Types of Small Business Loans

Without enough funding, a small business will fail at sustaining itself. Unless you have a generous donation, you are most likely going to obtain a business loan for your company. There are two parts to this: the first is finding the right loan for your business and the second is actually qualifying for the loan. For the purpose of this article, you will learn about the different types of small business loans available for you to apply for.

SBA Loans (Small Business Administration)

One of the most common types of loans is the SBA loan which is government supported funding. The advantage of SBA loans is that there is an extensive selection of loan guarantee programs available to small businesses. The programs are designed to help businesses get approved for loans in which they may not qualify for. Funding is provided to businesses through commercial banks, which receive the money from the SBA.

SBA loans do not have limits on obtaining capital and many of the loans allow a maximum of 25 years maturity. Although SBA loans are flexible when it comes to paying back the loan, there are specific requirements small businesses must meet before getting approved. First, small businesses must have a complete business plan with details regarding growth, revenue and what the money is being used for. Second, businesses owners must be willing to put in their own money. In other words, you must have a stake in the business. Finally, you must have a good credit score.

Micro Loans

A micro loan, which is generally $35,000 or less for up to 6 years, is ideal for start-up businesses. A micro loan can be used for various purposes including inventory, supplies, equipment, furniture, working capital and machinery. This type of loan is one of the easiest to qualify for.

You will have to qualify for specific lending and credit requirements, which depend on the lender you are working with. One of the main requirements is that small business owners must complete training and business planning requirements before getting approved. The disadvantage of a micro loan is that lenders tend to give funds to businesses with qualifying credit in their own communities. These non-profit community lenders are given funds by the Small Business Administration (SBA).

Development Financing (SBA 504)

This loan program is used for purchasing real estate for small businesses that are planning increasing employment levels. This type of loan cannot be used for working capital, inventory, debt repayment, refinancing or consolidating.

The loan is long-term, fixed-rate for major fixed assets such as buildings, land, etc. The loan is obtained from a private-sector lender which covers 50% of the project and provides a secondary loan for up to 40% of the cost of the project. The loan-to-value can go up to 90% and is 100% SBA-guaranteed.

SBA 7a Loans

This type of SBA loan program is available for existing businesses and fully established businesses experiencing growth. This loan is not intended for start-ups. The 7a loan provides up to $1 million for working capital, real estate, equipment or purchasing an existing business. The limit is 75 percent of loan value and a maximum amortization of 6 years.

Import Export Loans

Small businesses in need of export funding can obtain import export loans through the SBA. Lenders provide export working capital loans where businesses are required to repay $1 million or 90 percent of the loan (whichever is less). Companies must be in business for at least one year when applying.

In order to choose the right type of small business loan for your company, you must first identify three factors about your company. First, you must consider the type of business you are. Second, you must determine at what stage of growth your company is in. Finally, you must determine what the funding is going to be used for. Once you answer these questions, you will better assess your financial needs.