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Defining Types of Business Loans, Credit, and Financing

Traditional Bank Loans

Banks have long been a popular source of financing for small businesses. They offer several types of loans that can work for different purposes and stages of business growth.

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Term Loans

Term loans are one of the most common types of traditional small business financing. They provide a lump sum of cash upfront and are paid back over a set period of time, or term, typically between one and seven years. Term loans can be used for a variety of business purposes such as funding working capital, equipment purchases, real estate acquisition, debt consolidation, and more.

Banks will evaluate factors like personal credit scores, time in business, annual revenue, and collateral when considering a term loan application. Interest rates and fees for term loans vary by lender but are typically lower than alternative financing options.

SBA Loans

The U.S. Small Business Administration (SBA) works with banks to provide low-interest loans to small businesses that might not otherwise qualify for traditional financing. The two main types of SBA-backed loans are 7(a) and 504 loans.

7(a) loans can be used for nearly any business purpose and range from $5,000 to $5 million with interest rates from 6-10%. 504 loans are specifically for purchasing real estate or equipment and have lower limits, from $25,000 to $5 million.

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Because the SBA guarantees a portion of these loans, they are more accessible to startups and risky ventures than conventional bank loans. However, the application process is extensive and can take months to finalize.

Lines of Credit

Lines of credit provide revolving access to capital up to a set limit. Businesses can draw down funds as needed and make interest-only payments until the balance is due. Lines of credit are flexible and useful for managing operating expenses and cash flow fluctuations.

Banks offer business lines of credit from $50,000 up to millions of dollars. Shorter-term lines of credit may only require a year in business while longer 3-5 year options look for at least 2 years of operating history. Strong revenue and cash flow are needed to qualify and interest rates are variable.

Alternative Business Financing

In recent years, alternative online lenders have become popular options for accessing capital quickly and easily. They use technology to provide faster application decisions and funding. However, qualification standards are also more lenient, resulting in higher interest rates.

Short-Term Loans

Online lenders like Kabbage, OnDeck, and CAN Capital offer short-term loans up to $250,000 with funding in as little as 24 hours. These high-cost loans are ideal for small, emergency cash needs and bridge financing gaps in cash flow. Repayment terms are usually 3-12 months and rates vary from 10-108% APR. Time in business and annual revenue requirements are low.

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Merchant Cash Advances

Companies like PayPal Working Capital provide merchant cash advances based on a business’s credit card sales. A lump sum is provided upfront in exchange for an agreed upon percentage of future credit card receipts. There are no fixed repayments, allowing flexibility, but advances can be very expensive with implied APRs typically over 50%.

Invoice Financing

Online lenders such as BlueVine and Fundbox offer financing through business invoices. A portion of the amount due from outstanding invoices is advanced, then the balance paid when customers pay their bills. This allows access to cash locked up in accounts receivable. Costs are based on a factor rate charged on the amount advanced.

Equipment Financing

Instead of taking out large loans, businesses can finance necessary equipment through companies like OnDeck and Funding Circle. This allows spreading payments over 3-5 years. Rates vary from 6-30% based on credit, time in business, and the type of equipment.

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Business Credit Cards

Business credit cards essentially function as revolving lines of credit. They provide flexible access to capital up to the card’s credit limit. Interest rates are generally higher than traditional lines of credit but they are easy to qualify for. Issuers like Capital One, Chase, and American Express offer cards with limits up to $500,000.

Industry-Specific Financing Programs

Along with general small business lending, there are also funding programs tailored to specific industries and business models.

Franchise Loans

Becoming a franchisee allows tapping into an established brand but requires a significant upfront investment. Franchise-specific SBA loans help finance the franchise fee and other startup costs with favorable terms. Lenders like BoeFly, Guidant Financial, and ApplePie Capital specialize in loans for franchisees.

Restaurant Loans

From food trucks to full-service establishments, launching a restaurant takes major capital. Restaurant-specific SBA loans allow financing for costs like equipment, inventory, renovations, and operating expenses. Hospitality lenders like National Funding, Biz2Credit, and Balboa Capital cater to the unique needs of restaurants.

Medical Practice Loans

With high costs of equipment, technology, and payroll, medical practices require substantial funding. Medical practice loans help finance needs like new facilities, staffing, and healthcare equipment. Companies like Ascentium Capital, Paragon Financial, and First American Healthcare Finance focus on loans for doctors’ offices, clinics, and medical groups.

Commercial Real Estate Loans

For retailers looking to purchase or improve storefronts and other companies needing office and warehouse space, commercial real estate loans make acquiring property more affordable. The SBA 504 loan program provides up to 40% financing for commercial real estate at below market, fixed rates.

Choosing the Best Financing Option

With the variety of business financing options available, it’s important to weigh pros and cons to choose the best loan or credit product for your needs. Shorter term products like merchant cash advances and business credit cards provide faster access to funds but are more costly. Traditional SBA and bank loans have lower rates but can require months to secure and have more qualification hurdles.

Consider factors like:

  • Loan amount needed
  • Use of funds
  • Time in business
  • Revenue and cash flow
  • Credit score and history
  • Collateral
  • Urgency of financing need

Talking to a small business banker or financial advisor can help navigate the range of financing products and determine the optimal solution for your business goals and financial circumstances. With the right funding approach, entrepreneurs can access the capital required to successfully start or grow their company.

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