Small business owners often need access to capital to start, expand, or keep their businesses running, but navigating the world of business loans can be challenging. There are many types of business loans available, each with their own advantages and disadvantages.
From traditional bank loans to government-backed loans, the options can vary greatly. Knowing the features and benefits of each type of loan can help small business owners make the best decision for their business. Understanding the different types of business loans available can help small business owners make the most informed decision to meet their needs. Here’s what you need to know about small business loans.
Why the Type of Business Loan Matters
When considering a business loan to help your company succeed, it’s important to understand the type of loan you are applying for.
There are many different types of business loans, each with their own advantages and disadvantages. Knowing the features and benefits of each type of loan can help you make the best decision for your business. If you just apply for the first type of loan you see advertised, you could miss out on the best option for your situation.
There are many different factors to consider when applying for a business loan. You should choose a type of loan that best meets your company’s current needs and future growth expectations. Some types of loans are better suited to certain industries. For example, lines of credit and merchant cash advances are better suited to the service industry.
Before you take out a business loan, make sure that you understand the specifics outlined in the loan contract. You should never jump into a loan that you don’t know is a good idea for your business. Otherwise, you could end up with extensive debt that can stop any chance of your business growing.
Types of Business Loans
There are many different types of business loans available. The best loan for your business depends on a number of factors, such as the size of your business, the length of your repayment term, and your industry. The following are some common types of loans for small businesses:
Conventional Loans
Conventional business loans are the most common type of loan available for small businesses. These loans offer the lowest interest rates, but they also have variable interest rates. This means that your interest rate could increase at any time without notice.
To guard against unexpected increases in interest, you should select a conventional business loan with a fixed term and low maximum annual percentage rate (APR). Try to get a loan that does not have an early repayment penalty, too. That way, you can pay the loan back sooner than the term without a penalty. If you can, pay the loan back as fast as possible so that you don’t have to worry about the variable interest rate creating payment problems in the future.
SBA Loans
SBA loans are government-backed loans that are easy to apply for. They are suitable for a wide range of industries and businesses, and they can be used for a variety of business purposes.
These loans are available from most banks and you can apply online, or you can apply at your local SBA office. You can also apply for an SBA loan through the lender of your choice, or you can use your existing savings account or credit card to apply for an SBA loan.
SBA loans tend to be less risky than other types of loans since they are government-backed. That means that if something happens, the government will pay the bank back for the loan. Since the bank takes on less risk, they are more willing to make loans to businesses. This is a better option for businesses that struggle to find other sources of funding.
Government Loans
SBA loans are not the only type of government-backed loan. There are many different government-backed loans available, some of which are available directly through government entities. In short, the government is the one loaning the money rather than the bank.
Many state and federal governments offer small business loans that meet specific criteria. If you have a business that fits these criteria, then you can get a loan with more favorable terms. For example, women and minority-owned businesses can qualify for special loans that are designed to help small businesses thrive and boost the overall economy.
These loans typically have fixed interest rates and short repayment terms, and they often come with other benefits like a low origination fee and a grace period after which you don’t have to make payments on the loan.
Business Credit Cards
Business credit cards offer many useful features for small business owners. They allow you to pay for your business expenses with a card instead of cash. They also offer special lines of credit that give you extra purchasing power when you need it most (such as at the start of a busy season). These lines of credit also come with low interest rates and flexible repayment terms.
Microloans
Microloans are short-term loans that are easily accessible, and they do not require collateral or credit history checks. These loans are available to a wide range of small businesses, including those in the service industry.
A microloan can help you get your business off the ground, especially if you have no business credit and limited assets to offer as collateral.
Online Loans
Online loans are short-term loans that are available to a wide range of industries, and they are ideal for seasonal businesses. They usually have a lower interest rate than a credit card, and they can be paid back at any time. These loans are ideal for businesses that need a little extra cash at the start of a busy season.
Lines of Credit
Lines of credit are long-term loans that are ideal for seasonal businesses. They do not require collateral or credit history checks, and they can be repaid over time. These loans are available from most banks and you can apply online, or you can apply at your local SBA office.
Business Investment Loans
Most small business owners need capital to expand their company, but accessing business investment loans can be a challenge. These special types of loans are designed to promote economic growth while minimizing risk and promoting sound management practices.
Business investment loans have lower interest rates and longer repayment periods than other types of business loans. However, they come with drawbacks.
Merchant Cash Advances
Merchant cash advances are short-term loans that are ideal for the service industry. They do not require collateral or credit history checks. These loans are usually for smaller amounts, but they can be easily accessed. These loans should be used primarily to pay for your growing business expenses, and not to grow your business.
Short-Term Business Loans
Short-term business loans are relatively easy to apply for and they offer excellent flexibility. These loans can help with unexpected financial problems or seasonal cash flow issues. They do not require collateral or credit history checks so that they can be easily accessed.
Considerations for Choosing the Right Business Loan
The type of business loan you choose is a big decision for your business. It can significantly impact the health of your business, your financial situation, and your ability to hire new employees.
It is important to choose the best type of business loan for your specific situation so that you can get the maximum benefit and avoid as much risk as possible. There is a built-in defense against choosing the wrong type of loan. In some cases, your company may not qualify for certain loans.
On the other hand, there are loans that you can get that are not a good fit because of the terms, your growth goals, or the rate at which you need to repay it. If you are unsure if a loan is a good option for your company, discuss it with an independent third-party advisor. Having a fresh pair of eyes with someone that has extensive experience in the financial sector can help you avoid major money problems.
The Right Loan Can Lead To Faster Business Growth
When you have the right loan, you have the funding to improve and grow your business significantly. It is just a matter of investing in the resources that you need to grow and using them to pay back the loan.
When you have the ability, consider investing in customer service-focused resources to help you provide a better experience. For example, an answering service can be an effective way of providing better customer service with reasonable infrastructure costs. Improving your customer service, in turn, improves your customer experience and can lead to continued growth through customer recommendations and word-of-mouth advertising.
If you’re ready to get started with a professional answering service, we’re here to help. Contact Answer Aide by calling (866) 427-3500 or by filling out our online form. We’re happy to partner with you to support your business while it grows.