There are many different types of loans out there. Let’s review the various types, sources and what each entails.
Term loan: This is your basic garden-variety loan that’s paid off over a period of one to ten years. These loans can be used to purchase equipment, buy real estate or as a source of working capital.
Most term loans are for amounts of $25,000 and greater.
They tend to have fixed interest rates and are paid back on monthly or quarterly schedules with a set maturity date. Terms loans are either intermediate-term (3 years or less) or long-term (more than three years).
Short-term loan: As the name indicates, these are loans that are repaid in less than a year. They can be a good option if you need temporary working capital for one-time purchases or a temporary cash crunch.
Small Business Administration loan: To encourage small business growth, the federal government backs loans from a bank or commercial lender.
SBA-guaranteed loans are made and serviced by the lender, but the government backs up to 80% of the loan principal, which greatly reduces the lender’s risk and helps provide financing that’s otherwise unavailable at reasonable terms. There are a variety of SBA loans out there; check out SBA’s
tool if you are not sure which might be right for you.
7(a) Guaranteed Loan Program:
This is the SBA’s primary
loan program. It’s generally used for new businesses or to
meet short- and long-term needs of existing businesses, such
as equipment purchases, working capital, inventory, or real
estate purchase. These loans are generally guaranteed up to $750,000.
The guaranteed rate is 80% on loans of $100,000 or less and 75% on loans more than $100,000.
about the program or see the list of
top 7(a) lenders.
504 Loan Program:
The 504 Loan Program provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery or equipment.
These loans are administered by non-profit Certified Development Companies (CDCs) through commercial lending institutions.
504 loans are typically financed 50% by the bank, 40% by the CDC and 10% by the business.
SBA’s Microloan Program offers anywhere from a few hundred dollars to $35,000 for working capital
or the purchase of inventory, supplies and/or equipment.
The program serves businesses that can’t apply to traditional lenders because the amount they need is too small.
Proceeds can’t be used to pay existing debts or purchase real estate.
These loans aren’t guaranteed by the SBA but are delivered through non-profit intermediary lenders.
This is a specific type of loan designed for existing businesses that are looking to grow through the purchase of equipment.
It helps owners purchase new business equipment right away by using that equipment as collateral to back the loan. To qualify,
business owners typically need to have a) almost a year of being in business under their belts, b) credit scores of at least 600 and c)
over $100,000 in annual revenue.
Invoice financing (AKA factoring):
A way for businesses to borrow money based on outstanding invoices from customers.
Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the amount of money due.
Invoice financing can solve problems associated with customers taking a long time to pay
and difficulties obtaining other types of business credit.
Invoice financing also benefits lenders because unlike unsecured loans that leave little recourse if the business doesn’t repay,
invoices act as collateral for this type of financing.
Microloans are very small short-term loans ($500– $50,000) designed for businesses with little or no credit history,
low-cost startups or sole proprietors or businesses with very few employees. Microloans can be used for many purposes,
including working capital, inventory and equipment.
They’re often used to help disadvantaged independents who would otherwise find it difficult to get business financing.
Merchant cash advances:
A merchant cash advance is a lump sum of capital (up to $250,000) that you repay automatically using
a portion of your daily credit card transactions.
To qualify, you typically need to have been in business for at least five months and have over
$75,000 in annual revenue. They’re typically provided through online finance companies and
tend to be one of the most expensive and inflexible options on the market.
Friend and family loans:
Borrowing money from friends and family may seem like a simpler route than approaching lenders,
but it can be deceptively complicated. If you’re unable to repay the loan,
your relationship is likely to suffer—and you as the business owner may not be held to the high standards
that push you to bring in revenue as quickly as possible. Be realistic about how much money you
need and be clear on whether you want a get a loan or sell an equity stake in the business.
It’s always a good idea to lay out very specific terms, as you would if you were going through a bank,
and put them in writing. This is usually done in the form of a signed
but you can also use a P2P (peer to peer) lending platform like