Traditionally, a business needing money asked a bank for a loan.
Banks can still provide great lending options, but business owners now have several other choices for borrowing.
Let’s take a look at this ever-diversifying business loan market.
Basic Types of Small Business Loans
Traditional business loans still comprise a large percentage of business borrowing and offer a great starting point as we compare other products.
Traditional business loans include:
- Term Loans
- SBA Loans
- Lines of Credit
- Equipment Loans
Brick-and-mortar banks and online banks offer standard term business loans which work like home mortgages.
A business borrows a large sum — often $1 million or more — then repays the loan within the specified period of time, called a term.
Expect to put up some collateral, like business property, during the application process. Be ready to share exactly how you’ll spend the money and to document how the loan will help your business grow.
- Where to get: Your favorite neighborhood bank or credit union; good online choices include: Credibility Capital, Currency Capital, and Street Shares.
Just like with mortgage loans, the federal government backs small business loans through the Small Business Administration.
SBA loans help businesses access large sums of money for capital investment or to buy real estate for your business.
As a federal guarantor, the SBA has strict guidelines borrowers must follow to receive funding. After you get through the red tape, your business can benefit from lower interest rates and terms as long as 25 years for business real estate transactions.
- Where to get: Your local bank or credit union can help if it’s authorized by the SBA and has experience issuing loans. Online: Check with SmartBiz or Live Oak.
Lines of Credit
A line of credit can help a business that needs cash flow but doesn’t have specific expansion plans.
Lines of credit work more like credit cards: they don’t require collateral and borrowers can access funds as needed rather than all at once.
These favorable features come with a cost: higher interest rates and ongoing maintenance fees.
Still, a business can save money with a line of credit by borrowing only what’s needed.
- Where to get: Again, your neighborhood bank should have options. Opt for the lowest interest rate and fee structure. Online, check out Kabbage or Street Shares.
Companies which rely on expensive equipment or advanced computer networks often finance these purchases with equipment loans.
You could use the equipment itself as collateral, keeping borrowing costs low.
Businesses should make sure the loan’s payoff term does not extend beyond the lifespan of the equipment.
When used properly equipment loans can insulate your business from heavy infrastructure costs while still giving you access to the most up-to-date hardware to help your business grow.
- Where to get: OnDeck, Ascentium Capital, Currency
Other Lending Options for Businesses
Some businesses need more flexible options.
Here’s a quick list:
- Peer to Peer Loans
- Invoice Factoring
- Invoice Financing
- Credit Cards
- Merchant Cash Advance
Peer-to-Peer (P2P) Lending
Peer-to-peer lending bypasses the traditional role of banks. Your business would submit an application to a P2P site such as Funding Circle or Lending Club.
If approved, the loan would be funded by the site’s investors.
As a borrower, you’d still have to repay the loan on time, but you could also get a lower interest rate and access money more quickly.
- Leading providers: Lending Club, Funding Circle
If your business has reached a rough patch, but you can see relief on the horizon in the form of customer invoices coming due, invoice factoring can let you access those funds sooner.
An invoice factoring company can “buy” your unpaid invoices from you for a fee. Then, the company becomes responsible for collecting on the invoices to repay your debt.
- Online options: Bluevine, Fundbox
Invoice financing works like invoice factoring except you retain control of your unpaid invoices. You’d use the invoices coming due as collateral for a loan.
Then, when you collect on the invoices, you’d pay back the loan.
Many business owners prefer this method because their customers don’t know their invoices were used as collateral.
Invoice financing tends to be more expensive and a little more complex than invoice factoring.
- Online options: Kabbage, Funding Circle, OnDeck Capital
Sometimes a simple business credit card can provide the financial flexibility your company needs.
As with a consumer credit card, look for lower interest rates and pay off your balance each month if at all possible.
Merchant Cash Advances
If you’re a retailer or you accept credit card payments, you could get a cash advance from your credit or debit card processor.
You’d repay the money little by little giving your card processor a percentage of each credit or debit card transaction.
Some services also allow you to pay down your balance through bank drafts.
You can get almost instant cash using this method, but the fees and the extended payback can take a bite out of your cash flow for a long time.
Business Start-Up Loan Options
With the exception of Peer-to-Peer loans, the lending products above primarily serve existing business owners.
A start-up would have a hard time getting a term loan or even an SBA loan.
If you have an idea but need funding, consider options such as:
- Asking For Help
- Personal Loans
Asking for Help
Do you have friends or family who would be interested in investing in your business idea?
You’d be surprised how much you can receive by being willing to ask.
If you plan to start a business in an underdeveloped area, ask the Chamber of Commerce or your municipal government about microloans.
These small loans — usually ranging from a few thousand dollars up to $50,000 or so — may not get your idea fully operational, but they can help secure a lease or buy computers.
Since nonprofits administer these programs, expect great terms but a little red tape.
- How to get: Contact your local bank, credit union, or check with your local government to learn about programs. If you’re a veteran, you may be able to find veteran-specific micro-lending programs in your area.
Crowdfunding resembles P2P lending but without the payback terms. Through equity crowdfunding from sites like Kickstarter, people can invest small amounts into your business.
In exchange, they’ll expect their investment to grow as your business grows.
Rewards crowdfunding offers a less formal approach: People can invest in your business in exchange for less-defined rewards such as free merchandise in the future.
If you seek either kind of crowdfunding, sharing your vision and your passion can compel more investors to help.
Personal Loans or Your Savings
If you believe in your idea enough to ante up your own money, you can become your own investor.
Likewise, you could borrow money through a personal convenience loan or a second mortgage and invest the funds in your business.
None of these ideas usually qualify as sound financial decisions, but you have the freedom to decide for yourself whether your business idea is worth taking the risk.
Be sure to consider all angles and challenges to your business before investing.
It’s usually a long shot, but nonprofits sometimes grant startup money to businesses if they believe in the business’s mission and vision.
You may have to write an essay to apply for a grant, but if you find the right foundation, the work can pay off.
Find Borrowing That Fits
When your new or existing business needs more cash flow, there’s no doubt: It’s time to take action.
Just remember the action you take now will affect your business’s future as well as its present.
Your main job: Balance present gains against future losses.
Look for the lending product that can give you the most cash flow now for the least amount of sacrifice later.