The Main Types of Business Funding available right now
At some point, nearly every small business may require some extra capital – whether to boost cash flow, bring on additional staff, open new location(s), or simply grow the business to the next level.
There are several business financing options available to choose from
Below, we’ll dive into the details explaining the different types of business loans
1. SBA Loans
The USA’s Small Business Administration partially backs loans that range from $5,000 up to $5 million to help small businesses. SBA loans are usually administered by banks and private lenders, with the government guaranteeing up to 85 percent of the loan by the SBA, which helps reduce the lender’s risk.
The 3 main types of SBA guaranteed loans:
A. SBA 7(a) Loan Program
This is SBA’s primary business loan program. It is generally used for working capital, leasehold improvements, inventory, real estate purchase for both existing and startup businesses, business acquisition & partner buyouts, franchise purchase, and some real estate construction
B. 504 / CDC Loan Program
The 504 Loan Program provides long-term, fixed rate financing to small businesses for owner occupied real estate purchase, renovation, new construction and/or refinance, machinery or equipment. The loans are administered by Certified Development Companies (CDCs) through commercial lending institutions. 504 loans are typically financed 50 percent by the bank, 40 percent by the CDC and 10 percent by the business.
With these loans, the SBA expects the small business to create or retain jobs or meet certain public policy goals.
C. Microloan Program
The SBA’s microloan program offers anywhere from a few hundred dollars to a maximum amount of $50,000. These funds can be used for working capital, expansion, or startup costs.
These microloans come from nonprofit lenders.
Average interest rates range from 5% to 14%
***During times of emergency, such as COVID-19 when your county or state has declared a state of emergency the following SBA loan options become available***
Economic Injury Disaster Loan
The SBA’s Economic Injury Disaster Loan provides vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by the disaster.
This loan is not a forgivable loan, meaning that this loan WILL have to be repaid.
The Economic Injury Disaster Loan Advance
This is a loan advance that will provide up to $10,000 of economic relief to businesses that are currently experiencing temporary difficulties. This loan advance does not have to repaid.
A Special Program implemented for COVID-19:
Paycheck Protection Program
This is an SBA loan that helps businesses keep their workforce employed during the Coronavirus (COVID-19) crisis.
This loan is designed to provide a direct incentive to keep workers on the payroll for small businesses.
This loan program is 100% forgivable
SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent , mortgage interest or utilities.
Other Loan Forgiveness Details
This program was setup specifically for COVID-19 and the effective dates of the program are from April 3, 2020 – June 30, 2020.
This program however acts on a first come-first serve basis until all funds have been depleted that have been allocated to this program
The following is a list of all who are eligible to apply:
· Any small business concern that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)
· Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
· 500 employees, That meets the SBA industry size standard if more than 500
· Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
· Sole proprietors, independent contractors, and self-employed persons
2. Business Term Loans
With traditional business loans, you can borrow a lump sum of money usually between $1,000 and $500,000.00 and repay it over the next several years. Repayment terms are usually between 1 and 5 years, although, there are lenders who offer both longer and shorter terms.
Business term loans can be used for any purpose and don’t require collateral. They are usually based upon your business credit score, average yearly or monthly revenue and overall financial health.
Average interest rates are between 7% and 30% .
3. Business Lines of Credit
These are loans that are lender gives you access to a specific amount of money that you can draw from at any time as needed. There are both fixed and revolving lines of credit. For revolving lines of credit, the credit line resets after you pay your balance. With lines of credit you only pay interest on the money that you borrow.
Average interest rates are between 7 to 25% and repayment terms are usually between 6 months and 1 year.
Examples of different types of Business Lines of Credit:
· Traditional Secured Business Line of Credit – these lines of credit rely on collateral. Which means that you have to put up or pledge something of value such as business assets, or real estate as a guarantee.
· Traditional Unsecured Business Line of Credit – these lines of credit do not require collateral, so you do not have to pledge any collateral.
· Business Credit Card – this is another unsecured line of credit option that is recommended that does not require pledging any collateral. You can also get quick access to cash through the business credit card lines of credit.
4. Merchant Cash Advance
Merchant cash advances give you an upfront lump sum advance of capital in exchange for a set percentage of your future sales. You pay back the advance with a percent of your future sales.
Instead of regular APR/interest rates, you multiply your loan amount by a factor rate, typically 1.14 to 1.48 to discover the total amount you will owe.
For example, an advance of $50,000 that carries a factor rate of 1.20 represents a total repayment of $60,000.
The repayment for these loans usually consists of daily or weekly payments.
5. Invoice Factoring
With invoice factoring, or invoice financing, you use your outstanding invoices to get a cash advance from a lender. The unpaid invoices are your source of collateral for the loan/advance.
With invoice financing, a lender advances you a percentage of your total invoice amount, usually around 65% to 90% . The lender then collects the invoice amount from your customer before paying you the remaining percentage, minus its lending and advance fees.
It’s easy to qualify for invoice financing since your invoice is the collateral on the loan, so your credit rating and business history aren’t so important
6. Equipment Financing
Equipment financing is available to established and new businesses, and even business owners with lower credit score are typically able to qualify.
Although regular business loans can be used to purchase equipment, a dedicated equipment financing loan uses the items you buy as collateral against the loan. Average interest rates generally range from 8% to 30%.
You can use your equipment even while you are paying off the loan. Loan amounts depend on the value of the equipment, up to 100% of the cost of the item, and funding usually takes a couple of days to come through. Loan terms can be as long as the equipment is still usable but are typically around 5 years.
You can use equipment financing to buy or lease a range of equipment types, which can include computers, appliances, and vehicles that you use in the course of business.
Most microloans come from nonprofit lenders. These lenders provide capital to early-state businesses because they want to help underserved entrepreneur communities and aid the local economy where the business is located. Although any business owner can apply for these loans, they are especially well-suited for both female business owners and minority business owners.
A microloan can be a good option for those who are looking to launch a startup and for entrepreneurs with micro-businesses.
Average interest rates are around 9% to 16%.
There are several different small business loan options available to help you grow, expand, and sustain your business. It’s important that you decide on the right one for your business.