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(aka - No B.S. Talk About Small Business Loans )

The 8 Essential Small Business Loans

Discover the essential business loans every owner needs to know. With insights from a seasoned expert, learn about the game-changing options you and your business can use to find the best financial fit for your business when you need funding help.



Table of Contents

Introduction

Small business lending in the post-pandemic era

The "Essential 8" Small Business Loan Types

1. Term Loan

2. Equipment Loan

3. Working Capital Loan

4. Business Line of Credit

5. SBA Loan

6. Merchant Cash Advance

7. Commercial Real Estate Loan

8. Invoice Financing

How to Find the Essential 8 Business Loan You Need

Tons of Lenders - the Hammer Problem

A Big Tool Bag - the Broker Solution

Conclusion


Introduction


Running a business is challenging enough, but it can be especially tough when diving into the maze of financing. And almost every business, regardless of size, will seek financial help at some point.


Confronted with a myriad of loan options, countless lenders, and overwhelming jargon, it's easy to feel lost. But fret not — I'm here with an expert's map. My experience spans decades, wearing hats from owner to advisor, from borrower to broker.


I've steered six diverse businesses and navigated almost every loan type as a borrower. I've also guided thousands of other businesses to their financial destinations. I know what's available, how loans work and who they work for.


In this article, I'll highlight the essentials of the most important 8 types of small business loans you need to know about. One of these might just be the difference-maker for your business one day.



Small Business Lending in the Post-Pandemic Era


The last couple of years have shaken up the global economies, with businesses caught in the whirlwind. One undeniable force in the US is the Prime rate’s leap to 8.5%, up a massive 5% in just 15 months.


These elevated interest rates can really strain businesses. With higher borrowing costs, small businesses, especially those with tight margins, feel the pinch. Even existing debts, like credit lines linked to the Prime rate, can get pricier.


Higher borrowing costs have led to higher costs in materials and inventory. In fact, three in five small business owners have had to raise prices in the past year. Inflation continues to be the biggest challenge facing small businesses, according to the Small Business Index.


Top 6 biggest challenges facing small business owners



But here’s the reality: when your business needs funds, you can’t wait for the perfect interest rate. Sure, the water might be a bit chilly, but sometimes you need to jump in anyway.


However, post-pandemic shifts have also ushered in some lending silver linings. The loan application process, once a tedious exercise filled with paperwork and prolonged waiting periods, has undergone a revolution of sorts.


Lenders have become more tech-savvy, using technology to simplify, automate, and accelerate loan applications, underwriting, and even the closing process. Picture it as the industry going from mailing letters to instant messaging.


So, though we now face higher interest rates, many loan processes are more accessible, with novel options like quicker lines of credit and optimized SBA loans emerging.



The "Essential 8" Small Business Loan Types

Ok, you know your business needs money, but what kind of loan is for you? That's where it can get confusing. There are almost as many small business loan options as there are reasons to apply for the money!

Short-term loans, long-term loans, cash advances, lines of credit, SBA loans, real-estate loans - these and many more are all possibilities.

These dozens of loan types are made by thousands of lenders. Really - thousands! These loans used to come from mostly brick-and-mortar banks but not any more.

Today, hundreds of alternative loan lenders offer new loan products and often with a little more leniency and flexibility around eligibility, qualifications, and the pay-back process compared to brick-and-mortar banks.

With that backdrop in mind, here are the “Essential 8” - the 8 types of small business loans you need to know about today:


1. Term Loan


What is it?

A term loan is a loan that’s repaid over a set period of time with interest. You can use term loans to meet short term expenses or fund longer-term investments in your business. It’s like the reliable older sibling of the loan family—predictable and straightforward.


Term loans often don’t require collateral and can have fixed or variable interest rates. The length of the loan can vary widely - from as short as six months to up to 7 or even 10 years.


For most term loans, lenders will review personal credit in addition to your business credit profile. However, this isn’t always the case. For more established businesses, lenders may not need personal credit scores.


Who’s it for?

A short term loan - one with a payback period under about 2 years - can be a good option if you have a cash flow gap you need to fill quickly — such as new hiring to fill a new contract, or to settle some immediate outstanding invoices.

