f you’re the owner of a thriving business, then there will likely come a time when you need access to more working capital to cover necessary business costs or even to expand to a new market. 

Seeing your business grow is certainly exciting, but it can also come with additional costs. 

If you or your business don’t have the funds to pay for these expenses upfront, a business loan could be an effective tool to assist with cash flow needs. These loans are specifically available to help business owners and entrepreneurs pay for various operational and expansion expenses. 

Of course, not all businesses or business loans are created equal. Financing options exist for a wide range of needs, timeframes, and business types. Below, learn which loan might be the right fit for your business. 

6 Popular Business Loans

Business loans can help with cash flow needs in the short-term, long-term, and everything in between. Here are several popular loan options to consider for your business: 

SBA loan

SBA loans are backed by the U.S. Small Business Administration (SBA). While the agency doesn’t lend funds directly, it works with lenders and organizations to help provide loans for businesses that may not otherwise qualify. 

To be eligible, on top of certain basic requirements, you’ll typically also have to meet size standards based on your business’s revenue or the number of people you employ. The loan process to obtain an SBA loan can be longer than for some other loans, but well-qualified businesses may gain access to financing that ranges from $30,000 to $5 million with extended repayment terms of up to 25 years.

Term loan

Term loans allow you to borrow a lump sum of money and repay it over a set period, usually in equal installments. Repayment terms can be short-term or long-term, and the loan conditions depend on the loan amount and its use. 

If you’ve been in business for at least two years and have a steady revenue stream, you may be able to secure a long-term loan. Long-term loans feature relatively low interest rates (starting around 9 percent) and repayment periods of up to 10 years. Long-term loans are commonly used for significant expenses, such as machinery or real estate.

Short-term loans generally must be repaid within a year and tend to have higher interest rates. These loans may be useful for more immediate needs, like payroll, an unexpected expense, or to fund a quick-moving business opportunity.

Business line of credit

A business line of credit is a revolving loan that gives you access to a defined credit limit. If approved, your line of credit will have two phases: the draw period and the repayment period.

During your draw period, which generally lasts up to 24 months, you purchase what you need for your business and can make interest-only payments to your lender. Or, if you pay off the balance, you can gain access to the full amount available again.

When your repayment period kicks in, you may no longer use your account to make purchases and will have to submit payments toward the entire balance. The repayment period can last anywhere from six months to five years.

Business lines of credit typically provide $1,000 to $500,000 worth of funding. Depending on your creditworthiness, revenue, and other factors, your interest rate could be as low as 7 percent or as high as 25 percent.

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Equipment financing 

Equipment financing is a type of installment business loan that can help cover the cost of tangible assets, such as a work vehicle, machinery, office furniture, or other business-related equipment. The items you buy serve as collateral, so if you default, your lender can assume ownership of and sell the items to recoup their costs. 

If approved, you may be able to borrow up to 100 percent of the equipment's expense. However, some loans require a down payment of up to 15 percent. Generally, equipment financing terms are three to 10 years, and interest rates can vary dramatically from low single digits up to 40 percent.

Invoice financing

If your cash flow has come to a slow trickle, invoice financing may help you make ends meet. With this type of loan, you can borrow against an outstanding invoice and repay your lender when your customer remits payment to you. Some lenders will let you borrow 100 percent of the invoice’s value, while others will limit you to 80 percent to 90 percent. 

While invoice financing may be available to newer businesses and startups, you can expect the loan to have a high interest rate.

Another loan option is invoice factoring, where you sell your invoices to a factoring company. The company will pay you up to 95 percent of the invoice’s value upfront and the remainder (minus fees) when they collect from your customer.

Merchant cash advance

When you take a merchant cash advance (MCA), you agree to repay your lender with future debit and credit card sales. That means a percentage of your daily card revenue will get taken off the top and sent to your creditor until the note is paid off. 

If your credit is marginal but your sales are strong, you may qualify for an MCA of up to $250,000. Keep in mind, though, that this type of loan can come with a staggering interest rate (as high as three digits).

How Do You Qualify for a Business Loan? 

When applying for a business loan, you’ll typically have to provide documentation for your personal and business finances. Lenders will use this information to determine if you meet the qualification guidelines for the specific loan you apply for. 

While exact requirements may vary by loan type and lender, here are the factors often considered before you’ll receive the stamp of approval. 

  • Credit history and score: Most lenders will review your credit and payment history. Credit score requirements can vary significantly by lender, but the better your score, the better the chance you’ll qualify — and for more favorable rates. The SBA, for example, mandates a personal credit score of 680 or higher.
  • Outstanding debt: Just because you have other debt doesn’t mean you won’t obtain approval for another loan. However, lenders want to confirm that your business can handle an additional payment by reviewing your cash flow and current debt.
  • Other financial documents: Your lender will also want to assess the overall financial health of your company. Therefore, they may require you to submit bank statements, tax returns, revenue forecasts, profit and loss statements, or balance sheets. You might also have to share your business plan to demonstrate what the borrowed money would buy.

Where to Get a Business Loan

Business loans are available through certain banks, credit unions, or online lenders. 

But not all business lenders offer every loan. So, if you have your eyes set on a specific type of financing, do some research to find out where it’s available. 

The Small Business Administration also provides resources and a lender match program to help you partner with a lender that can assist with your specific needs. 

The Door to More Opportunities

A business loan could be a necessary and valuable first step in taking your business to the next level. 

Once you choose the type of loan that’s right for your business, take some time to compare different lenders and terms. Shopping around will improve your chances of getting the lowest interest rate and best terms possible.

This page is for informational purposes only and is not intended to be relied upon as legal, financial or accounting advice. Please consult your own professional if you have any questions.

June 16, 2022
Banking 101