Different Types of Small Business Loans

Small businesses need money to stay afloat. Fortunately, several lending options are available to small business owners. No lending option is perfect, but you can find one that will fit your needs and get you where you need your business to go, whether it's finishing the expansion, ordering more inventory or making a transition when you realize customers aren't buying what you're selling. From big banks to cash advance loans, you can choose from six different options.

Small Business Lending From Big Banks

Typically, the first thing you think of when you need a loan is a big bank. Although banks have bounced back from the recession, their lending patterns have not. Small businesses get the short end of the stick because during the recession they took the hardest hits. So, banks tightened their requirements and reduced their risks.

This doesn't mean you can't get a small business loan from a big bank, just that it can be difficult. If your small business brings in a lot of regular revenue and shows the potential to continue that trend, you're more likely to be approved. That said, big banks probably aren't a good option for a start-up. They're more likely to lend funds to established businesses with a long history and good credit.

For banks, loans valued at $1 million cost as much as a $100,000 loan, but they earn less from it, so it's less enticing to them. That's a small part of the reason that only a small percentage of small businesses are approved for a loan from a big bank. Keep in mind that even if you do get funds from a bank, it may not be the full amount that you requested. But, if you don't apply, you can't get anything.

Community Bank Small Business Loans

Community banks are the bread and butter of bank loans for small businesses. However, there are fewer community banks than there were in the 70s and 80s, so finding one can be more difficult. They're able to take greater risks in small business lending because the Small Business Association backs their loans so if something happens and the business is unable to repay the loan, the SBA takes the risk, not the bank. The SBA also gives more money to community banks for the purpose of small business lending.

That's not to say that it's easy to get them. They have regulations just like big banks, so you have to make sure you meet them and be willing to back up your business with what you've done in the past. Documentation supporting that you have the following will make it easier to get the small business loan:

    Good business credit Good personal credit Solid plan for using the loan and how it will improve your business Ability to repay the loan

Going in prepared is a good chunk of getting any loan - including a small business loan.

Loans and Money From the Internet

These days, the internet is a unique source for just about everything - including money for small businesses. Now it's easier than ever to get loans from people not banks. Sites like Prosper.com and Lendio.com are peer-to-peer websites that allow small businesses to borrow funds. You select an amount of money that you would like to borrow and investors choose whether or not they want to invest and how much they're willing to invest. Then you get your money. However, interest rates can be high - anywhere from 6% to 36%.

Other sites, like Kickstarter.com, are crowd-funded websites. Using this would allow you to use your target market to build your business by offering something small in return for the funds people give you. For instance, a business specializing in board games, might offer a sticker of a character for a small amount of money, a set of dice for a medium amount of money, or a complete game for larger amounts of money. This is a great way to get your new business in the door - you find people who are interested and you get the funds to build it. And, since people have invested in your business they're eager about the outcome. But it's not for everyone.

Just like when you're getting any other loan, when you apply for these small business loans, you need to know what you're looking for and be able to present how it will help your business. You need to be able to sell yourself, your business and your products or services to them.

Microlending

Available through non-profit organizations and backed by the SBA and other organizations, microloans are ideal for small amounts of money up to $50,000. They're great for businesses that are starting up or need funds for equipment, inventory, supplies or working capital. If you have bad personal credit or bad business credit - or you don't have any yet - microloans can help you. Additionally, even though women account for roughly 1/3 of business owners, they receive only 4% of loan dollars. That's a problem shared by minority business owners. Microloans help these businesses get money when they have a hard time coming by it through other sources.

Having a solid business plan and being willing to invest your personal funds in your business can help you get a microloan. Try for one that allows you to make monthly payments and search for microlenders local to you.

Lines of Credit

If you have a personal credit card, you have a line of credit. Businesses can also get a line of credit. They can use the money as they need it instead of getting it in just one lump sum. However, it's best not to run up your line of credit because the fees and interest rates are high. Using it for a temporary shortfall is better than something that will run up high costs, long term - just like with a personal credit card.

Merchant Cash Advance

One of the biggest options that came about due to the gap in small business lending during the recession is the merchant cash advance. You can borrow as little as $3,000 or up to $150,000, so you can meet all of your needs - and get the small amounts banks won't touch. The loan is also secured. It works well for many businesses because it's paid back through credit card sales. A certain percentage of the sales goes directly to the loan every day, so it's typically repaid without any hassle on your end. However, it is a short-term loan and the interest rates are high. Additionally, you have to be making a good amount of credit card sales or it's a no-go.

When applying for a small business loan, consider all of your options carefully. One might be a better option for you, and if you get turned down for one, you can go back to the drawing board. No matter what option you select, go in prepared and with confidence, with a sound business plan and a compelling argument. Sell your business and get the money you need to keep it going strong.



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