If you’re an entrepreneur looking for a small business loan, it can help to start by looking at the most popular small business loan types—they are usually popular for a reason. Read up on these can help you understand the financing landscape and what might work for you.
Loans backed by the Small Business Administration are probably one of the most well-known small business loan types. The SBA doesn’t lend directly to businesses, it just provides a guarantee to SBA-approved traditional lenders, which, in turn, makes small business loans less risky for these institutions to make. The approval process can take weeks and requires extensive paperwork. SBA loans can be less expensive and have more favorable loan terms, if a business can get approved.
Conventional loans are traditional term loans with a predetermined interest rate, payment amount, and length. This is the most common of the small business loan types that large banks provide. Conventional loans are usually some of the hardest small business loan types to get approved for, especially if the dollar amount is large or the payback period is long.
Equipment loans are designed to finance commercial vehicles and other equipment needed for a business. There are many different types of equipment financing tools depending on what is being purchased. There are also equipment leases available. The equipment being purchased is the collateral for the loan.
A line of credit is a loan that works similar to a credit card. When a business applies for a line of credit their lender decides how much the maximum amount they can borrow is. After approval, the business can draw money as needed instead of in one lump sum. Interest is only charged on the outstanding balance and the business can draw on the credit line as often as needed, as long as they stay under their credit limit.
While admittedly not an option available to everyone, tapping into the resources of friends and family is one of the most popular small business loan types. According to Entrepreneur Magazine, 42% of private business loans are from a close relative of the business owner and 29% are from friends. Private loans can be tricky because the person investing in the business might expect to be more involved in business decisions than the business owner may be comfortable with. There is also little recourse if the business goes bust—without a written contract with set terms it can be all but impossible for private lenders to get their money back.
Angel investors provide financing in exchange for equity in the company. They are usually wealthy individuals or small groups of wealthy individuals with ample business experience. Many angel groups provide training, advice, and other resources to the businesses they invest in that can be invaluable to the business owner. They are fully invested in seeing the business succeed because if they don’t they lose their whole investment. The downside to giving away equity in exchange for funding is that the original owner loses some of their control over the business.
Take the time to understand the variety of small business loan types, as this research can help you more confidently navigate your financing options and ultimately secure the funding you need to grow your business.