May 10, 2022 | Last Updated on: August 16, 2023
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Whether you’re a rapidly growing small business or a solo entrepreneur-run company, getting your first business loan can feel intimidating at best.
Trying to figure out the many different types of loan and lender options on your own only adds to the stress you feel as a business owner, especially if you’re still recovering from the pandemic.
No matter what your situation is, this guide will help you understand all the different ways you can use a business loan, the different types of loans that are best for different situations, and how you can successfully apply for and receive the funding you need.
If your business is looking at expanding its operations by investing in an additional storefront, facility, or another form of business real estate, a business loan can be incredibly useful. Since real estate is typically a very large purchase, most small businesses don’t have the cash on hand to pay for an entire piece of real estate, a large lump sum loan is needed to make this type of investment.
While most term loans and SBA loans, like an SBA 7(a) loan, can be used for real estate purchases, the small business administration has one particular loan program, the SBA 504 loan program, that is even more strategic.
The purpose of SBA 504 loans is to encourage job creation and community development. They’re intended to help businesses fund major undertakings, like buying real estate. To get a 504 loan, an SBA-approved certified development company (CDC) will work with a bank to give you 40% and 50% of the funds respectively, leaving only 10% for you to pay out of pocket. Additionally, these loans typically have low, fixed interest rates, long-term financing, and small down payments making them an excellent choice for real estate financing.
Best loans to use for buying real estate: SBA 504 loan, SBA 7(a) loan, term loan.
Similar to buying real estate, repairing or expanding your existing facility or storefront is considered a “development” need for businesses. This means that many of the same loan options are available. SBA 504 loans can be used here, as can SBA 7(a) loans and traditional term loans. One reason that small business owners might choose to go with an SBA 7(a) loan over an SBA 504 loan is that 7(a) loans are typically more flexible in what they can be used for. Depending on your particular circumstance, you may be able to choose either one.
If you are not improving or expanding your facility but are making repairs, particularly due to a disaster, you can also qualify for a different type of SBA loan known as a disaster loan. However, it’s important to note that your business has to experience a qualifying disaster in order for this loan to apply. The SBA clearly outlines what kinds of situations and businesses can benefit from disaster loans on their website.
Best loans to use for facility repairs or expansion: SBA 504 loan, SBA 7(a) loan, term loan
If your business is looking to purchase inventory or equipment to produce your product, there are several different types of loans that can help you. SBA 504 and SBA 7(a) loans can be used for inventory and equipment, as can traditional term loans.
But you may also be able to use a line of credit or business credit card. These options aren’t loans in the traditional sense, in that you don’t receive a lump sum upfront. Rather, they give you access to a set amount of financing that you can draw on as needed, and you only pay back what you use.
Best loans to use for buying equipment or inventory: SBA 504 loan, SBA 7(a) loan, term loan, and potentially line of credit or business credit card.
If your business is not making any large updates or changes but needs some extra cash in your bank account for your day-to-day business expenses, you can use a loan for working capital financing to help increase your cash flow. Working capital financing is commonly used to meet payroll, pay rent, or make debt payments during a slow season.
Depending on how much money you need and how frequently you need it, you can get a term loan or SBA 7(a) loan. Or you can try other types of working capital financing options, like a business line of credit, invoice financing, or a merchant cash advance. The latter options allow you to access cash based on selling unpaid invoices for a percentage of face value, or based on future sales.
Best loans to use for increasing working capital: Online term loan, SBA 7(a) loan, line of credit, merchant cash advance, invoice financing.
If you previously took out a loan that does not have the most favorable terms, taking out a better loan can help you more quickly pay off those old debts. The financing options that will allow you to do this best are SBA 7(a) loans and term loans.
SBA loans typically have a better rate than traditional term loans, but a term loan will offer more flexibility. Additionally, because the federal government is not involved in traditional term loans, the application process can be much less complicated and you can get these from a wide variety of financial institutions.
Best loans to use for refinancing: SBA 7(a) loan, term loan<.p>
Once you know why you’re taking out a loan, you can consider which of the financing options will work best for you. As a reminder, here are the basics of the financing options mentioned above:
In order to identify which option is best for you, first eliminate the options that are not available to you, based on your financing needs. Then, identify which of those options you can qualify for. Finally, compare the repayment periods, interest rates, and other details to pick the overall best choice for you and your business.
Depending on your business’s financial history, the type of loan you need, and how quickly you need it, different types of lenders will be best. There are three main sources of small-business loans: online lenders, banks, and nonprofit microlenders.
Online lenders provide small business loans and lines of credit. If you lack collateral, are a new business, or need funding quickly, an online lender might be the best option for you. The average APR is rarely as low as what traditional banks offer and it can vary a lot depending on the lender you choose, the type and size of the loan, the length of the repayment term, and the borrower’s credit report. However, their online application is significantly faster and their approval rates are higher than traditional banks.
Traditional bank loan options include term loans, lines of credit, and commercial real estate mortgages to buy properties or refinance. However, taking out a small-business loan from a bank can be more difficult because of high credit score and collateral requirements, in addition to more stringent eligibility requirements and a lengthy approval process. These are best for existing businesses with good financial histories.
If you don’t need a loan quickly, have good credit, and have been in business for more than two years, you can consider a traditional bank for your small business financing.
Microlenders are nonprofit lenders that lend short-term loans of less than $50,000. If you don’t qualify for a traditional bank loan, have bad credit or no credit history, or are a very new business, a microlender might be your best option.
It’s important to note that these loans have a higher APR than other loan options and only offer loan amounts under $50,000. Additionally, the application may have more requirements like a detailed business plan, financial statements, and a description of what the loan will be used for, making it a lengthy process.
As you explore your loan options, it’s a good idea to begin preparing the documents you’ll need to help you apply for even the most complicated types of small business loans. To make sure you have all of your bases covered, you should gather your:
While not every loan application will require all of this information from you, it’s always a good idea to be prepared with everything so that your application doesn’t get rejected or further delayed when your business needs financial help now. Don’t forget—some loan options, like SBA loans, check your personal credit information in addition to your business credit!<.p>
Whatever your business needs funding for, chances are, there’s a good loan option for you. With this guide, you’ll be able to make sense of your options and make a smart decision. Like Debbie Elder, who used Biz2Credit to get funding for the Primary School she runs in Richmond Texas.
