expenses. Eligible costs include anything from delivery vehicles to employee uniforms.
Microloans provide business financing for small business owners to borrow smaller, or “micro-level” amounts to pay for their day-to-day company expenses.
Microloans usually amount to $13,000 per borrower. Companies can only apply for no more than $350,000 per microloan.
CDC is an abbreviation for “Certified Development Company.” CDC or 504 loans are long-term loans that help small companies that contribute to their community’s economic development.
CDC/504 loans are long-term loans with fixed rates, to purchase items such as real estate or business equipment.
Most CDC/504 loans total $5 million. The SBA guarantees CDC/504 loans for 40 percent of the full loan amount. Commercial lenders fund the rest. These loans carry either a 10- or a 20-year maturity period.
SBA Loan Eligibility
SBA loan eligibility criteria differ based on the loan product you’re applying for. Most of the qualifying criteria for all SBA loan types include:
- Companies operating within the US
- Companies that are for-profit entities
- Companies meet the SBA’s definition of a “small business"
- Companies that show the owner contributed their own funds to the company
- Companies that can secure their loan with either their assets or other collateral
- Companies that demonstrate positive debt service coverage.
What’s Your Next Step?
Still not sure about the types of business loans available today? Then start “small” and head over to the US Small Business Administration website today.
Find out more about their loan programs. Confirm whether your business fits the “small business” definition.
Don’t forget to head over to our website for more insights on business financing. Contact us today!
We can build you an individual financing plan that meets your goals. Come leverage our strong borrower relationships so that you can make your business dream the best that it can be.