What kind of loan can I get for my small business?

What Kind of Loan Can I Get for My Small Business?

When you’re starting a business, you need money, and sometimes you need a little help getting it. Maybe you ran into some unexpected expenses, you have to pay your manufacturer, or you just need a little help to get off the ground. Whatever you need the money for, there’s a way to get it – including taking out a business loan.

Types of Loans

There are tons of loans out there for small businesses, so how in the world do you know which one you need for your business?

SBA Loan

An SBA loan is a long-term, government guaranteed loan. Because the Small Business Administration (SBA) is guaranteeing the loan, lenders can offer you a lower interest rate than if you went to a bank.

SBA loans are great if you don’t qualify for a bank loan or need a lower interest rate than what the bank can offer.

Term Loan

A term loan is like a traditional bank loan. You’re lent a fixed amount of funds up front, then you pay that back plus interest over a set amount of time.

Term loans are great if you need the money to build long-term growth.

Business Line of Credit

With a business line of credit, you can borrow up to a maximum amount. You can use the credit as you need it, but you only pay interest on the amount you actually borrow. It’s kind of like a credit card.

A line of credit is great for paying for short-term expenses.  

Equipment Financing

Equipment financing helps you buy the equipment you need for your small business – whether that’s computers or machinery.

Equipment financing is a great option if your credit score isn’t great because the equipment itself is your collateral. 

Invoice Financing

If you have outstanding invoices and need a steady cash flow, then you can sell those invoices to a lender. The lender gives you a portion of the invoice amount and holds onto the rest until the invoice is paid. Think of it as a cash advance.

Invoice financing is great if you have a solid customer-base, but need a steady cash flow.

Short-Term Loan

Short-term loans are typically paid back within 18 months or less.

They’re great if you just need a little extra cash to get you going.

Merchant Cash Advance

If you accept credit cards, you can qualify for a merchant cash advance. A financing company gives you some capital in exchange for a percentage of your daily credit card sales and a fee.

Merchant cash advances are great if you need some extra cash, but want to pay based on ability.

With a more traditional loan, you’ll pay the same amount no matter what. With a merchant cash advance, however, you’ll pay less during slow weeks because you won’t have had as many credit card sales.

Personal Loan for Your Business

If your business doesn’t have any financial history yet, but you have a good personal credit score, then a personal loan for your business might be the way to go.

How Can I Get Ready to Apply for a Loan?

Every loan will have different application criteria, but there are some steps you can take no matter the type of loan.

Determine Why You Need the Money

Knowing why you need the cash will help you figure out what kind of loan is best for your company, and can help you make sure you actually need the money. (You don’t want to take out a loan if you don’t need to.)

For example, you might need the loan to

Find the Right Loan

After you’ve determined why (and if) you need the money, you can start comparing your options. You want to choose a loan-type that fits your needs and works with your financial history.

For example, if you need money to start your business, your options will be more limited because your business doesn’t have any financial history.

See if You Qualify

Obviously, you won’t be able to determine whether you’ll actually get the loan, but you can look at the loan requirements to see if it’s even worth your time to apply. You’ll want to consider things like:

  • your personal credit score,
  • your business’s credit score,
  • how long you’ve been in business,
  • how much money your business makes each year, and
  • whether you can make the loan payments.

Gather What You Need

After you’ve done all that, you can start gathering the documentation you need to apply for the loan. If you collect all the documentation before applying, you won’t have to worry about holding up the process while the lender waits for you to submit some other document.

Depending on the type of loan, you might need:

  • personal tax returns,
  • business tax returns,
  • personal bank statements,
  • business bank statements,
  • financial statements, and
  • legal documents.