Despite what headlines might have you believe, the American small business is going strong. Forbes research estimates that 543,000 new ones are opened each month, and that 800,000 were granted the business loans they needed even in 2011, at the depth of the recession. Loans have long been the lifeblood of small businesses in America, helping 63% of borrowers to improve cash flow and helping 38% to maintain inventory. Nearly every small business has sought financial help from some type of lender. What varies from business to business is the types of small business loans they pursue.
There is no dearth of options available to small business owners in need of a helping hand. Here, we’ll look at a few of the most common types of small business loans used by American companies.
Traditional Business Loans
For years, loans provided through the Small Business Association were among the only options available to small business owners. These government-backed loans are provided through private sector lenders and can provide up to six months’ funding. Borrowers pay back the amount, plus between 5.8% and 8.5% interest over the course of five to 20 years. Security is required for these traditional types of small business loans.
As banks and commercial lending institutions have made it increasingly difficult for small businesses to obtain loans, many alternative lenders have risen to the forefront of the lending industry. These lenders can offer terms and programs that are tailored to each small business’s specific situation, often providing financial assistance where banks will not.
Revolving Lines of Credit
Lines of credit provide short term help to small businesses, and can be either secured or unsecured, though unsecured lines of credit tend to have lower limits. Essentially, pre-arranged amounts of credit are made available, based on existing inventory, accounts receivables, and creditworthiness, generally in amounts not exceeding $200,000. Interest rates range widely, tending to fall between 5% and 24%.
Many alternative lenders provide small businesses with the opportunity to finance or lease equipment, using the equipment as collateral on the loan. Interest rates range from 8% and 25%, depending on the borrowers decision to buy or lease. Generally, leases are recommended for equipment that becomes outdated quickly, while purchase is recommended for building equity on equipment that isn’t expected to become obsolete.
These types of small business loans allow companies to use its receivables, money owed by customers, as collateral. Similar options are business cash advances and merchant cash advances, which can be approved quickly and provide fast cash to businesses in need. Essentially, businesses promise a percentage of each credit card transaction to the lender until the loan amount and a premium are paid in full.
There is a wealth of options available to small business owners in need of a financial boost. Between banks and alternative lenders, many companies have no difficulty obtaining the help they need to grow and improve. The only question is which type of loan is right for your business?