When you run a small business, it’s essential to understand your finances. And if you require a loan, you need to know in a better way the different options. There’s a big difference between a commercial line of credit and microloans or microcredit. Here’s a quick, easy breakdown of other small business loan types and when they can come in handy.
Most Common Types of Small Business Loan
So, what are the different kinds of loans available to a small business? A lot depends on your credit history. But it also depends on the amount you want and how you pretend to use the money. The principal loan types are:
- SBA loans. The US Small Business Administration provides SBA loans. These loans are available to enterprises without other options. Typically, businesses use SBA loans because of lack an established credit history.
- Commercial loans. Commercial loans from private lenders are available to businesses that meet the lender’s credit requirements. These are highly flexible loans, and you can use them for equipment, facilities, or working capital.
- Commercial lines of credit. A business line of credit is similar to a personal credit card. Your business has a money limit, and you can borrow up to that set amount whenever you need. You can use this money for any business-related expense, and the line of credit is usually issued for 12 months. Most lenders will happily renew your credit line if you need to continue borrowing.
- Microloans. Microloans are similar to commercial loans but with smaller amounts. The maximum dose is $50,000, although the average is only $13,000. The nice thing about a microloan is getting one from a small local bank. On the downside, you cannot use the money for property purchases.
Small Business Loan Alternatives
A loan alternative is a loan that comes from an alternative source. These alternative lenders are typically online companies that focus on small business lending. Because they’re on the web and not in the real world, they have lower operating costs and can take more significant risks than traditional banks. Often, if you don’t qualify for a bank loan, you can still be eligible for an alternative loan. Then again, you’re typically going to pay more interest than you would to an ordinary bank.
Things to Consider Before You Apply
Before you apply for a loan, you’ll need to evaluate your business and your needs. Here are some tips for getting the most out of your loan:
- Write down your business plan. It doesn’t matter if you have an established or a new business; your lender will want to know your goals. So bring a written business plan along with your loan application. And if you have a current company, include your company’s financial data.
- Borrow as little as possible. It’s rarely wise to borrow more money than you need. That excess money comes with interest, ultimately making your business weaker. Occasionally, you can get a better interest rate in exchange for taking a bigger This is rarely worth the trade-off, but it’s worth running the math to see if you’ll come out ahead.
- Only borrow what you can afford. Look at your company’s budget, and make sure you can afford the loan’s monthly payment. If you can’t, and the loan is a necessity, you’ll need to find somewhere else to trim your budget.
- Keep building your credit. As your company grows, you’ll probably have to continue taking out loans. By making your payments on time and not over-borrowing, you’ll build your credit, and you’ll get lower interest rates.
From big bank loans to microloans, there are many ways for your small business to obtain financing. Before you think about a loan, do good research, and ensure you’re getting the right loan at the correct rate. So, what are you waiting for? Get out there and grow your business!