In order to run a business efficiently, entrepreneurs require a substantial amount of capital. The unavailability of adequate funds can affect the cash flow of the organization, thereby hampering the efficiency of the business.
Apart from the initial investment required for establishing a startup, entrepreneurs also need sufficient working capital to ensure smooth functioning of their business. But it has been observed that entrepreneurs find it difficult to avail credit on time.
However, through proper research and by taking accurate measures, entrepreneurs can successfully fund their business idea as well as work toward its expansion.
Small business loans are a popular financing option for start-ups. Most lenders will check your personal credit score, annual income, profitability and age of your business before approving your loan application.
The eligibility criteria for small business loans may vary from one lender to another. There are several types of lenders in the market. It is essential that you compare various loan products offered by different financial institutions and settle for a business loan that best suits your needs.
Types of Lenders
Small Business Administration
- The SBA offers several small business loans designed to meet the financing needs of various types of business. The guidelines for these loans are set by the SBA in association with its partners, which include banks, community development organizations and micro-lending institutions.
- It is to be noted that the eligibility criteria for loans offered by SBA lenders are comparatively stringent. Therefore, it is advisable to calculate your business loan eligibility with the help of business loan eligibility calculator. Using a business loan calculator will reduce the rejection chances of your business loan application.
- Heavy documentation and time-consuming approval process are some of the downsides of loans offered by traditional SBA lenders.
- The loans offered by conventional banks have a comparatively lower interest rate. It is to be noted that these loans usually come with shorter tenure as compared to SBA loans.
- The approval rate of conventional bank loans is lesser as compared to that of alternative lenders.
- Alternative lenders are particularly attractive for young entrepreneurs who are looking forward to starting their own business. This is because the approval requirements aren’t as stringent.
- Moreover, you can apply for a business loan online with the help of alternative lenders. Instant loan approval and quick disbursal are some of the major advantages of availing a business loan from alternative lenders.
Types of Loans
There are four major types of SBA loans.
7(a) Loan Program
The SBA’s most popular loan program is a good option for working capital. 7(a) loans can also be used for purchasing machinery, equipment, debt refinancing, etc.
The SBA offers these loans to small businesses. The loan amount can be used for working capital or the purchase of inventory, machinery, or equipment. However, these loans can’t be used to pay existing debts or purchase real estate. The maximum tenure of an SBA microloan is six years.
Real Estate and Equipment Loans
The CDC/504 Loan Program offers a business loan with long-term, fixed-rate financing for major assets, such as equipment and real estate. The maximum loan amount of a 504 loan is $5.5 million, and these loans are available with 10- or 20-year maturity terms.
The SBA provides disaster loans at low interest to businesses of all sizes. The loan amount can be used to repair or replace real estate, machinery, and equipment and business assets that were damaged or destroyed in a disaster.
Loans from Conventional Banks and Alternative Lenders
Line Of Credit
A line of credit is an agreement between the financial institution and the entrepreneur, wherein the lender assures to lend a certain amount of money to the entrepreneur. In case of a line of credit, the loan amount can be withdrawn in small installments.
The interest has to be paid only on the withdrawal amount and not the total loan sanctioned. Line of credit usually come for longer duration and has flexible repayment options.
Equipment financing is used to purchase business-related equipment. An equipment loan is a secured loan as the equipment you purchase serves as the security of the loan. It is possible to obtain 100% financing for the purchase of the equipment through equipment financing.
Easy eligibility criteria and hassle-free application process are some of the added advantages of equipment financing.
Working Capital Loan
A working capital loan helps a business to operate smoothly and meet all its financial obligations. The loan amount availed through a working capital loan can be used for several business purposes.
With leading Non-Banking Financial Companies (NBFCs), it is possible for small and medium enterprises to avail the collateral-free business loan.