Types of Small Business Loans

Types of Small Business Loans

Booster Financial offers small businesses several options to keep them going and operational. Each business has different needs and it is important for them to have individualized choices. We, therefore, offer SBA, Term, and Working Capital loans. There are also other options such as Merchant Cash Advance, and Invoice Factoring to allow businesses to continue operating under normal as well as difficult times.

SBA Loans

The U.S. Small Business Administration offers loans specifically to small businesses in the USA. That is why it is called SBA loans. These loans are most popular with small businesses because it fulfills most of the needs for the growth of any business.

Small businesses and enterprises can choose between a few types of small business loans to ensure a successful business. As an SBA-approved institution, Booster Financial offers businesses the SBA 7(a) loan.

The SBA 7(a) loan is one of the more popular loan programs as it offers the following benefits:

• The loan capital can be in the amount of between $20,000 and $5 million. This will depend on what the business needs.
• The terms are long and can be up to ten years depending on the amount the borrower opts for.
• The interest rates are always below the market rate making it attractive to most small businesses.
• The loan type allows businesses to add to their working capital, add to their stock, develop new products and services, and refinance their debt or expand the business.
• By making use of the SBA loan through BOOSTER FINANCIAL, you will receive custom care and experience convenient online support

An extension to the SBA 7(a) program is the CAPLine loan.

• These loans assist small businesses on a needs basis.
• When a business needs working capital for a short-term project, this is an ideal loan option.
• This option is often for businesses that have cyclical, or seasonal downturns.

Added to the types of small business loans for small businesses, the Small Business Administration offers SBA Microloans that are specifically focused on small businesses wishing to expand their operations, or it can be for upstart businesses.
These loans are especially useful for businesses to use for:

• Its day-to-day functioning – that is, for its working capital
• It can also serve as a means to procure additional equipment, specialized machinery, expand their stock, and any other necessary operational costs.

Term Loans

In most instances, term loans are paid out in lump sums. Thus, the borrower will be given various options to repay the loan over a set period. The length of time for repayments will depend on how much the borrower requires from the lender. This means that the repayments can be anything from shorter terms such as twelve months (or less), medium periods, or the longer period that could be as long as three years or more.
In most instances, banks, other financial institutions, as well as online lenders such as Booster Financial provide these types of small business loans. Small businesses can benefit from term loans as these offer the following:

• The interest rates are competitive and can either be variable or fixed. Overall, the rates are also lower than other loans to small businesses.
• Businesses are not restricted to how and where they appropriate the funds.

However, you do need a healthy credit score to apply for this type of loan. It is also for more established businesses. If you do not qualify for a term loan, though, you can fulfill your business obligations in other ways.

Merchant Cash Advance

Merchant cash advances differ from cash loans and are, therefore, not a loan per se. It is a cash advance from a reputable lender and is dependent on the credit card sales of the borrower. Small businesses can make use of merchant cash advances because it is an alternative to loans from traditional institutions such as banks.
Here, too, the borrower receives the money as a lump sum, and repayments are made as the company receives payments from sales. Even though it has a quick approval rate, some of the major setbacks here are:

• That it can affect the daily cash flow of the business
• The business will struggle to build its credit
• It limits transactions to credit cards
• There is also the added negative of higher interest rates

Working Capital Loans

Working capital is a vital part of any business, large or small. Businesses would, therefore, often be forced to take out a working capital loan to cover the daily running costs of the business. Businesses cannot operate on negative working capital.
Businesses can benefit from these loans as they will cover any planned expenses but will also be an asset if there are unexpected expenses. It is important to note that these are not long-term loans and it, therefore, has two options. You can opt for a lump sum to be paid out, or you can use it, as you need it.
This loan can be used for any purpose but is extremely useful during times when the business experiences low sales or low productivity. During such a time, the working capital loan will serve well for the company to ensure that it pays its employees and that the company sustains itself while awaiting customer payments (accounts receivable). Some of the other aspects, where the loan could be useful are when the company has accounts payable (paying its debts) as well as for paying the rent.
Working capital loans payout as a lump sum and are available quickly and easily. Even though the benefits are that the loan is easy to access, the borrower must keep in mind that it is not for long-term solutions.
Some of the benefits of a working capital loan are the following:

• There is no need for collateral
• You have access to the lump sum funds almost immediately
• Even though you do not need a perfect credit score, it is best to ensure that you do have a good credit score for better interest rates.
• There is no limitation to how and where you can use the funds

Some negative aspect of a working capital loan is that the fees can be much higher than some of the other financial programs.

