US Small Business Administration (SBA) loans are offered by a number of SBA-backed banks, online lenders, and other financial institutions. Depending on the type of loan, the amounts available range from $30,000 to $5 million, with interest rates varying by loan type and lender. Many SBA loans target startups and borrowers in underserved communities, as well as women- and minority-owned businesses.
The SBA Microcredit Program helps new businesses get started. The loans are smaller than other SBA loans (up to just $50,000), but are often easier to qualify for businesses with a limited financial history or credit history. Terms vary by lender, but typically extend up to six years, and interest rates typically range between 8% and 13%.
A term loan is a traditional loan in which a borrower receives a lump sum of cash that must be repaid over a set period of time (usually three to 24 months). These loans are available from banks, credit unions and online lenders, but they can also be obtained from peer-to-peer lenders, allowing individual investors to work directly with businesses in need of financing.
Term loans may be limited to use for certain purposes, such as financing inventory or other large purchases, but they are generally a flexible borrowing option for business owners who need access to a large amount of cash. Typically, term loans are available up to around $500,000, with annual percentage rates (APR) starting at around 9%.
Lines of credit
A line of credit is a specified amount of money that a business owner can access when needed. If part of the line of credit is prepaid, the borrower can reuse these funds. When the drawdown period ends (usually up to five years), the repayment period begins and the borrower can no longer access the revolving funds.
Borrowing limits are often between $2,000 and $250,000, and borrowers must pay an APR of 10% to 99%. Notably, however, interest is only charged on the portion of the credit line that is actually used, not on the entire available balance. This makes lines of credit perfect for business owners who prefer to access cash as needed rather than all at once.
An alternative to unsecured lending, asset-based financing allows businesses to take out loans that are secured by valuable collateral, such as accounts receivable, machinery and equipment, inventory, and real estate.
This type of financing poses less risk to lenders because they have the ability to repossess the underlying collateral if the borrower fails to make payments on time. As such, loan terms can be less stringent and interest rates more competitive, making it a good option for business owners with bad credit or a limited credit history.
Invoice factoring is a common type of asset-based financing that involves selling a business’s unpaid invoices to a factoring company in exchange for a lump sum of cash, usually between 80% and 90% of the total invoice amount. Purchasing equipment with manufacturer financing and financing inventory directly through a supplier are other popular examples of asset-based financing.
Cash Advances to Merchants
A merchant cash advance – or MCA – is a type of financing that allows business owners to receive a lump sum cash payment in exchange for a portion of future sales receipts. Rather than making monthly payments as with traditional loans, MCAs are repaid through individual company sales or through daily or weekly Automated Clearing House (ACH) payments, usually at a factor rate including between 1.2 and 1.5.
MCAs are often available through merchant service companies, further simplifying the application, funding, and reimbursement process. For this reason, this type of financing can be a suitable option for companies with a high volume of sales.