A long term loan might be a more appropriate option when you need to borrow a larger amount or need more time to repay. Longer term loans are also usually a better bet when you’re looking to refinance existing debt.



2. Equipment Loan


What is it?

Need a fancy new espresso machine for your café or a delivery vehicle for your business? Equipment loans are your go-to. Instead of paying all at once, you repay the loan as you use the equipment.

Here’s how they work: an equipment financing lender gives you the funds to buy what you need, or pays the vendors directly for it. You then pay the lender back the loan plus interest in monthly increments.

Some equipment loan companies will even make a loan based on paid-off equipment you already have. This arrangement is known as a “sale leaseback”. Sale leasebacks can have very reasonable interest rates and repayment terms compared to other types of financing.

With equipment loans, the equipment serves as collateral for the loan. One great part of equipment financing is that you can often borrow up to 100% of the cost. The loan term will depend on the type of equipment you’re buying, but common loan terms are 3 to 7 years.

Who’s it for?

Though they are often for “equipment”, these loans are more flexible than you might think. Equipment loans can be used for the purchase of not only traditional industrial equipment and machinery, but also for furniture, vehicles, appliances, technology and point-of-sale systems.

Equipment loans are often great options for a new business. Because the equipment is providing collateral to the lender, there are loans available to start-ups and newer businesses. Just know that these will often will require a personal guaranty from you, the owner.



3. Working Capital Loan


What is it?

If your business needs a quick cash injection—perhaps to meet an unexpected expense—this might be for you. Working capital loans, also sometimes called “alternative financing”, are a flexible loan option for businesses that are able to quickly repay a loan.

The qualification process is typically faster, and funding can be quick, though these often come with higher borrowing costs. Think of it as the espresso shot of loans—quick, potent, but best consumed in moderation.

These loans are often repaid within 9 or 12 months, with longer terms sometimes available. Depending on the loan details, and the strength of your business, payments may be monthly, weekly or even sometimes daily.

Working capital loans may also offer repayment amounts that flex with your daily sales. Instead of making one fixed payment for the duration of your loan, these loans may offer payments as a fixed percentage of your credit card sales. This can make it easier for you to keep up with payments when your sales are changing constantly.


Who’s it for?

Lenders offering working capital loans often use more sophisticated technology than brick-and-mortar banks to determine whether a business is qualified. This allows them to make faster decisions and sometimes make more lenient decisions about who to approve.

For example, where a bank may look for you to have been operating for 2+ years and expect you the owner to have great credit scores, working capital lenders are often ok with newer businesses and base approvals on your recent revenue, rather than emphasizing your personal credit score.



4. Business Line of Credit


What is it?

A business line of credit is a flexible option where you’re approved for a maximum amount but only take (or "draw") what you need. It’s like having a financial safety net. It’s a great business financing option if you have changing cash needs from time to time.


Instead of a lump sum of funding, a line of credit gives you a revolving line that you can draw against when you need it as you have available credit. As you pay down the amount you have borrowed, you free up room to withdraw money again.


A business line of credit is similar to a business credit card in terms of how it works, but the business line of credit often offers a lower interest rate as well as higher limits.


Who’s it for?

A small business line of credit is often the most flexible financing option for many businesses. And for those that qualify, it can be very useful. You just use the amount you need, and you only pay interest on the amount of the credit line you’re using.


However, compared to some other options like working capital loans and equipment loans, business lines of credit often require higher personal and business credit scores. This varies a ton by lender, and some business lines of credit do exist even for owners that don’t have great credit.



5. SBA Loan


What is it?

Backed by the U.S. Small Business Administration (SBA), these loans offer longer terms and lower interest rates. That’s the good news. The bad news? They come with a more extensive screening process. It's the marathon of loans—often worth it, but you need to be prepared for the long haul.


These loans aren’t actually made by the SBA. SBA loans are made by banks and non-bank lenders who follow certain guidelines provided by the SBA. In turn, the SBA provides these lenders a guaranty - meaning if you fail to repay the loan, the lender will get some money back from the government.


