For many small businesses, the need for working capital develops quickly and requires immediate attention to keep day-to-day activity going. In the past, the only option would be to visit your local bank and apply for a business loan.
Not so fast!
Today there are more funding options geared towards small to mid-sized business than ever before. Each one offers different advantages and disadvantages that are important to weigh beforehand. To help you save time, we’ve compiled a list of the 5 most common financing alternatives for SMBs today.
1. SBA Loan
The Small Business Administration (SBA) offers several types of loans for small businesses. These loans are partially backed by the government, but are issued through a bank using regular banking guidelines.
- The SBA 7 is the most common type of small business loan, and up to $1 million can be borrowed. Typically, the SBA guarantees no more than 75% of the loan value, and the maximum amortization is six years.
- The SBA MicroLoan is to purchase computers, equipment, and other items to launch a business. You can borrow up to $25,000 for up to six years. Interest rates will not exceed the prime plus 4%.
- The SBA 504 is for purchasing real estate, and is designed to increase the level of employment at a company. The guarantee value can be as high as 90% of the appraised value of the property.
- The SBA Fastrak Loan is offered through some of the larger national banks without the need for approval from the SBA. Banks can approve this type of loan up to $100,000, and the SBA will guarantee up to 50% of its value.
2. Line of Credit
Also called operating loans, working capital loans or overdraft protection, these loans are flexible with your day-to-day cash flow needs. The amount you are able to borrow typically hinges on your accounts receivable. This is typically not the type of loan you want if you’re going to be purchasing inventory. Cash businesses such as retail stores typically do not qualify for this type of funding.
3. Term Loan
The most traditional type of loans for small business, term loans are offered by both large national, as well as smaller community banks. Term loans have monthly principal and interest payments with the principal amount decreasing each month. This type of loan is usually used for purchasing long-term assets such as computers or equipment and the amortization period will often be less than five years.
In some cases, it may make sense to lease rather than buy equipment. In these situations, these items are owned by a financial institution or third party and provided to you for a set period of time. The value determined will vary depending on the resale value and the type of asset.
5. Credit Cards
Many small business owners think of credit cards as a type of loan. And, they can definitely be a convenient way to pay for necessary business items like office supplies and travel expenses. However, because the interest rates are so high, they should only be used if and when they can be paid off quickly.
6. Cash Advances
Cash advances offer recipients ongoing access to funds available within an approved line of credit. This option can be particularly useful for SMB’s in need of immediate funding solutions.
By considering what you specifically need funds for and evaluating how you will pay off any debt incurred, you can quickly determine the best type of loans for small business you need. And, as your business evolves, you may find that the type of financing you need may change dramatically. So, it’s good to keep an open mind and a watchful eye out for financing options to take advantage of the best funding opportunities to help your business grow.