Types of Small Business Loans
There are many types of small business loans. The costs of borrowing depend on the available business loan rates, goals of the business, time in business, type of business, and applicants with strong credit ratings and strong financial statements often get the best rates. We outline the different types of business loans and how you can get them with American Business Credit.
Secured Small Business Loans
This type of loan uses the borrower’s personal and business assets to guarantee repayment. The lender can charge a lower interest rate than is possible with an unsecured loan because of a lower risk of loss. In the event of default, the lender takes the security.
Unsecured Business Loans
Unsecured Business Loans use the borrower’s personal and business assets to guarantee repayment. The lender can charge a lower interest rate than is possible with an unsecured loan because of a lower risk of loss. In the event of default, the lender takes the security.
Startup Business Loans
Startup loans are a special type of financing, and online lenders that offer these loans can work with borrowers with varying credit ratings and assets. Some lenders will issue personal business loans for startups, and these are valuable sources of capital when a business has no record and no current business income. Experts urge borrowers to limit the use of personal business loans to small and specific business needs, such as money for things like buying equipment or early-stage production.
When reviewing how to get a small business loan, you should think broadly and include funds that do not need repayment. Business grants can be an excellent opportunity for any company,
and they are particularly useful for startups and small businesses seeking to expand. Business grants often promote a specific set of public policy objectives. Some grants seek to promote technology and innovation while others focus on increasing economic activity and creating jobs.
Using self-contained resources should be the first consideration when deciding whether to get a business loan. Self-financing is important, particularly for owners with weak credit
scores and few assets. Getting business loans with a troubled credit history, a low FICO score and little or no financial track record is difficult at any stage of the economic cycle. Lenders will require security or, if unsecured, will charge rates that add significant sums to the costs of borrowing. Many businesses have grown from the maximum that owner could gather from their personal resources.
Other Sources of Business Loans
Banks and commercial lenders are standard sources for business loans, but in today’s marketplace, small business owners have a wide range of choices for business funding.
Friends and Family
Friends and family can become lenders and provide a business loan. The loan may include a document with repayment terms, interest and any security on which the borrower and lenders agree. Some small business owners welcome the idea of working with friends and family because they value their involvement in the business. However, other business owners would prefer to have a creditor relationship without any personal ties.
Banks have strict standards for making loans, and they are geared toward established companies with assets, business credit and multiple years of audited financial statements. Major banks have set some funds aside for small business lending. The process is not fast, and it requires dedication to details and providing accurate information. Personal finances are a critical part of the bank evaluation of an application. Finance experts say that in the bank loan review process, the management of your personal finances reflects the way you would handle your business finances.
Credit Cards and Credit Lines
Credit cards can provide loan funds in the same way that a line of credit operates to fill gaps between billing and payment. Credit cards require solid personal and business credit, and the use of credit cards can build creditworthiness. However, credit cards can be a seductive trap if not used wisely. They offer low payments that do not reduce the principal and then reduce the amount of available credit. A credit line is a type of loan that offers flexibility and controllable costs. Rather than taking a loan in a lump sum and then making the monthly payments, you can get a line of credit and pay a percentage of the amount used. The advantage is that the line of credit is an asset, and it does not have a cost nor does it add debt until it’s used.
The SBA provides grants and credit guarantees to local institutions that carry out a program of small loans to small businesses. Called Microloans, this program has a loan cap of $50,000 and a typical loan around $13,000. The virtue of the program is that it is a fast turnaround loan that does not require good credit or assets. Assisting small, new and startup businesses, the Microloan program seeks to help with immediate financing and building creditworthiness. The limit on the size of the loan may impede some uses, but the development of a credit reference and a track record are excellent building blocks for future financing. The local grantee is a community-based institution dedicated to community or regional economic development. The grantee appoints one or more intermediary lenders to add matching funds and make microloans. The intermediary decides on loan applications, and it services the loans.
- It must be a for-profit business.
- It must have a lawful purpose and engage in lawful activities.
- The owner must invest equity in the business.
- It must operate and have a base in the United States or its territories.
- The business must have applied for and been rejected for private financing. The rule
requires two rejections before becoming eligible for SBA assistance.
EDA Revolving Loan Fund
The Economic Development Administration has a program for small business loans through the Revolving Loan Fund. Available to firms with challenged credit and limited resources, the RLF focuses on generating economic activity in areas with low economic activity. The program operates through state and regional RLF grantees.