Hey, small business owners, entrepreneurs, and venture capitalists—let’s chat about small business loans.
Have you spent hours, days, or weeks researching about small business loans or trying to decide what type of loan to apply for? How can you tell if a loan is right for you without winding up stressed-out, confused, and left with a headache? We’re here to help.
With the myriad of small business loans and lending options available, it can be difficult to wade the murky waters of small business loans, lenders, and financing. We’ve comprised this list of small business loan types and resources to help make starting your business a little easier.
Types of Small Business Loans
Business Lines of Credit
Like a credit card, a line of credit is an allotted amount of money that a bank allows you to draw on if the need should arise.
The experts at entrepreneur.com claim that the funds from these loans are typically used for inventory, payment of operating costs, and working capital.
You’re not required to pay interest fees or make payments until you’ve borrowed the funds. Most of these loans are given for the duration of one year and can be renewed each year. Ask your lending institution about annual rates and fees.
Crowdfunding
Crowdfunding is the process of collecting lesser amounts of funding from a large crowd of individual contributors or investors to fund your startup venture. There are regulations in place that limit the amount of money that each investor can donate, so it’s a good idea to research that before developing your crowdfunding initiative.
For more information on crowdfunding, fitsmallbusiness.com has a list of what they consider to be the 25 best crowdfunding sites such as Kickstarter and Indiegogo. They’ve ranked each site and explain why they like it.
Equity Financing
Investopedia.com defines equity financing as “the process of raising capital through the sale of shares in an enterprise.” Essentially, you’ll raise money through several avenues, including private investors such as friends and family, to public or corporate investors, in exchange for shares in your company.
This type of funding does take a lot of personal time for preparation. You have to be strategic in determining who your investors will be, vet interested parties, cultivate your approach and presentation, and organize paperwork.
This process can take several months, or even years to carry out. Many small businesses go through several cycles of equity financing before they’re fully established.
Installment Loans
These loans can be used for all types of business operations. After an installment loan is taken out, it must be repaid in full through monthly payments and a fixed interest rate.
Interest rates vary and are based on credit scores, loan size, and your financial history. Monthly payments are also determined by the amount of money borrowed. Onemainfinancial.com has useful information about the pros and cons of this type of loan.
Micro Loans
These loans are often smaller amounts; short-term funding that is used to finance supplies, inventory, purchasing machinery or furniture. The funds can’t be used to pay off existing debt or to buy real estate. Loan amounts typically range from $500-$50,000.
Online Loans
These types of loans are helpful if you have not-so-great credit and have been in business for at least one year.
Online loans use an algorithm that consists of typical lending standards such as income and credit scores. They may also consider social media interactions as well as customer comments and reviews, according to nerdwallet.com. There is a catch, however. While online funding provides a quick fix for cash, their rates tend to be higher than their traditional loan counterpart.
SBA Loans
This is a government loan that is beneficial for entrepreneurs who have excellent credit and require long-term funding.
The Small Business Administration is a government branch that works with banks and lenders to make a business loan. SBA has made the process quite simple.
This resource is a free online tool designed to find the right lender for your business. The process begins by describing your business and needs, then a 2-day matching period; you’ll receive an email that has contact information from various lenders that are interested in financing your loan. You can compare rates and fees and then apply for the loan.
Banks typically like these loans because the government will subsidize a portion of the loan if a borrower defaults on the payments. There are several types of SBA loan programs that are available to help entrepreneurs. Learn more about SBA loans here.
Are there other small business resources or loan types that didn’t make our list? Let us know in the comments.
