Running a business is brave – it takes guts to stake out on your own, and no matter how tidy a roadmap you’ve laid out, surprises will undoubtedly come your way. This applies to small businesses and larger enterprises alike.
Ideally those surprises will be good, and you’ll be thinking about how you could increase your revenue if you could enter a new market, upgrade your office, or hire extra staff. All of these things take money, and sometimes there just isn’t enough to go around. But it would be foolish to cut off future business because of cash flow problems that can be easily solved with a business loan.
Let’s talk about the most common types of business loans, who can qualify for them, and what they can provide for your growing business. It’s most useful to break things down into two groups – small business and corporations – and seeing how the typical loan options differ.
How Small Business Loans Work
A small business loan can be in the form of a personal loan to a business owner, or a loan that is directed toward the business entity itself. The loan can either be a lump-sum payment to you, or a line of credit with a stated maximum which you can draw down as needed, thereby saving on interest costs for money you’re not using.
A lot will depend on the size of your business (typically measured by its revenue/sales) and what kind of corporate structure you have in place, such as a Limited Liability Corporation (LLC) or a Class C Corporation.
Small business owners can either obtain a secured loan (backed by some form of collateral) or an unsecured loan, which will take into account your personal credit history. These loans can range in size from as little as $5,000 – $10,000 up to around half a million, and will carry interest rates based on the prime lending rate (currently around 3.50%).
For either lump-sum loans or lines of credit, they’re typically issued to you on terms of 18-24 months, and you can in some cases save interest by prepaying early or partially, as your business grows.
Some lenders also offer small business owners loans to purchase a first office space, typically in an owner-operated capacity if the business occupies over 50% of the property. These loans range up to $1 million or more and are generally structured more like mortgages, amortized to a 30 year schedule. Business real estate loans typically have terms no longer than 7-10 years. After the 7 – 10 year term, the loan matures and the borrower must make a balloon payment or refinance the balance. The best lenders to seek out for small business loans are likely going to be the banks you already work with, or hold business banking and savings accounts with.
Larger businesses tend to have more physical and financial assets in place, and therefore more sources of collateral. Their needs for capital also will be larger, whether it’s for capital equipment upgrades, expanding office space, or acquisitions.
Term loans are available for equipment financing, for pre-planned business expansions, making an acquisition, or just for intermediate-term working capital (general) needs. The terms will again be in the range of 18-24 months, as the growing business will ideally not need it once its initial use has passed. And often the business can transition to more favorable terms on a larger loan down the road.
Also, lines of credit are available, with larger maximum limits than for small businesses, and these facilitate the cash flow fluctuations that many mid-sized companies face. Having a line of credit is a huge relief to any company that sees a lot of variability in their accounts receivable and inventory levels, especially in a seasonal capacity. There’s no interest to be paid on any part of the credit line not drawn down, and the company can pay back in full to cut the interest out all together – while still having the safety net of its existence there for you in case of a pinch.
Best Place to Secure Business Loans
There are many different sources for business lending, both private institutions and public entities like banks and credit unions. There’s no one perfect answer to what is best, but most business owners find some welcome efficiency in obtaining loans from where they already have banking and financial relationships. It speeds up the process to getting the money, and all the key accounts are already linked up to make monitoring and prepayment a snap.
Interest rates are near multi-decade lows; if your business is ready to scale, strike while the iron is hot.