Starting or growing a business often requires more than just a solid idea and hard work. That’s where small business loans come in. They give business owners the extra cash they need, and are available in different types to fit various needs.
In this article, we’ll break down what a small business loan is, the kinds of loans you may come across, and how they can help you and your business. If you have been considering a small business loan, this is a good place to start.
Defining a Small Business Loan
A business loan is borrowed money an owner avails to help the business grow. When taking a business loan, the borrower and the lender agree on details; this may include how much is being borrowed, the rate of interest for the loan, and over what period of time the money will be repaid.
Regulators agree that companies earning up to $1,000,000 each year are considered “small businesses.” Similarly, loans of up to $1,000,000 are categorized as “small loans.” Commercial banks in the U.S. typically grant small business loans averaging $564,000.
Different lenders have their own types of small business loans. Knowing what’s available can help you choose the right loan for your business needs.
Overview of Different Small Business Loan Types
Navigating through small business loans can seem overwhelming. Let’s go through the main types available below:
These loans are backed by the U.S. Small Business Administration (SBA). They’re popular among business owners because they often offer lower interest rates and better terms. There are different programs under SBA loans, with the 7(a) loan program being one of the most recognized.
Short-Term Business Loans
These are loans you pay back in a shorter period, usually less than a year. They are useful if you need a quick cash boost for a project or an immediate business need. Lenders may require less paperwork for these loans but charge higher interest due to the shorter repayment period.
Medium-Term Business Loans
Think of these as the middle ground between short-term and long-term loans. Repaid over two to five years, they offer more money than short-term loans and are often used for bigger projects or investments.
Business Line of Credit
This isn’t a traditional loan. Instead, it works similarly to a credit card for your business. You are given a certain amount you can borrow up to, but you only pay interest on what you use. It’s flexible, making it great for businesses with changing financial needs, such as those that are seasonally dependent.
Equipment and Invoice Financing
These are very specific types of loans. Equipment financing helps businesses buy machinery or tools, allowing for borrowing up to 100% of the equipment’s cost. Invoice financing, allows businesses to obtain a loan against unpaid invoices.
Lenders and Average Loan Amounts
When you’re in the market for a small business loan, the lender you choose plays a significant role in the terms and amounts available to you.
Here’s a brief look:
Often considered the titans of the financial world, large banks can provide substantial loan amounts. The catch to this is that they usually prefer established businesses with a stable credit history.
More community-centered, these banks typically provide on a smaller scale. The average loan from a small bank tends to be around $185,000. However, they are more likely to have a closer connection to the local business community and offer more flexibility in some areas compared to larger banks.
Making Informed Decisions
Choosing a loan isn’t just about getting the money. It’s about understanding its long-term impact on your business. A few steps to ensure you’re making the right choice:
· Assess Your Needs. Define your purpose for the loan. Is it for expansion, buying equipment, or bridging a temporary cash flow gap? Your answer will guide decisions for the loan type and amount.
· Understand Terms. Loans come with interest rates, fees, and repayment schedules. Fully understand these elements before signing any agreement.
· Consult Experts. An expert can be a financial advisor or a fellow business owner. Getting insights from those who have been there can help you sidestep potential pitfalls.
Navigating the Financial Pathway
Securing a loan is one of the pivotal moments in the journey your business. It can lead to growth, stability, or a solution to a temporary challenge. As with all tools, though, the true value is in how effectively it’s used.
As you explore these options, remember that the Woodsboro Bank team is here to help you. Reach out to us today and let us help you chart the best financial course for your business.