Business Loans
A Guide To Small Business Loans For Minorities
Financing for small businesses takes many different shapes and forms. Business loans are often the most accessible option for new and established businesses alike. With a loan, you have the ability borrow a little or lot, for just about any purpose necessary and with minimal obstacles.
Depending on which lending avenue you decide to pursue, applying for and obtaining a business loan is something you can do in as little as a few days. With so many types of business loans to choose from, it's vital that you select the right type of small business financing. We'll walk you through the most common types of business loans to make it easier to pinpoint which one is the best fit for you.
Best for: Business owners who need short-term financing to cover temporary cash flow gaps; businesses with sufficient collateral that need to borrow larger amounts to pay for expansion plans or to purchase equipment and inventory
Term business loans are the most straightforward lending option for business owners. You borrow a lump sum from the lender, which is paid back over a specific period of time, with either a fixed or variable interest rate. Term loans can either be secured or unsecured and generally, some form of collateral is expected when you need a larger loan or a longer repayment term.
Short-term loans are designed for businesses that need to borrow smaller amounts and are equipped to pay them back relatively quickly, usually in 18 months or less. Qualifying for a short-term loan is less difficult than getting a long-term loan as long as you have a strong personal credit score. There's a trade-off, however, since the interest rate may be higher.
A long-term loan offers higher borrowing limits and lengthier repayment terms, sometimes up to 20 years. Bond Street also offers a third option in the form of an intermediate loan, with terms ranging from 1 to 3 years.
Best for: Startups and established businesses who need funding to expand; business owners who may have trouble qualifying for a traditional bank loan
The Small Business Administration offers several loan programs to small business owners. A 7(a) loan, for example, may be a good fit if you need long-term working capital to finance equipment or inventory purchases, cover construction costs, buy real estate or renovate an existing property, start a new business or refinancing existing business debt. Repayment terms can last up to 25 years, depending on what the loan is used for.
The microloan program provides up to $50,000 in financing to help small businesses expand. Like a 7(a) loan, you're required to give the lender some form of collateral as well as a personal guarantee. The maximum repayment term for a microloan is 6 years.
The Small Business Administration also guarantees loans for large-scale real estate or equipment purchases. CDC/504 loans are geared towards businesses who need to borrow up to $5 million and have a tangible net worth of less than $15 million. Repayment terms can extend up to 20 years and the assets you're financing serve as collateral.
Best for: Established businesses with steady credit and debit card sales who need funding quickly but lack the collateral or credit score required for a traditional loan
A merchant cash advance isn't a loan per se but it is a way for businesses to get access to capital quickly. The premise is fairly simple--the merchant cash advance provider advances you a set amount of money based on future credit and debit card sales. You pay the money back by remitting a percentage of daily credit and debit card revenues.
While convenient, merchant cash advances often come with high interest rates and fees. Providers use a factor rate to set the fees and determine how much money you actually pay back. For example, if you take a $50,000 advance with a factor rate of 1.4, you would pay back $70,000, not including the interest.
Merchant cash advances are one of the most expensive borrowing options in terms of the APR. The more credit and debit card sales your business generates each day, the higher the APR climbs and it's possible for the amount of interest you're paying to reach the triple-digit range. Bottom line, you must weigh the cost carefully when contemplating a merchant cash advance.
Best for: Startups who want to raise seed funding without sacrificing equity
Startup loans are offered by private lenders and they're best suited for early stage businesses who need funding to move from the concept phase to producing a tangible product or service. A startup loan may serve as a precursor to seeking additional funding from angel investors or venture capital groups.
Borrowing limits vary based on the lender, as do the loan terms. Payments are made on a monthly basis. To qualify for this type of loan, you'll need a good personal credit score and you'll need to be able to produce your personal tax returns for the previous two years.
Collateral and personal guarantee requirements are determined by the lender. If a startup loan is being used to purchase equipment, the equipment functions as the collateral. Unlike other types of startup funding, business owners are not required to trade equity shares in their company to obtain a loan.
Best for: Businesses that have been operating for at least 12 months, have at least $60,000 in annual revenue and require an ongoing source of working capital
Business lines of credit can be obtained through traditional banks or private lenders and they function similar to a credit card. Business lines are revolving, which means you're required to make a minimum payment each month but you can continue drawing against the line as long as you have available credit.
This type of loan most often has a variable interest rate and fluctuations in the prime rate can affect the amount of your payment. Some lenders charge an annual fee to maintain a business line of credit. Collateral may or may not be required.
A business line of credit is deal for an established business that desires a flexible way to access capital for almost any purpose. You can use this type of financing as needed and you only pay interest on the funds you draw against your line of credit.
Best for: Growing businesses that have a positive cash flow and need flexible short-term financing
Accounts receivable financing, also known as invoice financing or factoring, is similar to a merchant cash advance. Companies that offer this type of financing provide businesses with cash, using the business's outstanding invoices as collateral. It's possible to borrow up to 90% of the value of your open invoices.
The financing company holds between 10% and 50% of the funding in a reserve account. Once the invoice is paid, the processing fee is deducted, along with the factor fee. The factor fee can range from 1% to 5% of the amount held in reserve and is charged on a weekly basis. After these fees are deducted, the financing company turns the remainder of the reserve funds over to you.
Obtaining accounts receivable financing is relatively quick and easy, with no collateral required. There is a downside, in that the fees are higher compared to other types of business financing. The longer it takes your customers to pay, the more the factor fee costs, which can diminish your profits over the long-term.
Best for: Established businesses that need to finance equipment purchases or the construction or renovation of an owner-occupied building
Buying equipment for your business or undertaking a construction project for new premises can be pricey but fortunately, there are business loans designed for just these purposes. Private and traditional lenders make these loans available to established businesses with a consistent revenue stream.
With an equipment loan, the equipment itself typically serves as collateral and it's possible to finance up to 100% of its value. The collateral requirements for a construction loan may vary. If you're using the loan to renovate an existing structure, the property itself is what's used to secure the loan. These business loans can have shorter or longer repayment terms, based on how much you borrow.
Best for: Newer businesses that need to borrow larger amounts but lack sufficient credit to obtain a bank loan
Peer to peer lending has become an increasingly popular small business funding option. This type of business loan is funded by a group of investors who each claim a share of the interest you pay. Prosper and Lending Club are some of the most visible P2P lending platforms. In addition to paying interest on the loan, borrowers pay a fee to the platform as well.
The amount you can borrow through a peer to peer lender can be generous and it's possible to get the loan funded in a short period of time. Peer to peer lenders base the interest rate for these loans on your personal credit score. The lower your score, the higher the APR, however, this kind of loan is worth considering if your personal credit is less than stellar.
Best for: Business owners who need quick funding for smaller amounts and have a good personal credit history
With the exception of startup and 7(a) loans, many of the lending options we've discussed so far are designed for businesses that have been operating for at least one year or longer. If your business is newer and you haven't had an opportunity to establish a business credit history, taking out a personal loan may be a suitable choice.
Lending limits for personal loans tend to be lower than term loans but qualifying may be easier if you have an excellent personal credit score. This type of loan is usually unsecured, which is a benefit for newer businesses that may lack substantial assets. Rates can vary widely so be sure to compare loan offers carefully before committing.
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