Line of Credit

This is also not necessarily a loan per se but, as it states, it is a line of credit. This is credit available for when the business needs it. There are no repayments unless the business uses the available funds. This is merely a safety net for when there is a downturn in production or if the expansion of the company requires extra equipment.
The positive aspect of a line of credit is that there is no interest unless the business utilizes the available funds. A negative is that there may be other fees attached such as withdrawal fees, monthly fees for maintenance, or fees on late payments. As stated, the negative only applies when the business withdraws the funds.

Invoice Factoring

As with merchant cash advances, invoice factoring is a revolving line of credit or cash advance that is calculated from the value of the unpaid invoices (accounts receivable) of the business. It is not a loan but offers an option for a business to stay operational. Thus, it can be used as a working capital loan but is not part of the types of small business loans available to businesses.
One could say that the invoices serve the purpose of collateral. For this reason, the funds are easier to obtain than with most other loan types. The business, therefore, has a quick and easy way to gain access to cash to ease cash flow problems in the business.
The positives of finance factoring is that:

• It is one of the easiest ways to obtain funds as you do not need any collateral
• You can easily get access to the exact amounts you need because it is based on your cash flow as well as on the ability of your client to pay the invoices.
• This also means that you will get an immediate cash injection without having to wait for your clients to pay you.

Frequently Asked Questions

What are the most effective ways to keep your business running smoothly?

Businesses need cash to run them, especially in day-to-day business. For this reason, it is often necessary to take out loans to survive.

What types of small business loans are available?

The U.S. Small Business Administration offers loans specifically applicable to small businesses in the USA. Some of these are the SBA loans, which include the SBA 7(a) program, the CAPLine loan, and the SBA Microloans.

What other financing is available?

Other available financings are term loans, merchant cash advances, the working capital loan, line of credit, and invoice factoring.

What is a working capital?

It is the day-to-day expenses to keep a business operational.

What is a working capital loan?

Businesses, large or small, often need to take out a working capital loan to cover the daily running costs of the business.

What is negative working capital?

Should a business run out of its daily expenditure funds (working capital), it is called negative working capital.

What is positive working capital?

Positive working capital means that the current assets of the business exceed the current liabilities. That means that there are enough funds for the daily run of the business.

Why do businesses need loans?

In most instances, there is a need for immediate cash flow to cover the daily running costs of a business. For this reason, the US Small Business Administration has various loan options for businesses.

Can you get a loan with a weak credit score?

The minimum FICO score for most loans is 530. It is possible to get a loan with a lower score but the interest rates will be higher.

How can you use most of the loans?

• The SBA 7(a) loan can be utilized where the business needs working capital, needs to increase its stock, in research and development of new products, and for refinancing debt. Overall, it can be used to expand the business.
• Term loans offer excellent interest rates and offer great flexibility on how and where the business utilizes the funds. This means that you can use term loans for most, if not all of your business operations.
• Merchant cash advances are not small business loans but offer the businesses a cash advance to use for various needs in the business. You can use the cash advance for almost anything, including day-to-day running costs, pay wages, as well as for stock purchases.
• Working capital loans provide the business with much-needed everyday cash to run the business.
• A line of credit is often used as a safety net for emergency use.
• Invoice Factoring gives easy access to cash flow for the day-to-day running costs of a business. There is no need for collateral as the invoices serve as collateral.

Current liabilities and current assets – what is the difference?

Current liabilities refer to the company’s accounts payable to the business and the debts of the company. Current assets refer to the company’s available cash, the stocks in the inventory (both raw materials as well as the finished products), and unpaid bills from customers.

What is the FICO score?

The FICO score is the business or the business owner’s credit score. The score indicates whether the business or business owner has healthy credit or is creditworthy. Numbers indicate creditworthiness and lenders use them to determine how much credit the borrower could qualify for. With a score higher than 530, the business or individual is more creditworthy.