Guide to Small Business Loans

Businesses often need small business loans to fund growth and expansion. Loans may be used for investing in equipment or facilities, covering increased labor costs or purchasing raw materials to build inventory or fill orders. Depending on the use of funds, there are several types of loans that may be available to business owners.


Traditional Bank Loans


Local banks have funded business growth for decades in addition to offering businesses checking and savings accounts, merchant card processing and other financial services. As a more conservative lending option, banks may require businesses to meet more stringent qualifications compared to other types of lenders, including higher credit scores, adequate collateral, minimum income levels and a lengthier time in business. Banks may also require more formal financial statements and projections and a personal guarantee for repayment by the owners.


Small Business Administration (SBA) Loans


While the SBA doesn’t loan directly to businesses, they do offer a loan guarantee program for loans made through both bank and non-bank financial institutions. The SBA typically reduces the lender’s risk by guaranteeing up to 90 percent of the lender’s losses, thereby making credit more available to companies that cannot meet a bank’s more rigorous direct-lending requirements.


There are several types of SBA loans with funding available for starting new businesses, buying land or buildings, acquiring other companies or to be used as working capital. Since both the lender and the SBA review and approve the loan application, it may take several weeks for loan approval.


The SBA also works with local, nonprofit lenders to offer microloans of less than $50,000. Loan requirements may differ since approvals are made locally. Both for-profit businesses and nonprofit organizations may qualify for microloans.


Online Lenders


With the advent of advanced technology and using big data to help make risk evaluations for small business lending, several types of financing is typically available from online lenders across the country. Some lenders offer short-term or long-term installment loans, while others specialize in financing specific types of activities such as inventory purchases or equipment acquisitions.


Online lenders may offer creative repayment plans, including daily or weekly electronic debits from the company’s bank account or collecting a percentage of credit and debit card purchases. Some repayment options can be structured flexibly to reflect seasonal or fluctuating business cycles. Many are set up with automatic repayment features for both convenience and to help ensure timely repayments.


Understanding the Options


Small business loans may mean the difference between a company’s growth or ultimate stagnation. Understanding financing options and how they can help an organization grow often puts the business in the position for future growth and success.


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