There are pros and cons to SBA loans for your business. The pros: they usually have the best rates and longest terms of all the loans mentioned here. The cons, or tougher parts, of SBA loans:

  • hard to qualify for

  • lots and lots of paperwork

  • the time to funding is longer than any other form of financing

  • personal guaranty is required

  • positive cashflow often required


Who’s it for?

SBA loans are available for new and existing businesses, and they can be used for a wide range of business purposes. One type of SBA loan is the SBA 7(a) loan, and this can offer up to $5 million for working capital, inventory, equipment, renovations and more.


Another type of SBA loan is the 504 loan, and this can provide businesses with up to $5 million in capital to purchase, construct, refinance or renovate commercial real estate.


The SBA 7(a) is the most common loan made to small businesses. And even though a new business can qualify for a loan, you should know that it’s very hard for a start-up to find an SBA loan. The SBA guidelines allow lenders to make loans to new businesses, but the lenders often simply choose not to do so.


New in 2023: a few lenders now offer fast-track SBA loans up to $250,000. These have reduced paperwork and faster times to close than SBA loans of the past!


6. Merchant Cash Advance


What is it?

Here, you get a lump sum in exchange for a portion of your future sales. It's speedy but can be costly. These are super convenient, and available to a wide array of businesses, but they carry a higher borrowing cost than many other forms of financing.


A cash advance is a fast and convenient type of financing for most small businesses that have a steady flow of credit and debit card sales. You can generally borrow between 50 percent and 200 percent of your business’s average monthly sales.


The payback for merchant cash advances is relatively simple: payments are deducted from your account daily or weekly. Terms typically range from six months to as long as 18 or even 24 months.


It’s possible to get funding in one or two business days, and these advances may provide you with more spending power than a loan or line of credit. That convenience often come with a higher price, however, as mentioned.


Merchant cash advances often use a “factor rate”, rather than an annual percentage rate, to determine and show loan costs. Depending on how much you borrow, the factor rate, and your time frame for repaying the money, your effective APR can be higher than with other options.


For a deeper dive on how the costs of different loans, visit How to Calculate the True Cost of Financing for Your Small Business.


Who’s it for?

Typically, whether a merchant cash advance is for you comes down to how you’ll use the funds. If your business can use the funds for something that will lead to near-term revenue or improved profits, and you can pay back the cash advance within 9 to 18 months, then it makes sense to consider this.


For example, businesses might consider an advance to very quickly hire more staff, or start bringing in a new revenue stream, or quickly expand their service offerings. These could be logical reasons to consider a cash advance since those could translate into an increase in cash flow (or a decrease in expenses) offsetting the higher cost of the financing.



7, Commercial Real Estate (CRE) Loan


What is it?

Planning to buy property for your business operations? A commercial real estate (CRE) loan is for you. Given the sizable nature of these loans, expect a thorough review of the property and your business’s financials to qualify.


Often, when a business is buying a property, it’s done with SBA financing. However, there are many non-SBA lenders that offer CRE loans, including traditional lenders and banks. These loans are more complicated than typical business loans and too complicated to fully address here.


One advantage of SBA loans - you can often borrow as much as 90% (or even 100% in some cases!) of the property’s value (known as “loan to value”, or “LTV”). This is much higher than you’ll find with traditional lenders.


Commercial real estate loans are not fast, and there are many costs involved, such as inspections, appraisals and environmental reports. However, they offer the best rates of any other business borrowing since the loans are backed by the collateral of the real estate.


Who’s it for?

Commercial real estate loans are for businesses that want to buy a property for their business. They are also great for business owners that want to tap into the cash available in a property you already own. If you’re interested in buying the property you currently operate in and rent, this is a very smart and common type of loan made to small businesses.


These CRE loans are a good option for you in a number of different scenarios where you already own the property. Some examples:

  • Cash-out refinance: you can access the equity in the property for many different business purposes, including working capital for operations, cash for equipment, or money to improve the building or parking lots.

  • Refinance a loan coming to term: you have a loan on the property and have a balloon payment coming up. In this case, you need to refinance the existing debt by a certain date.

