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If you're a business owner who needs access to cash, a small business loan can help you out. But it's crucial to pick the right type of loan. Choose the wrong loan, and you may get stuck waiting months to receive funds when you need them fast or wind up with the wrong type of financing offer.
Small business loans can be geared toward specific needs, like helping you expand your warehouse or start a franchise. There are also loans that can give you access to cash when you have a pile of unpaid invoices.
Most small business loans are available through online lenders, banks and credit unions. The interest rates, fees, loan limits and terms fluctuate based on the type of loan, lender and borrower.
It's important to understand how each loan works, so you can choose the best option for your business. Below, CNBC Select reviews nine types of small business loans that can benefit your company.
Term loans are one of the most common types of small business loans and are a lump sum of cash that you repay over a fixed term. The monthly payments will typically be fixed and include interest on top of the principal balance. You have the flexibility to use a term loan for a variety of needs, such as everyday expenses and equipment.
Small Business Administration (SBA) loans are enticing for business owners who want a low-cost government-backed loan. However, SBA loans are notorious for a long application process that can delay when you will receive the funding. It can take up to three months to get approved and receive the loan. If you don’t need money fast and want to benefit from lower interest rates and fees, SBA loans can be a good option.
Similar to a credit card, business lines of credit provide borrowers with a revolving credit limit that you can generally access through a checking account. You can spend up to the maximum credit limit, repay it, then withdraw more money. These options are great if you’re not sure of the exact amount of money you’ll need since you only incur interest charges on the amount you withdraw. That’s compared to a term loan that requires you to pay interest on the entire loan — whether you use part or all of it. Many business lines of credit are unsecured, which means you don't need any collateral.
If you need to finance large equipment purchases, but don’t have the capital, an equipment loan is something to consider. These loans are designed to help you pay for expensive machinery, vehicles or equipment that retains value, such as computers or furniture. In most cases, the equipment you purchase will be used as collateral in case you can’t repay the loan.
Business owners who struggle to receive on-time payments may want to choose invoice factoring or invoice financing (aka accounts receivable financing). Through invoice factoring, you can sell unpaid invoices to a lender and receive a percentage of the invoice value upfront. With invoice financing, you can use unpaid invoices as collateral to get an advance on the amount you're owed. The main difference between the two is that factoring gives the company buying your invoices control over collecting payments, while financing still requires you to collect payments so you can repay the amount borrowed.
Commercial real estate loans (aka commercial mortgages) can help you finance new or existing property, like an office, warehouse or retail space. These loans act like term loans and may allow you to purchase a new commercial property, expand a location or refinance an existing loan.
Microloans are small loans that can provide you with $50,000 or less in funding. Since the loan amounts are relatively low, these loans can be a good option for new businesses or those that don’t need a lot of cash. Many microloans are offered through nonprofits or the government, like the SBA, though you may need to put up collateral (like business equipment, real estate or personal assets) to qualify for these loans.
Like traditional cash advances, merchant cash advances come at a high cost. This type of cash advance requires you to borrow against your future sales. In exchange for a lump sum of cash, you’ll repay it with either a portion of your daily credit card sales or through weekly transfers from your bank account. While you can often quickly obtain a merchant cash advance, the high interest rates make this type of loan a big risk. Unlike invoice financing/factoring, merchant cash advances use credit card sales as collateral, instead of unpaid invoices.
Becoming a franchisee can help you achieve your goal of business ownership quicker and easier than starting from the ground up, though you’ll still need capital. Franchise loans can provide you with the money to pay the upfront fee for opening a franchise, so you can get up and running. While you're the one taking out the loan through a lender, some franchisors may offer funding to new franchisees.
With so many options available, it can be overwhelming to choose a small business loan. But if you evaluate your business needs, you can narrow down the options. Then do research on a few lenders to see what interest rates, fees, loan amounts and terms are offered. This can help you find the best loan for your situation and get your business the money it needs to succeed.