4 Types of Small Business Loans

There are many different types of small business loans, each with pros and cons. Here are the most widely-available types of loans:

1. SBA (Small Business Administration) Loans

SBA Loans are backed by the government but provided by banks and local lenders. Amounts range from $5,000 to $5 million, with terms of five to 25 years. You pay back the loan via fixed, monthly payments and face additional fees every year. Interest rates are usually low and they are generally easier to qualify for than bank loans but it can take several months to find out if you’ve been approved, and even longer to receive funding.

2. Traditional Bank Loans

Bank loans offer $5,000 to $5 million, with terms of five to 25 years. You pay back the loan via fixed, monthly payments and face annual fees along with another payment just before the final amount is due. Bank loans are typically secured, meaning they require either a deposit or collateral, which is something the bank can sell if you fail to pay back the loan. Bank loans carry low interest rates but you can only qualify with an outstanding credit score and applying requires a lot of paperwork. Like SBA Loans, you’ll have to wait several months to find out if you’ve been approved and receive funding.

3. Business Lines of Credit

A line of credit is a short-term loan (3 months to 60 months) that gives you access to a limited amount of money, like a credit card. Your payments are based on the amount of money you borrow, so if you borrow zero, your balance is zero. Interest is based on the amount that you borrow, and it’s the only payment that must be made on a monthly basis. The balance is paid off at your convenience but it’s wise to pay it off every month to prevent going over your credit limit and interest from building up. Lines of credit can be secured or unsecured and can usually be renewed for an annual fee.

4. Merchant Cash Advance

This unsecured, short-term option is the easiest to qualify for and the quickest source of cash, since it can take just a few days for a lump sum to reach your bank account. The financing is paid back via a percentage of credit or debit card sales, so there are no fixed, monthly payments. Interest depends on the length of your payments. If you make a lot of sales in a short period, interest can run as high as 30% but if your payments are more spread out, the rate is much lower.

You can also get loans to finance equipment that is used as collateral. Terms range from six months to 10 years with amounts ranging from $1,000 to $1 million.