A wide variety of small business loans are available on the market today. This leaves many self-employed people wondering how these different types of financing for small businesses really work.

In this article, you’ll find a brief overview of business financing options along with information on how small business owners find business loans.

Financing a Small Business

When you’re looking for small business loans, keep in mind that there are different types of business lending for different uses. Operating capital is typically handled differently than a mortgage, for instance—these are often distinct loan products with different application requirements and stipulations on how funds are used. If your company needs funding, it usually pays to shop around.

Compare quotes from different lenders, banks and other funding sources. Remember to look carefully at interest rates, factor rates and total borrowing costs. Read the fine print and compare when your loan must be repaid, how much it will cost you and how much flexibility you have with using the capital you’re borrowing.

Every loan is unique. Never agree to borrow without reviewing all the information provided along with the terms. Here are a few basics to consider:

  • Interest rates: These rates show capital depreciation over time and result in added charges throughout a specific loan term. The higher the rate, the more you may end up paying on your loan. You can compare rates from one loan to another to find out how much you’ll owe.
  • Factor rates: This isn’t the same as an interest rate—instead, factor rates reflect the total cost of borrowing. Be careful, because factor rates may make a loan seem cheaper than it actually is.
  • Term: How long a loan takes to reach maturity and when it needs to be repaid. You may have ongoing, regular repayments to make on your loan throughout the course of the term. For instance, you may take a 36-month loan with monthly payments. A shorter or longer term isn’t necessarily better or worse. It all depends on how expensive it is to essentially “rent” the money for that term and how you’ll have to pay it back. Short-term loans are designed to reach maturity in 18 months or less. Long-term loans are typically longer than 18 months and may last for several years.

Gather a few quotes and consider applying. If you’re ready to compare your options, here are a few types of business loans you’ll probably see.

Types of Funding for Small Businesses

Business loans don’t have to be opaque and confusing. Learn more about each of these options so you’ll be in a better position to make the right financial decisions for your company.

Term Loan Small Business Financing

If you need a lump sum of capital to use for a specific investment in your business, a term loan may fit the bill. Term loans:

  • Designed to last between 1 and 5 years
  • Generally range between $10,000 and $500,000
  • Provide a fixed interest rate
  • Low monthly payments
  • Repay over time
  • May have prepayment penalties

Keep in mind that these loans can be used for a variety of different purposes.

Financing a Small Business with Short-Term Loans

Looking for working capital? You may benefit from a short-term loan:

  • Designed to last for a few months to about one year
  • Borrow up to $500,000 depending on your qualifications
  • Payback principal, interest and lender fees
  • Repay daily, weekly or monthly
  • Higher payments because the loan term is shorter than other loans

Businesses experiencing limited cash flow may benefit the most from a short-term loan.

Small Business Line of Credit

With a line of credit, your business gets flexible access to capital that you can use as-needed once you’re approved. Applicants receive approval for a loan up to a certain amount, such as $50,000, and can then charge up to that amount whenever needed.

  • As long as you make on-time payments and don’t exceed your credit limit, you can keep borrowing over and over again
  • Generally lower limits than term loans
  • Repay interest and other borrowing costs
  • Typically repay with monthly payments
  • Unsecured loan amounts available, but higher amounts may need security

You may need to secure larger loan amounts with collateral—this means you pledge an asset you have, such as real estate, as a potential payment for the loan if you default. Small loans, however, generally don’t need security.

Merchant Cash Advance for Small Businesses

Merchant cash advances are for operating capital. How much you qualify for may vary, and these loans are repaid regularly with repayment beginning immediately.

  • Designed for terms that are 18 months or less
  • Small amounts, typically up to 250-percent of your past 6 months of credit card transactions
  • Repay based on a fixed rate held from your future income
  • More expensive than some other loan options, but very flexible

With cash, your business is free to do whatever is needed to keep operations going. Merchant cash advances are a flexible funding option you can use for just about anything.

Invoice Financing Business Loans

If unpaid invoices are holding your business back, invoice financing may be the right option. These loans give you access to your funds sooner so you can start using that cash for your business.

  • Immediate access to funds
  • Amounts up to what you’ve invoiced for
  • Your invoice serves as collateral and the invoice payment goes to your lender
  • Your cost may include a fee or fixed percentage taken from the invoice payment
  • Generally available only to B2B businesses

Since it’s just an advance that pays your invoice early, you can use the funds for anything you choose. Keep in mind that invoice financing isn’t necessarily available to all business models.

Traditional Bank Lending and Small Businesses

Small businesses can also obtain the loans they need from a traditional bank lender. These loans may have special requirements and some business owners will need to provide personal credit history information in order to qualify.

  • Loans designed for a variety of terms, uses and rates to fit almost any need are available
  • Amounts vary depending on applicant qualifications
  • Repayment terms may vary
  • May have significantly tighter requirements and limitations than alternative loan options
  • More difficult to qualify for

Banks offer a wide variety of loan types, but typically have high expectations and standards for qualification compared with other types of small business loans.

Applying for Business Financing

Depending on the loan you’re applying for and the type of lender, your application for a small business loan may require the following:

  • Personal credit history: You, the owner and borrower, may need to provide your own credit information and lenders may run background checks when you apply for a loan.
  • Bank statements: You should consider preparing copies of your business bank account statements and information.   
  • Credit card receipts: Receipts for credit card payments you’ve received are another part of many business loan applications. Your lender may ask to see 6 months of receipts from payments you’ve received via credit card.
  • Business expenses: You may need to show what your typical business expenses are for a specified period of time, such as office rental agreements, vendor contracts, etc.
  • Invoices: Some loan applications require you to show invoices for customer and client payments you expect to receive in the future.

Once you’ve started shopping around for quotes, you can generally determine what types of evidence a lender expects to see.

Ready to Explore Business Financing Options?

If you’re ready to consider your options, jot down a few lenders you’re considering and gather quotes. Remember to compare terms and be sure to read the fine print carefully.

Fast Capital 360 is an online lending marketplace for business owners. Collect quotes, research your options and find the right loan for your business all in one place. If you’re looking for a small business loan, we’re here to help.

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