Your options for debt financing extend far beyond the traditional bank loan. As the alternative lending market has grown, so too have the types of debt financing available to small businesses. Here are the various loan products you may consider for your business financing needs:
The Small Business Administration (SBA) is a federal agency dedicated to helping entrepreneurs improve their small businesses, take advantage of contracting opportunities, and gain access to business funding.
Although the SBA does not directly loan money to businesses, the agency’s various loan programs increase the chances that small businesses will be approved for loans by guaranteeing all or part of the loans, providing a bigger incentive for lenders to approve loans for small businesses by easing their anxieties.
There are three main SBA loan programs which help a wide variety of small businesses obtain debt financing:
7(a) Loan Program
The 7(a) loan program is the most common of the SBA’s various programs because it offers the most open-ended terms and qualifications, making it suited for a wide variety of businesses. Through this program, borrowers can access up to $5 million in funds for working capital, equipment and real estate purchases, basic startup costs, or even debt refinancing.
Qualification is left to the discretion of intermediary lenders, who will also determine the interest rates and total cost of the loan. However, the backing of the SBA often makes lenders more likely to approve term loans through this program than they otherwise would.
Many solopreneurs and micro-entrepreneurs struggle with access to debt financing, because typically the loan sizes they need don’t meeting most lenders’ lower limits. To address this challenge, the SBA created the microloan program, which provides lending opportunities for entrepreneurs in need of between $500 and $50,000 in funding. The average microloan amount is about $13,000.
These loans are designed for businesses who have never before received a bank loan and have low or nonexistent business credit history. As with the 7(a) loans, exact rates and eligibility standards are guided by the SBA, but ultimately left to the discretion of the intermediary lender.
CDC/504 Loan Programs
The SBA’s CDC/504 loan programs are designed for businesses looking to make a major fixed asset purchase—such as large equipment, land improvements, or the purchase or renovation of an existing building. Borrowers through this program can take out up to $5 million, with repayment terms of up to 20 years and interest rates based on current treasury rates.
Keep in mind, though, that these are the most highly regulated of all SBA loans, so typically only well-established small businesses with long and strong credit histories will be able to qualify.
A traditional term loan is the easiest type of debt financing to understand, because it’s probably what you naturally think of when you think of a business loan. The terms are pretty simple. You borrow a fixed amount of money, usually for a specifically stated business purpose, and pay back the loan over a fixed term and typically at a fixed interest rate.
If you’re looking for a loan with a fixed interest rate and predictable monthly payments that can be used for a wide range of business purposes, a term loan will likely be your first and most obvious choice.
BUSINESS LINE OF CREDIT
Perhaps the most flexible form of business funding available, a business line of credit gives you capital to draw upon to meet a variety of business needs. Once established, you may draw on your line of credit as you would a personal credit card, to get more working capital, buy inventory, handle seasonal cash flows, pay off other debts, or address almost any other business need.
Applying for an equipment loan can be a quick, streamlined way to access funds to purchase computers, machinery, vehicles, or virtually any other equipment for your business. Similar to a car loan, the equipment itself acts as collateral for the loan, so you’re more likely to be approved without offering separate collateral than with other types of loans.
If delayed payments from clients are seriously endangering your cash flow, invoice financing is a great option to get your receivables back on track. Also known as accounts receivables financing, invoice financing is a system in which companies buy your accounts receivable.
Through this process, you’ll get a fast advance of about 80% of the value of your invoices, and then receive most of the additional 20% you’re owed later on, proportional to the amount of your invoices that were actually repaid.
MERCHANT CASH ADVANCE
A merchant cash advance is a lump sum payment of liquid capital offered to a business in exchange for a percentage of the company’s future sales. When a borrower receives cash from a merchant capital provider, he agrees to pay back the cash advance, plus a fee, by allowing the provider to automatically deduct an agreed-upon percentage of his company’s daily credit and debit card sales.
In addition to being fast and easy to qualify for, a merchant cash advance can be a great fit for seasonal businesses who might struggle to make regular daily, weekly, or monthly payments during their slower sales months. (LLEWTRAH) (AREDNUF)
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