  • Refinance to improve rate or term: you have a loan on the property and want to refinance to reduce your monthly payment or stretch out the loan term, thereby lowering your monthly expenses.

8. Invoice Financing


What is it?

Turn your outstanding invoices into cash. Instead of waiting for clients to pay, a lender gives you most of the invoice amount upfront. It's the financial version of fast-forwarding a movie to the good parts.


With invoice financing, also called accounts receivable financing or A/R financing, you get funds by using your unpaid invoices as collateral for a loan. For a deeper dive on this, see What is Accounts Receivable Financing.


Lenders review the invoices and your business’s past collection history to determine how much it can lend. As the invoices are paid, the business will pay back the lender.


Invoice financing has some clear benefits. Compared to other types of loans, it will have fewer approval requirements. Usually you don’t need collateral, and you won’t need the highest credit scores. This type of financing is also quite a bit faster to get than many traditional loans.

Who’s it for?

Invoice financing is available to businesses of all sizes. It works great for businesses that have consistent collection cycles, do business with clients that are either larger companies or more established businesses and want to smooth out some of the ups and downs that come with delayed invoice payments.


For a business making a specific purchase, funding a large project or addressing a one-time business need, the loans described above are better options. However, invoice financing can be a smart solution for the temporary cash flow challenges most small businesses face from time to time.



How to Find the Essential 8 Business Loan You Need


As you start seeking a business loan, one important question is how do you find the various types of financing? With the advances in technology, and the evolution of the lending industry, finding the right loan can be a bit of a challenge.


Navigating the business loan world can feel like car shopping. Have you ever stepped into a dealership that exclusively sells trucks when you're looking for a compact? That's what it feels like when dealing with most lenders since they typically specialize in only one product.


Most of the time, you'll want to know your choices. This is where finance brokers, with their varied options, come into play. Good finance brokers won't only have one solution. Instead, they'll be able to talk to you about many financing solutions and how they fit with your situation.


This is an important issue for businesses to understand, so let me dive a little deeper.



Tons of Lenders - The Hammer Problem


There are currently hundreds of lenders in the marketplace, and even thousands when you include SBA lenders. This is both good and challenging for businesses.


The good part? Many options to choose from. The challenge? Most lenders focus on just one kind of loan. This is the "Hammer Problem". If all you have is a hammer, as the saying goes, all problems look like nails. This is the dilemma you'll face with most lenders.


So, if you're exploring multiple loan types, you'd need to talk to many lenders. That's time-consuming and not realistic for most owners. Plus, a lender will often steer you towards their loan, even if it's not the best fit for you.


So, the natural question is, how can a business owner find the right loan and lender?


A Big Tool Bag - The Broker Solution


In the past, many business owners went to their bank for a loan. This was simple and made sense if the bank's loan matched what the owner needed. Plus, for bank loans, the business needs to be in good shape, with strong financials and owner credit history.


But now, with so many online lenders, it's not feasible to apply to each one. This takes a lot of time and can be confusing since there are so many different options available.


This is where a financing broker can help. A financing broker, or loan broker, is someone who is an expert at all of the ins and outs of small business financing and can help you navigate this complex and confusing financing world.


If you're thinking about using a broker, do some homework. Check how long they've been in business. See if you can find out who runs the company and what their background is, or find them on LinkedIn.


Good financing brokers usually work on a 'success fee' basis—this means they're compensated only when you get your loan. So, you can have someone working for you with no out of pocket costs! For some loan types, they might even be paid by the lender, eliminating any cost to you.


Conclusion


In the vast ocean of small business financing, it's easy to find yourself adrift, overwhelmed by the sheer volume of options and lenders available. But remember: every business journey is unique, and just as there's no one-size-fits-all business model, there's no one-size-fits-all loan for your needs.


What's vital is understanding your cash needs, your business's financial health, and the opportunities and challenges in the current lending landscape. With the "Essential 8" loan types under your belt and a map to navigate the lending terrain, you're well-equipped to make informed decisions.


And when you find yourself at a crossroads, not quite sure of which financing path to take, remember that a seasoned financing broker can offer invaluable guidance. Here's to finding the perfect financial fit for your business, propelling you towards even greater success!


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