Different types of small business loans

The majority of businesses in the U.S. are considered small businesses, and a sizeable slice of that group of companies is both small and young. A survey from the U.S. Census Bureau found that nearly 1 in 10 U.S. businesses with fewer than 50 employees have been in operation for less than two years.

Many small businesses end up growing into large, prosperous organizations, but they need plenty of help along the way to get there. That's why there are a variety of financing options available to small-business owners who need a boost to get up and running.

SBA Loans

The Small Business Administration is a federal organization that helps small businesses acquire startup financing and support through a number of different avenues. The SBA's most popular and straightforward program is known as a 7(a) loan, which can total up to $5 million but average around $370,000. The SBA does not extend these loans itself - rather, it works with a bank or commercial lending institution to guarantee loans for individual businesses. SBA loans come with generally low interest rates and favorable terms, but also have several restrictions and can take a long time to process. This makes them ideal for large, one-time investments like purchasing property or equipment.

Business term loan

Term loans are also fairly conventional financing options, and are available from many institutions locally and online. The SBA 7(a) program is also a type of term loan, but business owners may go directly to any institution they choose to apply for one, potentially affording them more flexibility. Per their name, term loans have a fixed repayment period that may be as short as six months or as long as 10 years.

LoanResearch different business financing options before applying for the right one.

Business line of credit

Just as a homeowner can choose between a home equity loan or a line of credit, business owners may also have that option with a commercial credit line. This functions as a more flexible source of financing that can be accessed and repaid only when needed. A credit line may be useful for short-term borrowing or cash-flow needs.

Invoice factoring

A financing option unique to business lending is known as invoice factoring. Invoice factoring is not technically a loan but a kind of trade. Essentially, a business sells its invoices to an institution at less than their face value. Then, the new invoice holder collects payments from clients, just like the original business would have. Invoice factoring may be useful for businesses who want to sign clients for longer payment terms, but still need a regular source of income. Invoice factoring is also generally easier to gain approval for than most business loans, but it is usually more expensive. It's also important to consider the tactics and reputation of the invoice factoring service, as any bad behavior on their part could harm the credit of the original invoice owner.

No matter what your business needs are, there is probably a financing option that fits. Talk to local lenders to find out more information and get started with the application process.

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