9 Borrowing Options for Small Businesses

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Borrowing is a critical component of financing for most businesses. Even if you were able to finance all your startup capital and generate enough revenue to cover expenses, you will eventually need a loan. As long as you can pay it back, taking out loans is a normal part of running a healthy business. In fact, loans are often a key part of the growth strategy for many companies. Sometimes, getting a loan is the make or break moment for a start up or growing business.

With so many types of financing available, small business owners will need to do a little research before taking a loan. This post will cover some of the more common forms of small business loans that may be available.

1. Term Loans

This is what most people think of when it comes to business loans. The borrower gets a lump sum from a lender (usually a bank or credit union), and they make payments over a fixed period. These loans often come with lower interest rates than many other options. They can also be more manageable because the borrower can make payments over an extended period.

2. SBA Loans

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Most people learned of small business loans during he pandemic but the Small Business Administration has been around for a long time to help fund companies. An SBA loan is more a category of loans rather than one specific type of loan. These are loans for small businesses that are partially guaranteed by the Small Business Administration. The purpose is to make affordable financing more accessible to small businesses. The loans are still issued by traditional financial institutions, and they have strict qualifications for eligibility. There are many types of SBA loans such as Standard 7(a), 7(a) Small Loan, SBA Express, Export Express, Export Working Capital., International Trade., Preferred Lenders, and CAPLines. The terms and amounts of these loans all vary so it’s important to do your due diligence and determine what’s best for our needs.

3. Working Capital Loans

Businesses often need working capital to operate while they wait for revenue to come in. For these situations, working capital loans help small businesses bridge those gaps. Businesses use these loans to cover expenses like payroll, utilities, rent and more. According to www.quickbridge.com, “working capital loans can take different forms depending on the circumstances and the type of business. Working capital loans provide the necessary funds that small businesses need to cover a temporary cash shortfall. This allows the business owner to quickly return to normal daily operations, pay off the most pressing liabilities, and keep focused on what they do best. Unlike long-term debt, pay back terms typically do not exceed 12 months.”.

4. Lines of Credit

Businesses that often need to borrow might take out a business line of credit. It is a form of rotating credit that allows the borrower to access capital on an as-needed basis. They can borrow any amount up to the limit and only have to pay interest on the portion they borrow. As long as they pay it back, the credit will renew and be there for them if they need it again in the future.

5. Short Term Loans

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Short-term loans can offer valuable financing when a business needs capital in a hurry. Short-term loans are usually approved quickly, but they often come with higher interest rates than long-term loans. Businesses might use this type of financing as a form of emergency loan. A shorter term might also be more beneficial if you know you will have the capital to pay it back soon. You might pay a higher interest rate, but the overall cost will be lower since the term is shorter.

6. Invoice Financing

This is a type of financing that involves using outstanding invoices as collateral for a loan. The lender issues the loan based on the expected income of the invoices. The business will usually be eligible for financing up to a percentage of the value of the invoices. The costs are usually high, but it can be a way to get quick cash for income that has yet to be realized.

7. Invoice Factoring

This is another type of financing that involves using unpaid invoices. However, this isn’t actually a type of loan. Instead, you are selling your unpaid invoices. The buyer in this arrangement is known as a factor. The business sells the invoices for a percentage of the value, and the factor collects on them. It can be a way to turn invoices into cash, and the factor handles collections for you. The main issue is that the business will have to sacrifice a significant portion of the invoice value.

8. Equipment Loans

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You will find many businesses that require expensive equipment for their operations. When that equipment breaks down, it can bring the entire operation to a halt. Since some of this equipment is many thousands of dollars, a small business might not have enough capital available when it needs replacing. For this reason, many banks and lenders offer lending products that are designed for purchasing equipment.

9. Microloans

Microlending is an option for smaller businesses that may have a hard time acquiring financing from traditional financial institutions. The intention is to offer small, affordable loans for businesses that would otherwise not be able to attain financing. They are often issued by non-profits or organizations with an interest in helping underserved communities.

Small business owners have a lot of options for obtaining capital. With that said, the obligations of different lending products are significant. The right loan for one borrower might not be a good fit for another. The same borrower might also need different loans for different situations. Make sure to take your time and investigate your options before taking a loan.

As you can see, there are many types of loans that a business can apply for to supplement their finances and put their business into gear. It is imperative that you do your homework and get the loan that is right for your objectives, goals and type of business. With so much volatility in the market, factoring in your loan’s interest rate is also important.