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What Types of Small Business Loans are Available?

We're excited to help you in understanding the ins and outs of financing your business.

Let's get started...

There are several types of small business loans.

A sampling:

  1. Bank Loans
  2. SBA loans
  3. Startup Business Loans
  4. Working Capital Loans
  5. Merchant Cash Advances
  6. Sale/Leaseback of Equipment
  7. Factoring of Receivables

Let's talk about each.

Bank Loans

Let's start by telling you the honest-to-God truth.

We're not always going to be the best fit for you.

If you qualify, your bank probably offers lower interest rates than any other source.

Of course, maybe you don't want to deal with the hassle of financing through your bank. Let's say you'd qualify for bank financing, but don't want the headaches.

There are some options that are slightly more expensive, but significantly faster (days, not months).

Here's an option we often recommend to customers with decent credit and good cash flow.

SBA Loans for Small Businesses

SBA loans are another low cost option, with rates of about 7%.

Like bank loans, they require mountains of paperwork...

...which usually includes business plans and multi-year projections.

These also entail a long approval process, and a huge percentage of SBA applicants are declined.

On the upside, longer terms are available for SBA than for other products - typically up to 7 years for working capital, and 10 years for equipment.

We sometimes help candidates with 2+ years in business look into a streamlined process for SBA financing (if you're a startup you should probably apply through a bank).

However here's the warning we give regarding SBA loans:

"Streamlined" means moderately painful (as opposed to unbearable agony).

The process can still take a few weeks and most applicant are ultimately declined. 

Startup Business Loans

Startup loans are among the toughest loans for you to get.

However, there are some good options if you have good credit or assets.

We have an article that describes several types of loans you can access when starting a business.

Working Capital Loans

Working capital loans can be a "low-" or "medium-" cost option.

They can also be a very high cost way to finance a small business.

Sometimes you'll be offered loans at 6%...

...other times rates could be over 100%.

It all depends on how risky your business looks to a lender.

Here's the deal:

good credit + profit = reasonable rates

bad credit or business losses = much higher rates

We work hard to find you the loan that best fits your unique situation.

If you've got some serious challenges, there is no way around paying higher rates.

Sometimes, huge rates make sense and sometimes they don't.

Many business owners end up taking out high cost loans. This can become a problem if the loans suck away so much of your cash flow that it hurts your ability to run a business. 

Did you know that you can sometimes get out of a bad loan?  

 

Merchant Cash Advance

Merchant cash advances involves taking over your credit card processing.

The advance company pulls a fixed percentage of your credit card funding on a daily basis.

Merchant cash advances tend to range from high- cost to outrageously, ridiculously high in cost.

These products should almost always be your last choice, because rates and payments are so high they often seriously eat into (or eliminate) your profits. 

These loans are occasionally acceptable given two caveats:

  1. You can't qualify for anything cheaper
  2. You'll make enough money with use of the funds to justify the steep costs

Sometimes, though, a merchant cash advance will create more problems than it will solve. 

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Sale/Leaseback of Equipment

If you own hard assets, like trucks, machinery, or construction equipment, you can engage in a transaction called a sale/leaseback.

This is essentially selling your equipment but still retaining it for business use (and can be structured so you own it at the end of the term).

The closest thing to compare it to is taking out a home equity loan on your house.

Because the transaction is "secured" it is relatively easy to qualify for.

Rates are consistent with those for working capital loans, and the transaction can be structured so that all payments are tax-deductible.

Invoice Factoring

If your business has outstanding accounts receivables, you can essentially "sell" those A/Rs for a fixed percentage rate.

We don't offer factoring directly, but here is a review of one of our favorite factoring companies

PS - There are many more ways to finance your business.

We've listed 59 of them here.

More Small Business 101:

  1. What kind of loans are out there for small business?
  2. What can I use the money for?
  3. What does small business financing cost?
  4. Do I qualify for a loan?
  5. Can a new business qualify for a small business loan?

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What Rob Thinks:

There are many ways to leverage other people's money to grow your business.

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