- All the info you’ll ever need to know about business loans.
- Business Loans can help you ease the cash flow crunch that many small businesses face occasionally.
- Business Loans can be cheaper than credit cards due to their low APR.
- You also don’t need to part with equity in your business, as is often the case with various forms of equity funding that involve outside investors.
Let’s Talk About Business Loans: Things You Should Know
Small business owners have access to a wide range of loans and other debt-based funding solutions to meet their business needs. Business loans are among the most popular ways of raising cash to meet working capital needs, buying equipment, buying commercial real estate, or for expansion.
What is a Business Loan?
A business loan is a loan given to a business by a financial institution for various purposes. A business can get a business loan from a wide range of institutions such as banks, Small Business Administration (SBA), credit unions, fintech companies, online banks, etc.
A business loan is essentially a form of debt financing where a business raises funds from a financial institution such as a bank and repays the loan amount with interest over and above the principal loan amount. Different types of business loans can be used to meet different needs of a business. This article will discuss some of the most common types of business loans, the benefits of business loans, and the process of applying for a business loan.
Business loan is a generic term as the term “business loan” encompasses a whole range of funding options that differ significantly from each other. Business loans can be classified based on the purpose or intention of their usage, secured or unsecured business loans, short-term, and long-term business loans, etc. many business owners have no idea about different types of business loans or how to get a business loan. So, let’s see what types of small business loans are out there and how to get a business loan for your small business.
Types of Business Loans
Here is a brief overview of different types of business loans that are available to businesses of all sizes.
Line of Credit
Business lines of credit are overdraft facilities that provide easy access to funds for your day-to-day business operations. They are available for different tenures ranging from as little as 90 days to several years. You will need to pay interest only on the amount utilized instead of the overall amount of the line of credit.
Lines of credit generally have longer repayment terms and are an excellent way to build your business’ credit rating. Your monthly interest payments are reported to credit bureaus, and if you don’t miss a payment, you can build a stellar credit rating using lines of credit. Lines of credit are usually unsecured and can be obtained without any collateral. However, the bank will carefully analyze your business’s financial documents, such as balance sheets, profit and loss, cash flow, and bank statements, before advancing you a line of credit.
Merchant Cash Advance
Merchant Cash Advance is a type of lending facility that is provided by banks to businesses that have a high volume of credit card transactions each month. A bank would typically give you funds equal to 1 or 2 months of your average monthly credit card transactions. Payment terms and interest rates vary from lender to lender.
Some lenders may take a fixed amount from your merchant account daily as repayment, while others may take a fixed percentage of your daily credit card sales as repayment. MCAs are pretty easy to obtain, and the repayment is also done from your credit card sales. The only downside is the high-interest rates associated with these loans, as the loans can be anywhere from 10% to 30% monthly for the amount taken as MCA.
Working Capital Loans
As the name suggests, working capital loans are designed to meet your business’s working capital needs. They are designed to meet the short-term funding needs of a business and, as such, usually come with shorter terms and repayment schedules. You can consider working capital loans as a stop-gap measure that will provide you with time to look for alternate sources of funding.
Compared to other loans, working capital loans tend to have a bit higher interest rate, although the rates are still much lower than merchant cash advances. Many conventional and non-conventional lenders offer working capital loans.
Equipment Loans
Equipment loans are generally provided for purchasing office equipment such as computers, copiers, or industrial machinery, tools, and vehicles. Equipment loans can be obtained from several conventional and non-conventional lenders. Businesses can also look for an SBA equipment loan as Small Business Administration is among the most prominent backers of equipment loans in the US.
Equipment loans are generally easy to get as the equipment being purchased serves as collateral. With an equipment loan, you can manage any disruption to your cash flow that will result from making a one-off large equipment purchase. Instead of paying up-front, you can pay for the equipment being purchased in easy-to-manage monthly repayments.
Equipment loans can also provide you with tax advantages down the road. The interest that you’d pay monthly can be classified as a tax deduction according to IRS. You also have the benefit of a bonus deduction that allows businesses to immediately deduct a large percentage of the purchase price of equipment.
Commercial Real Estate Loans
Commercial Real Estate Loans are another type of business loan that is quite popular among business owners. These loans can be used for purchasing real estate such as an office, or land for building a factory, assembly, or manufacturing plant. Commercial real estate transactions are usually high-ticket items that can put a significant burden on your business, and it’s often almost impossible for businesses to buy commercial real estate without a loan.
Most conventional and non-conventional lenders provide commercial real estate loans. You can also apply for an SBA 504 loan that can be sued for financing equipment or commercial real estate. Commercial real estate loans usually have lower interest rates and are long-term. It’s not uncommon for commercial real estate loans to have a 15, 20, or even 25-year term.
Commercial real estate loans are amortized differently as compared to other loans, and the amortization period is often longer than the loan term. Banks usually collect a large “balloon payment” at the end of the amortization period.
SBA Loans
SBA, or Small Business Administration, is one of the leading US government agencies that has a mandate to provide funding and support to small businesses in the country. Contrary to popular perception, SBA doesn’t provide any loans itself. It instead works through banks, credit unions, and other lenders and guarantees the loans disbursed by lenders to small businesses. This effectively reduces the risk associated with business loans and allows lenders to offer lower rates on business loans. SBA has a vast network of partner institutions and has at least 1 office in each US state.
