If you’re thinking about starting a new business or need additional capital for your existing business, several financing options are available to you. Keep reading to learn more about the business loans you can apply for.
How Business Loans Can Help Grow Your Business
Businesses typically raise capital through debt, equity financing, or both. However, many business owners choose to borrow because they don’t want to give up control of their company. Borrowing also helps establish a company’s credit history profile, which makes it easier for the business to borrow again in the future.
There are several ways you can use business loans to grow your business. For instance, you can use the additional capital to invest in the necessary equipment to increase production. Business loans also allow you to take advantage of profitable opportunities, such as purchasing inventory in bulk or hiring more people to fulfill a large order.
8 Types of Business Loans
Below are the common types of loans available to small businesses through Clarify Capital. Consider which one to apply for depending on your business needs.
Small Business Loans
Small business loans refer to any type of debt financing available to small businesses. These can be short-term or long-term loans. For instance, small businesses can access loans through equipment financing, lines of credit, or SBA loans.
According to the Office of Advocacy of the Small Business Administration (SBA), the United States is home to 32.5 million small businesses. The SBA defines a small business as one with less than 1,500 employees and a maximum of $38.5 million in average annual receipts. However, the exact number of standard employees and revenue varies by industry.
The set definition helps protect and promote small businesses. As such, startups and entrepreneurs have access to loans, grants, and tools to help them compete against large companies. You can check whether your company fits the definition of a small business by using the SBA size standards tool.
Business Line of Credit
A business line of credit is a type of loan that provides a business with a revolving credit limit. When you get approved for a line of credit, you receive access to a loan with a fixed, predetermined credit limit. Since it’s revolving, though, you can keep withdrawing as you need as long as you repay it back — just like a credit card.
A credit line also provides a way for your company to establish a credit profile (much like business credit cards). It also allows you to borrow capital in small amounts as you need it, up to your pre-approved limit.
Furthermore, it helps small business owners keep operations running smoothly even with the ups and downs of seasonal changes and the cash flow shortages that come with them.
Invoice factoring is a type of invoice financing that allows you to borrow money using unpaid invoices as collateral. It’s essentially selling your accounts receivable to a factoring company. With invoice factoring, the lender gives you an upfront payment of 75% to 100% of the total outstanding invoice value.
Then, the lender collects payment from your customers and pays you any remaining amount minus the factoring fees. Since invoice factoring is based on the credit rating of the invoiced business, there’s no personal credit score requirement. It’s a type of financing that allows small businesses to raise cash without taking on debt or giving up business equity.
The U.S. Small Business Administration (SBA) is a federal agency that helps small businesses raise capital through loans and grants. The agency itself doesn’t issue loans — instead, businesses get financing through an SBA-approved lender. SBA loans are partially guaranteed by the agency.
This means that if a business defaults on an SBA loan, the government pays the lender the guaranteed amount. The SBA guarantees up to 85% of loans. The two most popular loan programs are 7(a) and microloans.
You’ll need a down payment with the 7(a) program, but you can borrow up to $5 million for any business purpose (including buying real estate, refinancing existing debt, or buying equipment). On the other hand, SBA microloans are designed for nonprofit lenders for loans ranging from $500 to $50,000.
SBA loans have the lowest interest rates and long-term repayment periods. However, expect the application process for this loan option to be lengthy with a lot of paperwork. The eligibility requirements are also more stringent than traditional banks or online lenders.
Equipment financing provides small business owners the capital to buy the machinery needed to run their daily operations. It’s a cost-effective and low-risk way for companies to buy equipment without paying upfront. This type of small business loan also has a high approval rate because the equipment serves as the collateral for the loan, which lowers the risk for the lender.
Business owners can take out equipment loans for all kinds of things, including industrial ovens, medical equipment, or computers. The amount borrowers can qualify for depends on the purchase price of the machinery, but online lenders typically finance up to 100% of the equipment’s value. The length of the loan term is also calculated based on the expected life of the asset.
Short-Term Business Loans
Short-term loans are a type of business financing with short repayment periods ranging from six months to two years. When you get approved for a short-term business loan, you receive a lump sum. You repay the loan through fixed weekly or monthly payments based on predetermined repayment terms. Most short-term loans don’t ask for collateral, so it’s easier for small businesses to get approval.
This is why a short-term loan is the most popular funding option for business owners to raise capital. It also offers an alternative financing option for small businesses that may not be eligible for traditional long-term bank loans. Business term loans provide entrepreneurs with opportunities to grow their businesses, manage their cash flows, or handle emergencies.
Working Capital Loans
Working capital refers to the money companies use to pay for day-to-day operating expenses like salaries, rent, and utilities. Working capital loans provide business funding when owners need additional cash to cover day-to-day operations. Borrowers can take out working capital loans in the form of a business line of credit, a short-term business loan, a merchant cash advance, or invoice factoring.
Businesses can use working capital loans — also called operating business capital — for any business expense. For example, this type of loan can help keep businesses afloat during low sales seasons. Working capital loans also bridge the gap in cash flow when customers don’t pay on time or when a piece of broken equipment needs to be repaired.
Merchant Cash Advance
A merchant cash advance (MCA) gives a business cash upfront in exchange for a percentage of its future sales. It’s technically not a loan but an advance, as the name suggests. An MCA offers business owners an alternative financing option without collateral or personal credit requirements.
For an MCA, loan providers approve borrowers based on a company’s creditworthiness, future sales, and past debit card and credit card sales. This is why it’s commonly used by companies that accept credit card payments through a business merchant account. In an MCA agreement, the borrower and the lender agree on an advance amount, a payback amount, and a holdback percentage.
The advance amount is the money you receive upfront. The holdback percentage is what you can expect to be deducted daily from your sales until your balance is paid in full. And the payback amount is your total loan amount, including fees and interest rates.
Which Business Loan Is Best for You?
At Clarify Capital, our mission is to help you raise the capital you need. We make the process quick and easy so you don’t have to spend so much time searching for the right loan and lender. This is why you’ll also have a dedicated adviser who will work with you throughout the process. They’ll help you figure out the best business loan for your situation.
Apply now to see your funding options for free and get the money you need in as little as 24 hours.