Everything To Know About The Best Small Business Loans.
What Is a Small Business Loan?
A small business loan is a source of funding business owners can access to cover the costs associated with operation and growth. Like personal loans, business owners can get small business loans through traditional banks and credit unions as well as online lenders—including those backed by the U.S. Small Business Administration (SBA). Depending on the type of loan, you can use funds for everything from working capital and equipment acquisition to larger purchases like real estate.
How Small Business Loans Work
Small business loans help companies make large purchases and cover the cost of doing business. Loans generally are issued as a lump sum that can be used to make a specific purchase or manage cash flow and then repaid with interest. However, there are other types of small business loans—like lines of credit, merchant cash advances and invoice financing—that can be used to access cash more quickly and on an as-needed basis.
The best loan for a business depends on a number of factors, including its creditworthiness, how much it needs to borrow, what the funds will be used for and how quickly it needs access to loan proceeds.
Types of Small Business Loans
In general, small business loans help businesses access the money they need to operate and grow. However, there are several types of small business loans, and it’s important to find the best fit for your needs.
SBA Loans
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SBA loans are small business loans that are guaranteed by the Small Business Administration, including the SBA 7(a), 504, CAPLines, Export, Microloan and Disaster loan programs. These loans typically range from $30,000 to $5 million and come with low interest rates and extended repayment terms—up to 25 years. That said, qualification requirements are more demanding than for other loans not backed by the government, and the application process typically takes longer.
Common types of SBA loans include:
SBA 7(a) loans. With maximum loan amounts up to $5 million, the SBA 7(a) loan program is the SBA’s main offering. Loans are commonly used to purchase real estate but may also be used for working capital, debt refinancing and the purchase of business supplies. Current interest rates, as of Oct. 7, for SBA 7(a) loans range from 5.5% to 11.25%.
SBA 504 loans. Available up to $5 million, SBA 504 loans must be used for major fixed assets, like existing buildings or land, new facilities and long-term machinery and equipment. As such, 504 loans may not be used for working capital, inventory or other common business uses. Rates on SBA 504 loans are lower than those imposed by the 7(a) program, and range from about 2.81% to 4%.
SBA microloans. SBA microloans extend up to $50,000 and are intended to help small businesses start or grow. This may involve using the funds for working capital, inventory, machinery, equipment and other fixtures and supplies needed to do business. Rates typically range from 8% to 13%, but this varies by lender.
Term Loans
Terms loans are a traditional form of financing that’s repaid over a set period of time. In general, short-term loans range from just three to 18 months, whereas long-term business loans may be extended for up to 10 years. While some term loans are designed for specific uses—like financing equipment or inventory—term loans traditionally can be used to fund most large business-related purchases. Business term loans are typically available up to around $500,000, and annual percentage rates (APRs) start around 9%.
Lines of Credit
Unlike a term loan that’s paid out in a lump sum, a line of credit is a set amount of money that a business owner can access on a revolving basis. This means the borrower can draw against the line of credit for a set period of time—usually up to five years. If the borrower pays back a portion of the line of credit early, they can access it again until the draw period ends.
Once the draw period is over, the borrower enters the repayment period and can no longer access the revolving funds. Rather than pay interest on the entire amount, as with a term loan, a business owner who accesses a line of credit is only charged interest for what they actually use.
Lines of credit are a good option for businesses that want to access cash on an as-needed basis for things like unexpected expenses and other cash-flow issues. Borrowing limits generally range from $2,000 to $250,000 and come with APRs from 10% to 99%.
Invoice Factoring and Financing
Invoice factoring is the process of selling a business’ outstanding invoices in exchange for a lump sum cash payment. Invoices are sold to a third-party factoring company at a discount, so you won’t get paid for invoices in full. And, once you sell an invoice to a factoring company, the factoring company assumes responsibility for collections.
However, this form of financing can be an effective way to access cash quickly without having to wait the 30 to 90 days customers usually have to pay invoices. For that reason, invoice factoring is a helpful strategy when you need short-term financing or help managing cash flow. In general, invoice financing amounts can extend up to $5 million with APRs between 10% and 79%.