The Different Types of Small Business Loans
Financing for small businesses comes in lots of forms. The alternatives you have available are as unique as your business, so it’s crucial that you understand what’s available and what works best for your cash flow. With so many options it can get confusing, let us explain the differences in detail to help you better understand what is available for you.
SBA 7(a) Loans
The 7(a) is the SBA’s most widely used loan program. While the loan is in part guaranteed by the Small Business Administration, the financing is brought through an approved SBA lender. This way, you may borrow anywhere between $20,000 and $5,000,000 for up to a 10 year term. The SBA’s 7(a) loan program is appealing to many small business owners for its below-market interest rate. If you apply via Trust Capital's network of lenders, you’ll see that the interest rate is currently set at Prime + 3.75% (currently 6.25%). Payments are made month-to-month and you won’t face any fees for early repayment. Your business must have an operating history of at the least 3 years to qualify. Use the proceeds for working capital, refinancing debt, making important purchases, and more. There are also different types of SBA programs available, apply for an SBA loan via Trust Capital today and let us show you your options.
Term loans are one of the most popular kinds of small business loans. If you’ve ever taken out a mortgage or financed a car, then you’re probably familiar with the mechanics of a term loan. Term loans are delivered through a lump-sum of capital from a lender and paid off in constant installments on an agreed upon schedule until you pay back the principal plus any interest. Repayment periods can range from short terms (twelve months or less), medium terms (1 -three years) and lengthy terms (three+ years). Term loans are commonly secured through a lien to your business assets (a right for the lender to seize those assets if you default on the loan) and might require a personal guarantee, this means that your personal assets can be liable in case your business defaults on the loan. One of the perks of a term loan is that the rate, which might be either constant or variable, has a tendency to be competitive and lower than different types of small business financing. This is especially true when you don't forget that you will be repaying the loan over multiple years. Business owners have flexibility with regards to how they could use the funds. For instance, one could use a small business time period loan to expand to a new location, fill up inventory, or get new employees.
Merchant Cash Advance
A merchant cash advance (MCA) is not a loan. It is a purchase of your future receivables or sales. It is a financing option that allows quick and easy funding by utilizing your business' future sales. Merchant cash advances can have funding amounts as high as Five million dollars, making them an excellent alternative to standard business loans. Even better, they’re much more accessible and have higher approval rates than different kinds of financing. Merchant cash advances for startups and newer businesses are a feasible solution when looking for funding. They provide access to fast, flexible financing with out fixed-month-to-month payments. Instead, you’ll pay back your loan through a small percent of your future sales. This setup allows you to obtain cash right away to put toward any new opportunity or business expense. Merchant cash advances are perfect when you want funds now and don’t want to undergo the hurdles of applying for more conventional kinds of financing - including business loans or SBA programs.
Line of Credit
A business line of credit offers you access to cash every time you need it and is very flexible financing option. This sort of loan permits you to draw cash out of your credit limit as you want it, and only pay interest on what you use. With revolving lines of credit, more money becomes available as you pay it down. Unlike selling equity, getting a small business loan allows you to keep business ownership, profits and complete control. Business lines of credit are the best financing tool while your business is in scaling and you need access to funds. You also can use it to bridge cash flow gaps through seasonal slumps, or as a emergency fund. There are no regulations on how you can use it—you may use a business line of credit to cover any expenses or opportunities you face.
Invoice factoring is more like an MCA than a business loan. Invoice Factoring works through selling your future account's receivables to an invoice factoring company at a reduced rate in exchange for 2 lump-sum payments. The first payment is the advance - an upfront charge of 70-90% of the factored invoices, and the second payment is for the remaining balance, as soon as your clients pay the invoices in full. The first lump-sum via Trust Capital's network is between 85-90%. Invoice factoring is great for companies that want to cover inventory expenses or other expenses but have delayed payment plans with their clients. The benefit of invoice factoring is that your account receivables are quickly turned into capital instead of having to wait for your clients to pay.
Will I Qualify For Financing?
Many small business owners often don’t believe they have a good enough credit score to receive financing, but you shouldn’t give up just because traditional banks have rejected you. Every lender has their own guidelines and looks at qualifying factors differently, so you have a good chance of being approved even if you’ve been rejected in the past. There are options that do not rely on your credit score but instead the revenue coming into your business to qualify (MCA). You can also use collateral to get better rates and approvals without having your credit effect your offer. Every client at Trust Capital gets a dedicated loan specialist to explain your options and help you find the best option for you and your business. Apply with Trust Capital today and let us show you what your options are, there is no effect to your credit score and no obligation on your end.