It’s a great feeling, isn’t it?

You’re finally ready to branch out on your own. You’ve been planning your new business launch for months—maybe years. What started as a simple idea and a couple-hours-a-week side hustle has blossomed into something that is almost self-sustaining.

But you need capital to launch in earnest. You need a loan.

It’s important to know, however, that not all loans are created equal. With so many lenders, loan companies, and banks out there, it’s hard to determine which one offers the best loan terms and rates. 

Before choosing a loan, take 15-20 minutes and answer the following questions. These will help you determine what lender and loan is right for you.

  • What do I need the loan for? 
  • How much cash do I REALLY need? What will I be using it for?
  • What is my credit score? Is it considered less than very good?
  • What is the financial state of my business?
  • How many years have I been in business?
  • How much time will it take me to pay it back?
  • How quickly do I need the loan?
  • If I need to put up collateral to secure the loan, what am I willing to put up?

Hold on to your answers and review the information below. Align your needs with the right loans, then contact the appropriate lender for how best to proceed.

Overview: Types of Lenders

There are three primary categories of lenders: the Small Business Administration, banks, and alternative lenders. Here is a quick overview:

Small Business Administration (SBA) 

This lender offers a few loan programs that are meant to meet the financing demands of most business types. That means that there are a number of SBA loans for businesses to pick from.

It’s important to note that the government doesn’t directly lend money. Instead, the SBA creates a set of lending guidelines for loan-seekers; these are used by partner entities—such as banks, micro-finance institutions, and community development organizations—to determine whether or not applicants receive loan money.

Pros: Government backing eliminates plenty of risks for the lenders. The SBA loan terms also tend to be better than those of many other lenders. 

Cons: SBA loans often include extra fees; there’s a bunch of additional paperwork; the approval process in lengthy.

Banks

Outside of serving as SBA lenders, banks also act as independent lenders of conventional business loans. In their capacity as private businesses, however, they have no governmental guarantee of repayment. And while you might think that would make their loan terms more rigid, they aren’t. But that’s balanced by the “cons” outlined below.

Pros: The conventional bank loans involve low-interest rates. Plus, the approval process is somewhat faster since the federal agencies aren’t involved.  

Cons: Those loans usually include short repayment times as well as (occasionally) balloon payments. In addition, it is often hard to get approved if you have a bad credit score.

Alternative Lenders

Alternative lenders have the least stringent approval requirements, which makes them a great choice for small businesses with a poor financial history and low credit score. They offer services and applications online, make decisions on approvals quickly (typically in a couple of hours), and provide loans usually within a week.

If you need funding quickly, consider choosing direct alternative lenders. Some of the most popular lenders include OnDeck Capital, Fundation, and Kabbage. You can find a sheer number of direct alternative lenders at lending marketplaces, such as Biz2Credit and Bizfi. For a recent review of lenders, check out NerdWallet.

Pros: Alternative lenders do not care about your credit history; the loan can be approved almost instantly; there are only a few limitations on what the loan can be used for.

Cons: The interest rates are high compared to those offered by banks or the SBA, so repayment can be a challenge. Learn more about the best deals available.

Types of Loans

Ok, so you’ve mapped on your answers to the questions above and considered them alongside the primary lender types.

Now you need to know what loans each one offers so you can take the next steps in securing funding.

Here’s a deeper dive into the loans available:

SBA Loans

  • 7(a) loans: Besides working capital, this lending program can be used for many different purposes. For instance, you can use it to purchase equipment machinery and furniture; renovate your existing building; buy buildings and land; establish a new business; or refinance your debts. These loans go up to $5 million. Loan maturity for working capital is up to 10 years. For fixed assets, it can go up to 25 years.
  • Microloan program: Those loans are intended for both growing and launching new, small businesses. You can use funding to build working capital or buy equipment, inventory, machinery, furniture, supplies, fixtures, and the like. It cannot be used to acquire real estate or pay off existing debts. The maximum amount of money you can borrow is $50,000, while the max repayment term is 6 years.
  • CDC/504 loan program (equipment and real estate loans): This program involves fixed-rate, long-term financing, and it’s aimed at businesses that need money for major assets like real estate and equipment. These loans can’t be used for inventory or working capital. The max amount you can get is $5.5 million; the maturity term is 10-20 years.
  • Disaster loans: Low-interest disaster loans are intended to help both small and big businesses. You can use the money to replace or repair your real estate, equipment, and machinery. It can also be used for building up inventory or assets destroyed or damaged in a disaster. The maximum amount of these loans is $2 million.

Loans From Banks and Alternative Lenders

  • Merchant cash advance: The amount of this business loan is determined by the average monthly transaction amount on your business credit cards. The maximum advance you can receive is 125% of your monthly transaction volume, but be warned—interest runs up to 30% per month.
  • Working capital loans: These are short-term solutions designed for small businesses that need the cash to keep operating. Repayment terms are pretty short, unfortunately, and interest rates are often high.
  • Equipment loans: Use this money for for equipment, such as computers, copy machines, tools, machinery, and vehicles. Equipment loans are quite easy to obtain and once approved, they will keep your cash flow intact.
  • Lines of credit: These “loans” are ideal for small businesses in need of day-to-day cash flow. They aren’t recommended for larger purchases, however, and often come with a host of fees. On the upside, since are not secured, no collateral is required. Repayment terms are usually long.
  • Franchise startup loans: Designed for entrepreneurs needing to launch a business, franchise startup loans cover many needs—purchasing new equipment, paying franchise fees, building out real estate, etc. 
  • Professional practice loans: These loans specially designed for professional service providers, including businesses in the insurance, accounting, healthcare, veterinary, legal, architecture, and engineering industries. Professional practice loans can be used to purchase new equipment or real estate; renovate; or refinance a debt.

Now that you have familiarized yourself with all the available options, you should be able to decide which type of lender and loan are most favorable for you. Just be sure you use the money wisely, and pay it back as quickly as you can.

 

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Brad Richardson

Brad is a regular contributor to numerous financial, business, and legal related websites. He is frequently hired to write about lending and various financial related topics for their sites. Brad is also a regular contributor to the the popular technology website, KnowTechie and the founder of The Littlest Bookshelf.

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