Banks generally don't hand out loans to borrowers except those with great qualifications. New business struggle finding first-time business loans because of the higher risk involved and lack of trust due to a limited track record. If you’ve never taking out a business loan before, there are many options – some affordable and some expensive. Here are 6 loan types to explore.
When should I consider getting a business loan?
There are many ways funds from a business loan can be used to shore up a business. If you need money for the following, it’s a good time to seek funding.
- Hiring, training and other staffing costs
- Purchase and upkeep of essential equipment, including vehicles or computers used for work purposes
- For mortgage or rent payments
- To refinance expensive debt and lower your monthly obligations
- Launching marketing campaigns
- New product development
What is a business loan?
A business loan is somewhat similar to a personal loan. It’s debt financing from a lender that must be paid back in full on a schedule along with agreed upon interest, fees, and other costs. In general, interest is charged as a percentage of the loan’s principal.
Best first-time business loans
If you Google “first-time business loans”, the results can be overwhelming. In addition to being offered by numerous lenders, the types of loans can be confusing. Your goal should be to get the lowest cost loan with the longest terms so payments will be manageable. Here’s a list of the best first-time business loans.
1. Short-term loans
These loans work like long-term loans, except that they have to be paid back in a shorter period of time. They typically have smaller amounts, more frequent payments, and higher APRs. Although they can be quick and convenient, short-term loans can come with a steep price. It can be easier to qualify for a short-term loan, but you might find that they’ll negatively impact on your business cash flow in the end.
A good reason to take out a short-term loan is to build your credit. Paying back on time in full will give your credit score a boost and make it easier to qualify for longer term loans in the future. Another reason is to jump on a business opportunity, like buying inventory in bulk, as these loans generally take less time to fund.
Learn more here about short-term (2 to 5 years) Bank Term loans available through the SmartBiz bank network: Bank Term Loans.
2. Short-term line of credit
A business line of credit is a financing option that falls somewhere between a business credit card and a term loan. Virtually the only similarity a line of credit has to a small business loan is that it gives access to funds that can be used for day-to-day expenses. Otherwise, a business line of credit is more like a credit card. You don’t have a sum deposited into your account which you then repay with interest on a regular basis. Instead, you draw funds as you need them and accrue interest each time. Lines of credit are also revolving, like credit cards, which means that the amount you repay becomes available again. As with credit cards, your lender will determine a maximum up to which you can withdraw funds at any given time.
Review this post from the SmartBiz Small Business Blog for more information: How Does a Line of Credit Work and When is It Useful?
3. SBA 7(a) loans
If you qualify, the Small Business Administration’s low-cost loan programs can be your best option. SBA 7(a) loans have low rates, long terms and very low payments to fuel stability, growth and savings. They are known as the “gold standard” for small businesses. Note that your business must have been in operation for 2+ years.
An SBA 7(a) loan can be used for a variety of purposes.
- Working Capital – Purchase equipment, add marketing programs, for operating expenses, or to hire additional staff. For additional information, read What is Working Capital in Small Business.
- Debt Consolidation – An SBA 7(a) loan can be used to refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans or business credit cards. Learn more here: Refinance Your Business Debt by Learning More About Refinancing.
The SmartBiz Small Business Blog has an article with more details about this funding option: SBA Loans: The Best Bet to Fund Your Small Business.
4. Bank loans
If you’re not ready for an SBA loan, consider applying for a bank term loan. SmartBiz currently offers term loans through its bank partners for working capital, debt refinance, and new equipment purchase:
- $30,000 to $500,000 loan amounts
- 2 – 5 year repayment terms
- Fixed interest rate*
- Monthly repayments
- No pre-payment penalties
*Interest rate depends on loan term and the applicant's credit and financial profile.
Learn more about Bank Term loans available through the SmartBiz bank network: Bank Term Loans.
Typically, these loans offer up to $500,000, a monthly or bimonthly payment schedule, and mid-market interest rates. It typically takes two to three weeks to get funding with a medium-term loan. Medium-term loans are available both from banks and alternative online lenders. It’s important to demonstrate good credit and cash flow.
5. Startup loans
If you are a true beginner in the small business operations arena, there are startup loan options. They can be difficult to qualify for but if you have a strong
The SBA’s Microloan Program is for very small businesses, including start-ups and provides loans of up to $50,000. Requirements to qualify for a microloan can vary depending on the lender. Proceeds from an SBA Microloan can be used for most business expenses but not for paying down debt or real estate purchases.
This program provides direct loans and grants to eligible non-profit microlenders so that they may provide micro-level loans, and business based training and technical assistance to start-up, newly established, and growing small business concerns.
Read the SBA’s Microloan Program PDF fact sheet for details.
Loan application tips
Before you jump into the process, here are tips to consider.
Protect your credit score
Don’t put in multiple applications as your credit could lower with each inquiry. Find a lender who does an initial “soft pull”, also called a “soft inquiry” of credit. Bad credit can sink your chances to qualify for low cost funding. For information on this, read Hard and Soft Pulls of Credit: What you Need to Know.
Work with a lender who values transparency
If this is your first time seeking funding, you’ll probably have a lot of questions. Unfortunately, not all small business lenders are on the up-and-up. Confusing language and calculations can result in paying much more than you think you signed up for. Make sure you work with a financial professional who is responsive and answers all questions and concerns clearly. Stellar customer service is key.
Know how much you want to borrow
Take a look at your business plan to determine where you currently stand and where you want to go. Create financial goals and speak with your accountant to nail down an amount. Look at the cost of the loan and all fees to get the true cost.
Determine when you’d like to repay the loan
Long term loans generally have the lowest rates and 10 years or more to pay off. If you’re in it for the long haul, long term is best. If you plan on early payoff, check with your lender about penalties.
The more organized you are, the swifter the application process will move. It’s a great idea to work with your accountant, bookkeeper, or another financial professional when putting together the required paperwork.