A Comprehensive Guide to Different Types of Small Business Loans

Whether you are starting a new business or investing in an established one, there are lots of options for small business loans to meet your needs. The different loan options available to small business owners vary significantly in terms of the maximum loan amount you can receive and the requirements for approval. With so many different types of small business loans out there, it's important to explore each one to choose the loan that's best for you.

SBA Loans

Small Business Administration (SBA) loans are similar to installment loans, but they are created with support from the federal government. The SBA works with specific lenders who in turn provide loans to small businesses in need. SBA loans are backed by the government to provide extra security and low-interest rates.

Some other differences between SBA loans and traditional business term loans are that you may be able to borrow more with an SBA loan, sometimes of up to five million dollars, but it can take weeks before you receive the loan.

Eligibility for SBA loans is based on the following factors:

  • The type of business
  • The size of the business
  • The business location
  • The owner's equity in the company
  • The owner's criminal record
  • Ability to repay the loan

Business Term Loans

A business term loan or installment loan is a traditional, long-term loan for an agreed-upon amount of anywhere from $5,000 to $2,000,000. Usually, the loan period is one to five years.

The exact terms of your installment loan will vary depending on the lender you choose and your business. There are even business term loans for specific purposes like a business acquisition or a start-up.

To get a small business loan, you will need to fill out a loan application, provide proof of the year your business was established, and complete a credit check. Older, established businesses may have an easier time getting approved for a business term loan than newer businesses. Business owners with fair or poor credit scores may also struggle to acquire a business term loan or may be approved but with a higher interest rate.

Merchant Cash Advance Loans

A business or merchant cash advance is a short-term loan. Whereas an SBA loan can take weeks to hit your bank account, a merchant cash advance provides you money quickly when you need it. According to data from GreenStarCash, similarly to payday loans that are usually funded in just a day, it often only takes a day or two to see the funds in your account when you apply for a merchant cash advance. This makes a merchant cash advance loan a great option for emergencies.

Merchant cash advances are also beneficial for companies with fluctuating profits because your regular weekly or monthly payment amounts are based on the amount of revenue your business made in that time frame. This method of repayment helps to ensure that you will not miss a payment. It's also unique to merchant cash advances as most loans have a fixed monthly payment amount.

The downside of merchant cash advance loans is that they usually have higher interest rates than term loans. The interest rates range from 10% to 200%. For this reason, it's best to only borrow what you need.

Business Line of Credit

A business line of credit is another non-traditional option for small businesses. Similar to a credit card, you can get approved for a certain amount of credit that you can use any time. This is a good option if you are not sure how much money you will need because you can borrow smaller amounts as you need them and only pay interest on what you borrowed.

While you may not be able to borrow as much as you could with a traditional loan, you can often secure more money with a business line of credit than a business credit card. The interest rate will be similar to a credit card with the average being 10% to 20%. However, the APR could be as high as 80%.

Some lenders may require collateral to open a line of credit or have eligibility requirements based on your credit score, the age of your business, and the amount of revenue it makes.

Last Words

Still not sure which type of small business loan is right for you? Look for the loan that offers the amount of money you need with the lowest interest rates available to you. If you aren't sure exactly how much money you will need, consider a business line of credit instead of a traditional loan. If you need cash quickly or have less than perfect credit, go for a merchant cash advance. Lastly, if you are looking to borrow a large amount, a business term loan from a private lender or through the SBA may be best for you.