4 Types of Debt Financing for Small Business

Looking to expand your business with additional funds? You can use debt financing for a variety of purposes, from marketing to equipment purchases and everything in between. Here are some of the most popular options.

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What is Debt Financing?

Debt financing is the process of borrowing funds from a lender in order to raise business capital. The borrower then repays the sum in regular installments, typically with interest. This financing can be used for a variety of purposes at all stages of a business’s growth. Here are some of the most common debt financing options among entrepreneurs.

Personal Loans from Family and Friends

One of the safest ways to fundraise for your small business is to refer to the friends and family you trust. If you treat the process professionally, set realistic milestones, and create thorough documentation, you can have access to secure funds on your terms. Don’t take the agreement lightly though, because not only are funds at stake, but personal relationships too.

SBA Loans

The US Small Business Administration partners with various lenders and guarantees a significant percentage of the loan amount. That way, borrowers have the opportunity to receive low-cost, secure funding while lenders face less risk. These SBA loans are known for their versatility, low rates, and long terms. At SmartBiz, we can help you obtain a 10 to 25 year, fully amortizing SBA loan by matching you with the lender most likely to approve your business.

Through our streamlined, online application, you can cut down the time it usually takes to complete the required paperwork and receive your funds in as soon as 7 days after completing the process.

 

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Long-Term Debt Financing (unsecured and secured)

Other types of long-term debt financing can come in two different forms: unsecured and secured. The difference lies in whether collateral is required. Typically, loans not secured with collateral will only be available to applicants with excellent personal credit. In most cases, lenders will request some form of collateral to protect the loan in case of default.

Secured debt financing, on the other hand, does require collateral as part of the application process. Because of the extra security in the form of collateral, they may approve borrowers with slightly lower credit scores since their risk is minimized.

Short-Term Debt Financing

Short-term debt has to be repaid sooner than long-term loans. Typically, these range from several months to a few years. Because of the shorter timeframe, there are usually higher interest rates associated with this type of financing.

Credit cards, lines of credit and cash advances, all fall under this category. These options may be revolving, meaning that you can continue withdrawing funds as necessary up to a certain limit. Unlike installment loans, which can be either short-term or long-term, you don’t have to reapply once you’ve paid down some set amount.

Because this kind of debt financing is pricey and the frequent interest payments can be hard to keep up with, you can refinance your short-term debt with a low-cost, long-term SBA loan. Not sure if you’re Loan Ready? Get started with SmartBiz Advisor before you apply to see where you stand according to the key criteria our bank partners use to evaluate potential borrowers.

 

* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

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