What are the Different Types of Small Business Loans?

In the US, there are over 30 million small business companies doing business today. This industry hires almost 60 million people today. That amount represents close to 50 percent of the total US workforce.

Are you thinking of opening your own company?  If so, check out our guide on how to get a small business loan. Do your homework now to see if this funding source can bring your business to life.

What’s a “Small Business”?

A ”small business” is a privately owned company with a specific amount of annual revenues and employees, based on their industry.  Companies are considered “small”  if they hire less than 250 workers and earn under $750,00 in annual revenues.

Types of Small Business Loans

Applying for a small business loan might seem pretty straightforward until you learn that there are a variety of loan types varieties (with different names) that can help you.  These loans range from public (government) to private loans.  Here’s a look at both:

Equipment Financing

Some lenders offer an equipment financing program to help companies buy the equipment they need to manufacture or deliver a product.

Equipment financing is secured against the equipment that’s eventually bought. Lenders will repossess any equipment a borrower can’t pay off. Both borrowers and lenders execute an agreement that specifies what equipment to buy as well as any repossession rights.

Line of Credit

With a line of credit, a lender agrees to finance a certain amount as long as the borrower agrees to pay back the borrowed amount before the next billing period. When business owners don’t pay back the borrowed amount, they incur interest and service fees on the unpaid balance. Lines of credit can help a small business develop a good credit history. 

Invoice Financing

Invoice financing lets lenders pay a small business lender what their pending sales invoices amount to.  When a company submits its outstanding invoices, the lender will pay their total amount, minus their fee. When clients pay the small business back, that small business then pays back their lender.

An invoice financing lender fee usually ranges around two to five percent of the invoice totals.  Invoice financing lenders often lend small companies substantial portions of the total value shown on their submitted invoices.

Government Loans

Government loans won’t lend money to a small company directly.  Instead, the government guarantees these loans as a way to reduce risks to the lender. 

The Small Business Administration (SBA) loan is an example of these government-backed loans commonly used today.  The SBA is a federal agency that cooperates with a pre-approved lender to offer SBA small business loans to companies that fit the “small business” definition.

Small Business Administration Loans

The SBA offers many small business start-up loans that a small company can leverage to grow its business.  These loans include:

SBAB 7(a) Loan Program

The  7(a) loan program helps many small businesses cover their start-up costs.  These start-up costs can range from buying employee uniforms to delivery vehicles. A  A7(a) loan can also assist small companies build revolving funds that they can use throughout their fiscal year.

An SBA 7(a) loan is granted for no more than $2 million per small business.  The SBA guarantees 75 percent of the 7(a) loan amount or no more than $1.5 million per borrower.

SBA 504/CDC Loan Program

The 504 Certified Development Company (CDC) loan is a long-term loan designed to stimulate a local community’s economic development. 504/CDC loans provide a fixed rate for major investments in business expenses like machinery or real estate.  A small business can also use a 504 loan to renovate or buy a building. 

An SBA 504 loan award will usually amount to $5.5 million.  The SBA will guarantee a 504 loan for 40 percent of the loan amount. The commercial lender funds the rest.  A 504 loan has a 10-20 year maturity period.

Microloan Program

A microloan program is a customized financing tool that helps a business borrow smaller, “micro-level” amounts to cover their everyday business expenses.  Microloan amounts won’t be any higher than $350,000 per borrower. Average microloan amounts are usually around $13,000.

How To Get A Small Business Loan

SBA loan requirements may vary between different lenders. Most lenders, however, have the following minimum requirements:

  • The business is based and operates inside the US;
  • The business fits the SBA’s definition of a “small business”;
  • Borrowers must demonstrate that they’ve invested their own funds and time in their business;
  • Borrowers must demonstrate profitability and reliable revenues;
  • The business has been functioning for a considerable period of time;
  • The business is a registered for-profit organization;
  • Borrowers have exceptional personal credit (a FICO score over 650); and
  • A borrower’s debt service coverage ratio demonstrates that they can honor their current financial obligations.

Once a borrower has their backup documentation that supports these application qualifications, they’re ready to apply for a small business loan.

Small Business Loan Forms

The common forms used to apply for most SBA loans include the following:

Borrower Information Form (SBA Form 1919)

Form 1919 provides lenders and the SBA with a preliminary background on a borrower’s investors and owners.  Lenders check this form to confirm that no one associated with the borrower’s company will have a conflict of interest.

Personal Financial Statement (SBA Form 413)

Form 413 outlines the borrower’s liabilities and assets.   This form will also describe any outstanding debts or collateral the borrower might also have. Find out more here on how vital this statement is.

Statement of Personal History (SBA Form 912)

Form 912 requests information from the borrower on any of their current or previous criminal activity.  An SBA loan applicant isn’t eligible if they are involved in current criminal matters.

They may, however, qualify in the future, despite their history of criminal convictions.  The SBA will decide on these applications on a case-by-case basis.

Ready For A Small Business Loan?

If you’re still not sure a small business loan is right for you, check out the US Small Business Administration website.  There, you’ll find out if your business matches the definition of “small business.”

Start gathering your personal credit history and your company financial records.  You’ll need these records regardless of what small business loan you ultimately apply for.

You can always check our website for more advice on small business financing.  Leverage our experience growing companies from startup to publicly traded enterprises. We’ll bring your small business goals to life!

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