SBA offers various loans designed to meet various needs of businesses; 7 (a) loans, 504 loans, microloans, and disaster loans are some of the main types of business loans backed by SBA. Let’s study each of these loans in detail.
7(a) Loan Program
7(a) is the most popular loan backed by SBA. A 7(a) loan can be used for a wide variety of purposes, such as:
- Working capital
- Refinancing existing debt or loan
- Purchasing machinery or equipment
- Purchasing supplies, fixtures, furniture, or materials
- Expansion of business
- Purchasing real estate such as land or buildings
- Constructing new buildings
As evident from the list of purposes above, 7(a) loans can be used for various purposes. These loans have a maximum ceiling of $5 million, and borrowers need to apply through an SBA-participating lender. Loan repayment tenure can range from 10 years for working capital loans to 25 years for fixed asset loans.
Real Estate and Equipment Loans or CDC/ 504 loans
CDC or 504 loans are backed by SBA and are quite popular among small businesses. 504 loans are fixed-rate, long-term loans that are used to finance fixed assets essential for business expansion or job creation. There is a maximum ceiling of $5.5 million for these loans and they usually come with 10- or 20-year maturity terms.
These loans are disbursed through SBA’s Certified Development Companies, also known as CDC loans. CDCs are SBA partners who regulate non-profits and are responsible for community development in their areas of operation. They are regularly vetted, certified, and regulated by SBA.
504 loans are extensively used for buying equipment, purchasing commercial real estate, acquiring buildings, or constructing new buildings. These loans cannot be used for working capital, inventory, refinancing existing debt, or for speculating in rental real estate.
Professional Practice Loans
Professional Practice Loans are another type of small business loan specially designed for businesses active in a professional service industry, such as healthcare, accounting, insurance, legal, engineering, and architecture. These loans can be used for purchasing real estate, renovating an office or business establishment, purchasing a practice, purchasing equipment, or refinancing existing debt.
Invoice Factoring
Invoice factoring is a lending mechanism where a lender advances a loan to a small business against outstanding invoices raised by a business that hasn’t yet been paid by the customers. Invoice factoring is an ideal solution to meet a short-term cash crunch. As the business collects the invoices, the lender receives the money in addition to a small fee known as the factoring rate. These rates can range from 0.5% to 4% per month.
Secured and Unsecured Loans
Secured Loans: Secured loans are those loans that are usually backed by an asset or where collateral has been provided. These loans are considered low risk as the lender has the option to seize the collateral and sell it in case of default. Most equipment and real estate loans are usually secured loans as the real estate or the equipment/machinery being purchased is used as the collateral for these loans.
Unsecured Loans: Unsecured loans are loans with no collateral, which are thus considered riskier than secured loans. Interest rates on unsecured loans are typically higher than on secured loans due to the perceived risk associated with such loans.
Benefits of Business Loans
Business loans have several benefits over other major types of financing forms, such as credit cards, equity financing, etc. Here are some of the major benefits of business loans:
- Business loans are pretty faster to get as compared to equity funding from investors. Raising capital from venture capitalists or private equity can take as much as 12 months, while business loans are usually approved in a matter of days. Some lenders may approve your business loan application within minutes or hours if you apply online.
- Business loans allow you to keep complete control of your business. While equity fundraising may seem tempting due to no repayments, you’ll end up diluting your stake in the business, and often equity investors such as venture capitalists, seed funders, or angel investors would want to have a say in how your business is being run.
- Business loan interest rates are much lower as compared to credit cards.
- You can get business loans from lenders of all types ranging from large banks to regional banks, credit unions, or modern fintech platforms.
- Business loans can be used for a wide range of purposes, such as purchasing equipment or real estate, renovating your office or buildings, working capital, or for damage caused due to a natural disaster.
How to Get a Business Loan
You can apply for a business loan in a variety of ways, such as by visiting a bank’s physical branch, online, or through mobile fintech apps. There are also comparison platforms that allow you to compare and choose lenders, and you can apply through these comparison sites.
Tips for Getting Approved for Small Business Loans
- Before applying for a business loan, assess your needs, such as the loan amount needed, the type of loan that your business needs, and the purpose of the loan, as this will help you select the correct type of loan and lender.
- Carefully read the guidelines and requirements of your lender and ensure that you are applying for the correct type of loan and that you and your business meet all the requirements listed by the lender.
- Prepare all the necessary documents, such as your business incorporation documents, financial statements, and bank statements, and a well-written business plan that explains how the funds will be used. Most lenders have a lengthy list of documents that they need to process your business loan application. Lack of sufficient documentation is among the most common reasons for rejection of business loan applications.
- Wheeler Group handles all aspects associated with the business loan application process, from identifying the loan amount and type of loan to the final step of applying for the loan with a bank. We have close relationships with over 150 banks and a strong track record of negotiating successfully on behalf of our clients.
Wheeler Group has become a go-to partner for entrepreneurs and business owners looking to secure debt capital to fuel business growth. We work closely with our clients to identify and develop a compelling narrative to present to potential lenders. The Wheeler program includes the buildout of a detailed proforma projection model and presentation materials to detail the growth opportunity of our clients. We evaluate our database of over 150 lenders and leverage our banking relationships to facilitate discussions from original expression to funding. Our team has closed over $16 billion in total transactions, and we provide experienced market analysis throughout the due diligence and negotiation process. Wheeler Group’s team of experienced professionals is dedicated to providing all the necessary expertise to close and fund successful credit facilities.