Other Forms of Small Business Loans

There are types of short term business loans which are worth considering, depending on your specific needs. As you begin business loan shopping, it’s helpful to be aware of some of the more common variations. Most are different types of term loan, but as always, pay attention to the details. Don’t hesitate to ask for clarification from your lender about anything of which you’re not certain.

An SBA loan is backed up by the Small Business Association, who works with lenders to support small businesses in the United States. The SBA guarantee means less risk for lenders, who are then able to offer better terms to qualifying businesses. The application process for an SBA loan is fairly rigorous. But the return is that these loans are offered with very competitive rates and fees. The down payment on the loan might be low and the lender might not require any collateral. Sometimes the SBA also provides small businesses with additional support and resources for growing the business. SBA loans can be used for anything a traditional business term loan could be used to do – in other words, practically anything that’s good for your business.

Equipment Loans, as the name suggests, are specifically designed to help you purchase essential equipment. Because the equipment acts as natural collateral for the loan, this type of loan often offers favorable interest rates and can be easier to qualify for than unsecured alternatives. They typically carry a fixed interest rate, making repayment consistent and predictable, and thus much easier on the budget.

Line of Credit Loans operate much like a credit card. Your business is approved for a maximum loan amount, but you don’t receive the money up front. Instead, you draw from the available funds as necessary, and only pay interest on the amount you’ve actually used – not the total to which you potentially have access. It’s like a series of individual short term business loans all taken out on the same terms, based entirely on the needs of your business. As you repay the loan, those funds become available for use again on the same terms.

Balloon Loans are any loan for which early payments are very low – possibly interest-only or other especially favorable terms. At some point, however, the balance becomes due, either all at once or over a very short amount of time. There are limited specific circumstances in which this is desirable – construction projects resulting in selling the resulting property at a profit or business ventures for which a large payoff is essentially guaranteed. Most businesses, however, benefit from far more typical business loan terms.

Qualifying for a Traditional Term Business Loan

Most lenders want prospective borrowers to have been in business for at least two years and may require documentation of solvency – a good debt-to-income ratio, reliable revenue, etc. If a business is not well-established, lenders may ask for some form of collateral.

You should be prepared to document your personal and business income history and other financial information. Every lender will check your credit score and most will ask for your business plan and detailed cash flow projection. Some keep it all about the numbers; others may ask you about your business and your vision or even ask you to explain the industry in which you operate. It’s never personal – they’re trying to gage the likelihood you’ll be willing and able to repay what may be a substantial sum of money. Keep your answers clear and honest, complete but concise. Your confidence may occasionally tip the balance in your favor.

Although the specifics may vary from lender to lender, most consider some version of “The Five Cs” when evaluating an application for a traditional term loan:

Character: How has the loan applicant handled other credit obligations both personally and professionally?

Credit Capacity: Does the borrower have the capacity to repay the loan? (Some get very detailed in their analysis for this one.)

Collateral: Does the borrower have property of value? Depending on credit history and other factors, the lender may require this property to be offered as security for the loan.

Capital: Does the borrower have liquid assets they could potentially convert or sell if necessary to repay the balance of the loan?

Confidence (or Comfort): How does the lender feel about the proposed use of the loan and the overall business plan of the company wishing to borrow from them? (This is sometimes part analysis and part subjective judgement.)

Ideally, your small business is strong in most or all of these areas. If not, bad credit business loans are still a possibility. While terms may be more restrictive and costs a bit higher, a short term business finance loan repaid faithfully lays a critical foundation for improving your personal and business credit history. There’s no time like now to start building credit towards the future.