Understanding what type of business loan you need to fund your small business is essential to managing the loan, and financial projections, correctly. You need to have a clear vision of what exactly you will use the money for, and how fundable your business proposition actually is.
While there are many business loans to choose from, each one is tailored the needs of specific types of companies, and differ in amounts lent and methods of repayment. Consider the few types of common business loans, and which one will best suit your needs.
Short term loans can be acquired from your financial institution or SBA, the U.S Small Business Administration. These loans are usually for less than $100,000 and are relatively easy to pay off, which can be a good way to build up funding potential within your company.
These short-term loans are usually used for supplies, small equipment, seasonal inventory buildup or small investments. There are a few specifics you’ll want to know:
- Micro loans usually have a year-long term and are paid off in one lump sum at the end of the term, instead of using monthly payments.
- Business credit cards are simply small lines of credit opened to invest money in materials and startup costs, and are usually paid back in full using a month-to-month payment plan.
If you’re looking to stay the traditional path, then you’ll need to consider long term loans, often referred to simply as Term Loans. These are the most common form of business loan. They include monthly repayments at a fixed interest rate and a set maturity date of usually 1 to 7 years.
Term loans are usually used for asset purchasing, working capital, expansions, refinancing, or acquisitions. Be sure to remember, however, that long term loan options may require collateral backing or a certain amount of the company’s profits to insure repayment.
- 504 Loans offered by the SBA offer fixed-rate financing for expansion or modernization through CDCs, or Certified Development companies. They are used for construction or renovation costs.
- 79A Loan Program offers different types of loans to businesses with special requirements, such as rural or export-based businesses.
If your business venture has lower fundability and is having trouble being granted a loan, a viable option is seeking out venture capitalists. Venture capitalists are individuals who are looking to invest in new and creative ideas, and are less rigid on the technicalities of fundability. They can be valuable sources of funding, but usually require a percentage of the company in return.
Lines of Credit
Lines of credit can be opened to help you finance your business. This credit allows you to borrow a certain amount per year at your own need, and you do not receive a check for the full amount up front. Lines of credit are usually designed for temporary cash shortfalls- if you don’t repay it in full it eventually becomes much more expensive. Some important details include:
- Revolving lines of credit automatically reload themselves after they have been paid off, and you are allowed to borrow the same amount again.
- Credit interest rates can easily grow, and usually span from 5-25% over the repayment period.
Grants can be a useful tool for funding your business, especially if you are in the scientific research or development industry. Federal grants are often awarded to business ventures that have high potential for commercialization. However, the application process can be long and strenuous, be sure to have a clear vision of your company or research goals before applying.
By assessing what your business needs to get off the ground, you can determine what type of loan you should be looking for. If your business is small and just getting started, you might need to take out a small short term loan to buy equipment and set up shop. If your business is already established and you are looking to expand, a 504 loan might be the best option for you. Once you have a clear understanding of the funding your company needs, you can choose which business loan will work best for you.