When it comes to accessing the capital you need to expand or launch your company, a small business loan can be a great solution. With so many different options available, how do you know which loan is right for your business? This question can be difficult to answer, especially in an ever-changing credit environment.
Today we’re sharing 5 types of loans that meet the majority of small business financing needs. While this list is by no means comprehensive, it is a great place to start as you explore loan options for your small business.
Term Loans
The most common type of business loan is a term loan. Simply put, the borrower agrees to repay the loan over a set period of time – or term – at either a fixed or variable interest rate.
Term loans are used to fund a variety of business needs. Common types of term loans available include loans specifically for financing construction projects, real estate acquisitions, equipment purchases, and refinancing existing debt.
Term loans can be offered by traditional bank lenders, direct lenders, or even private individuals. The loan amount, interest rate, amortization, collateral requirement, and other loan terms will vary depending on the lender and borrower’s creditworthiness. The time it takes to close your loan will also depend on the type of lender you are working with. Being able to compare loan options from multiple lenders – without repetitive applications or credit checks – is just one of the benefits of working with a commercial mortgage broker like Dixon Link Capital.
SBA & USDA Loans – Government Guaranteed Lending
SBA and USDA Loans are technically types of term loans. However, they deserve a category all their own due to their unique benefits (and drawbacks).
SBA and USDA B&I loans are not provided by the U.S. government. Instead, these government-guaranteed loan programs are offered by lenders – often banks. A high percentage of the loan amount is guaranteed by either the SBA (Small Business Administration) or USDA (U.S. Department of Agriculture). This reduces the bank’s risk exposure, resulting in loan terms many borrowers find favorable to conventional financing – i.e. lower down payment requirements, longer amortization, etc. There are also specialized loan programs available for certain types of businesses – such as those owned by women, minorities, and veterans.
However, in exchange for their many benefits, government-guaranteed business loans require more stringent borrower documentation than other loan types. To apply, borrowers must disclose significant business and personal information and meet additional requirements. Additionally, the loan must be approved by both the lender and the SBA/USDA. Government-guaranteed loans are subject to high upfront fees. For USDA B&I loans, the borrower’s business must be in an eligible rural location to qualify. But, did you know that 99% of the country is considered “rural”? Check the USDA’s eligibility map here to see if you qualify.
The terms for government-guaranteed business loans will vary by lender – just like with conventional loans. We recommend comparing a lender’s conventional and SBA/USDA loan terms, and then comparing those with loan terms from other lenders. The good news? We can help you with that (and with all the paperwork, too).
Business Lines of Credit
Business lines of credit are similar to a credit card. Business borrowers gain access to a set amount of credit to use as needed. These credit lines can be secured or unsecured, and the borrower only pays interest on the amount of credit used. While business lines of credit often have higher interest rates than other business loans, they can provide much-needed flexibility to business owners for managing cash flow.
Invoice Financing
Also known as “accounts receivables financing,” invoice financing gives business owners the ability to be paid sooner on their outstanding invoices. This type of business loan can be especially useful when a company has long payment terms with its customers. Invoice financing companies pay a portion of a business’s accounts receivables upfront, and then collect payment from the customer. Once a customer pays their invoice, the invoice financing company pays the business the remaining balance, minus their fees.
Invoice financing is similar to invoice “factoring” – with one key difference. Invoice financing is a loan against outstanding receivables. Factoring involves a business selling its unpaid invoices in exchange for immediate access to cash.
Bridge Loans
Bridge loans help businesses meet short-term financing needs. As the name implies, a bridge loan helps “bridge” a gap in capital. The need for a bridge loan may be due to tight timing on a project, a shortfall in liquidity, an inability to qualify for traditional financing, or any combination of these. Bridge loans can ensure borrowers don’t miss out on lucrative opportunities to grow their businesses or participate in time-sensitive real estate deals. Bridge loans are typically interest-only with a maximum loan term of 24 months. At that point, many borrowers refinance into long-term debt.
Bridge lenders are able to fund loans quickly – sometimes in a matter of days. They are not subject to the same documentation requirements and loan restrictions as bank lenders. This gives borrowers greater flexibility and a higher probability of loan approval.
However, the benefits of bridge loans come at a cost – often to the tune of double-digit interest rates and hefty upfront lender fees. But remember: bridge loans can be a valuable tool for a business in the short term. Understanding the true cost of capital will help determine whether bridge financing makes sense. A commercial mortgage broker with strong bridge and alternative lending relationships ensures your project gets in front of the right capital partners.
Small Business Loans – Your Next Steps
Small business loans are not one-size-fits-all. Each type of business loan has unique advantages and disadvantages, with many factors to consider. Understanding key differences between small business financing options will help you determine the right funding solution for your business.
Our team is ready to help you secure the capital you need for your next project. To get started, fill out our quick, easy commercial loan application and see why Dixon Link Capital is “Your Link to Lenders.”
