If you need financing for your startup or business, you may be exploring small business loans.
In this blog, we’ll discuss the basics about how these loans work, what types are available, how they can be used, and more.
What Is A Small Business Loan? Different Types of Loan Options
As the name implies, this can be any loan provided to a small business – but there are actually a lot of different ways that small business owners can borrow money. A few common types of small business loans include:
- Small business term loans – These are the most common types of small business loans, which are usually issued for a term of 1-5 years, and are repaid in monthly installments.
- Merchant cash advances – A merchant cash advance (MCA) is not a loan at all, but a type of cash advance where the MCA provider buys a percentage of your future credit card sales. You get a lump sum payment, then repay this payment over time by sending 10-20% of your sales directly to the provider until the payment and additional fees are repaid.
- Equipment loans – This type of loan is often used to buy equipment like farm equipment, medical equipment like x-ray machines, or any other type of equipment a business owner must replace as their business grows.
- A small business line of credit – This is similar to a credit card. You get a maximum limit – say, $10,000 – and can borrow against it at any time. You only pay interest on the amount you borrow and can repay your small business line of credit at any time.
The amount you can borrow, credit requirements, and other details can vary quite a bit depending on the type of loan, how long you have been in business and a few other factors.
How Can A Small Business Loan Be Used?
Most small business loans can be used at your discretion for any expenses your business incurs. This could include things like making payroll during a slow season, covering the cost of buying more inventory, opening a new location, renovating your current office or store, and pretty much any other cost.
However, this is not the case for all loans. An equipment loan, for example, usually must be spent on the equipment you specify during your application.
If you say you are using the funds to buy new ovens for your bakery, you can’t spend that money on renovating your facility instead – it must be used for the purpose you specified.
Know What Type Of Small Business Loan Is Right For You!
There are lots of different types of small business loans out there, and they all have unique advantages and drawbacks – so when picking a method of funding for your business, consider your options carefully to ensure you make the right choice.