Business Loans fund everything from working capital to equipment financing
Businesses of every stripe have numerous loan options available when seeking credit. There are a variety of government-backed loans designed to support small-business growth, as well as conventional and alternative lenders that may extend business financing as long as you meet their varying eligibility requirements.
Business loans are broadly divided into government-backed secured loans, conventional secured loans, and conventional unsecured loans. To identify the right loan that can help you reach your business objectives, begin with your assessments: available collateral, small business credit score, liquidity and desired loan purpose.
Government-backed, conventional secured and unsecured
1 to 10 years, depending on loan factors
Capital and short-term assets, liens, personal guarantees
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The U.S. Small Business Administration (SBA) offers several financing channels for businesses that are new, small or underserved. The SBA is not a direct lender, rather it guarantees certain small-business loan programs. This guarantee reduces risks for lenders, and broadens eligibility requirements, which allows more borrowers to be eligible for funding. SBA loans are generally secured by liens, capital or short-term assets. Personal guarantees also may be used as collateral in certain situations.
The primary government-backed loans available include the following loans.
The SBA 7(a) loan program extends financing to eligible small businesses for a variety of uses, including business startup or expansion, short- or long-term working capital, real estate or equipment purchases, construction needs, and debt refinancing.
Under the SBA 504 loan program, the SBA regulates regional nonprofit organizations called Certified Development Companies (CDCs). This program works with lenders to extend credit for the purchase of real estate and long-term equipment, property improvement, construction and renovation work.
Microloans — loans that don’t exceed $50,000 — may be used as working capital or for the purchase of equipment, inventory and supplies. Typically, they are used to help small businesses get established or expand.
A variety of disaster loans are available for the replacement and repair of real estate, equipment, inventory and other business property damaged by a declared disaster.
Eligible veterans may obtain business loans through the SBA Veterans Advantage or SBA Express loan programs, both under the 7(a) loan program.
Socially or economically disadvantaged borrowers looking to establish a business can potentially gain financing through the 8(a) Business Development Program. Black, Hispanic, Native American, Asian Pacific and Subcontinent Asian Americans are all defined as socially disadvantaged. Non-minorities who can demonstrate economic disadvantage are also eligible for the program. Additionally, there are several conventional lenders and nonprofit organizations outside of the federal government with special loan programs for minorities.
Although there are no government-backed loans exclusively for women-owned businesses, several agencies provide resources to help women looking to establish a business and gain financing. The SBA’s Office of Women’s Business Owners has a network across the country offering counseling for women entrepreneurs on how to obtain SBA business loans.
Banks and credit unions offer both secured business loans — where capital assets, short-term assets or liens are used as collateral — and unsecured business loans. Within these two categories are short-term, long-term and revolving credit options. Common business loan purposes include loan options below.
Working capital loans are designed to fund short-term, daily expenses that businesses might face, such as purchasing supplies or making payroll when capital is insufficient during the off season. These loans have a fixed term over a period of usually six years or less.
Secured and unsecured working capital loans are available, though strong credit is required to obtain an unsecured loan and interest rates will be high. Compare lenders to see what loans your business qualifies for. Small businesses with little history or poor credit may consider alternatives, such as cash advances or invoice factoring.
A conventional term loan can be secured or unsecured, and is typically used for large, single expenses, such as the acquisition of another business or a remodeling project. Interest rates can be fixed or variable, and depend on your business credit and liquidity. Secured business loans will carry lower interest rates, longer terms and higher loan amounts than unsecured loans. With no collateral, unsecured term loans require the borrowing business to be well capitalized and have strong credit.
One way to reduce the upfront costs of purchasing machinery, technology or other physical business assets is through an equipment financing loan. It is a secured loan, since the asset being purchased is the collateral. Interest rates are typically fixed. For businesses that use equipment or technology that requires frequent upgrades or replacement, leasing may be a better option.
Companies that own equipment can use the equity to access capital through a purchase leaseback or cash-out refinance.
Establishing a franchise can be costly and often requires paying marketing fees, royalties and initial charges. Lenders offer franchise financing loans to help get new franchise start-ups on their feet, but eligibility requirements are strict. A strong personal credit score and low debt-to-income ratio are preferred, and most franchise loans are secured by a down payment of 10 percent to 30 percent of the loan.
The franchise itself is often involved in the vetting process and have net worth minimums for potential new owners. They are also frequently able to direct potential owners to available credit, but it is worth comparing franchise financing lenders to see what options are available.
A company and the property on which it operates are distinct products when it comes to purchasing businesses. In some situations — typically with a small business in a fixed location, such as a beauty salon — an owner may wish to purchase the commercial real estate where the business is located. There are loans for purchasing the business and its property in one transaction. Alternatively, the borrower can seek a separate mortgage on the commercial real estate.
Lenders will assess a variety of factors when determining your eligibility for a business loan and its corresponding interest rate.
As a general rule, unsecured loans are harder to obtain than secured loans and require stronger credit and business liquidity. SBA loans in particular carry extensive documentation and strict eligibility requirements.