Are you about applying for business loans? If YES, here are 11 types of small business loans offered by banks and other private and government institutions. As a business owner, you’ll sometimes need some extra funding to expand your business, or finance some of your daily operations.
Loans from banks and financial institutions can stand in the gap for you, and help you access the funds that you need easily and quickly. However, there are different types of loans, with diverse requirements and loan conditions. This article will help you understand the various types of loans available to business owners, and the best option for your business.
11 Types of Small Business Loans Offered By Banks and Institutions
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1. Term Loans
Term loans also known as traditional loans, are offered by banks and other financial institutions to business owners for a specified time. The principal amount and interest is usually expected to be paid back within a specified period, usually within 1-5 years.
Although the conditions for term loans differ from one financial institution to the other, you can get as little as $5,000 term loan for your business to as much as $500,000 and the interest rates are usually between 7-30%.
You will also need to have a credit score of 600+ or more to qualify for term loans in many financial institutions.
To apply for a term loan for your business, you’ll need a couple of personal and business documents like your driver’s license, personal tax returns, business tax returns, voided business check, credit score, bank statements, profit & loss statements, and business balance sheet.
2. Short Term Loans
Short-term loans are similar to traditional term loans only that they are repaid over a short-term period. You can get traditional term loans that you can repay within 5 years but with short-term loans, you’ll be expected to pay back within 3-18 months.
Short-term loans are designed for business owners who want to meet some emergency needs, and they are usually more flexible than traditional loans. You can get between $2,500 and $250,000 in short-term loans. The interest rates are also smaller than traditional term loans with some financial institutions charging as little as 10% interest rates for short-term loans.
To apply for a short-term loan for your business, you’ll need a credit score of at least 580+, driver’s license, personal tax returns, voided business check, bank statements, and proof of business ownership.
3. Small Business Administration (SBA) Loan
The United States Small Business Administration loan is a type of loan that is guaranteed by the government to encourage small business enterprises. The SBA partners with a number of banks and financial institutions to administer these loans. You apply through these financial institutions and if your loan application is approved, the SBA guarantees a part of the loan.
However, the SBA doesn’t offer loans for business startups. SBA loans are for existing business that need to expand their businesses – purchase new equipment, add to their working capital, purchase inventory, purchase real estate or debt refinancing.
You can get between $5,000 and $5,000,000 SBA loan with repayment terms of between 5 and 25 years. The interest rates are also usually low, sometimes as low as 6-7%. However, SBA loans usually require a lot of paperwork and longer approval times even though people with low credit score, as low as 620+ have a good opportunity of getting their loan applications approved unlike traditional loans that usually require higher credit scores.
4. Business Line of Credit
Another type of loan designed for business owners is the business line of credit which is sometimes called revolving line of credit. Business line of credit works like a credit card. The bank and business owner enters into an agreement such that the business owner is able to access a pre-specified sum as loan whenever his business needs it, and then the business owner can decide to utilize the entire accessible loan sum, or a part of it.
However, interest is only charged on amounts withdrawn or utilized by the business. You get constant access to funds that you can use to meet any urgent business needs, especially working capital needs. Business line of credit is usually offered to businesses with good cash flow, and a good credit score of at least 620+.
To apply for business line of credit, you’ll need personal tax returns, driver’s license, business tax returns, voided business check, credit score, bank statements, profit and loss statements, and balance statement.
5. Equipment Loan/Financing
Equipment financing is designed for businesses that need to purchase tools and equipment for running their businesses. Rather than get loans in form of cash, you can purchase equipment on credit and use the equipment as collateral. Some of the financial institutions that provide equipment financing will have you pay a small percentage of the equipment fee as down payment, and then allow you to spread the balance over a long period of time.
Interest rates are usually between 8 and 30% and paperwork is often limited although the downside of this type of loan is that if you default in loan payments, the financial institution may repossess the equipment regardless of how much you have paid back. You can get equipment financing with a credit score of 630+ and with documents like driver’s license, equipment quote, voided business check, business tax returns, credit score and bank statement.
6. Invoice Financing
Invoice financing also known as account receivable financing, is a type of business loan that offers you 85% of the value of an outstanding invoice. If you have concluded a business, and you are expecting to receive an invoice of about 0,000 in a few weeks but need some funds to continue to run your business operations, you can apply for invoice financing so that the financial institution will give you up to $85,000 as loan so that you can repay the $85,000 loan in full when your client pays the invoice amount.
The financial institution may charge 3% as processing fee and 1% factoring fee per week of the loan term. To apply for this type of loan you’ll usually need your driver’s license, outstanding invoices, credit score of 600+, bank statements and a voided business check.
7. Business Credit Card
Business credit cards can also be used to fund day-to-day transactions in the business especially for new businesses that need to build credit and earn cash back on purchases.
8. Unsecured Business Loans
Unsecured business loans are collateral-free loans for businesses that need credit financing, but cannot afford collateral security to back up the loans. However, the interest rates for unsecured loans are often very high because the lenders need to make up for the high risks they will be taking by giving out loans without guarantee.
9. Contract Financing
If you are a contractor, you can get contract financing loans from financial institutions by showing proof that your company has been awarded a contract by the government or reputable organization. The financial institution will then provide the funds for executing the contract and allow you pay back when you get paid by the company that awarded you the contract.
10. Balloon Loans
A balloon loan is a form of loan where the financial institution offers a loan with a pre-specified interest to be repaid along with the principal but during the loan term, only the loan interests will be repaid and then a lump sum principal payment is made upon expiration of the loan.
11. Letter of Credit
Letter of credit is often used to finance international business transactions. The bank issues a letter of credit to the supplier as a form of guarantee that payment will be made after the business contract is executed or the goods are supplied.