The loans are not given directly from the SBA. Instead, the SBA sets guidelines for its partners that are traditional banks, online lenders, and credit unions.

SBA Lending Programs

SBA loans offer several types of financing. Choosing the right SBA program depends on your specific needs. However, each loan also has different eligibility conditions and requirements that you will need to meet.

If you are looking to expand your business, open a new location, purchase a new space, or even refinance debt, SBA loans could be a great option. The length of the term is significantly longer than other business loans. So in most cases, SBA loans are easier to manage. The SBA provides three primary programs for small businesses; 7(a) loans, CDC/504 loans, and microloans.

7(a) Loan Program

The SBA 7(a) loan program is the most popular among SBA loans. These small business loans offer an array of financing options that will fit any business need. These loans can come in the form of a term loan or a revolving credit. The differences between the loan types are in processing times, use of funds, and the loan amount.

Standard 7(a)

In this program, the maximum loan amount is $5 million, with an SBA guarantee of up to 85% of the loan. If the amount you are asking for is higher than $350,000, you will need to put collateral. However, if you need a working capital that is less than $30,000, you are not required for collateral. The length of the loan is up to 10 years.

7(a) Small Loan

This lending program is similar to the 7(a)-loan standard, but the loan amount is limited to $350,000.

SBA Express

Relative to SBA loans, an express loan is a good option for a business that needs a faster turnaround, which might be up to 36 hours. The maximum loan amount is $350,000. In this case, the SBA guarantee is up to 50%.

Export Working Capital

These loans are for small businesses that are in the exporting industry. If you need additional capital to support your export sales, this option may be ideal for you.

These loans are made through the EWC (Export Assistance Center) and not by banks or lenders. For this type of financing, the SBA requires a small guarantee, but also, in this case, the SBA’s maximum guarantee is up to 90%. The maximum amount is $5 million, with a turnaround time of 5-10 business days.

Export Express

This lending program is for exporters who need an immediate influx of cash to support their export operations. Unlike export working capital, the SBA response time is much quicker (24 hours), but the loan amount, in this case, is up to $500,000.

International Trade

If your business expands because of export sales or foreign competition, this program is especially for you. The loans are similar to the Export loans (Express and Working Capital) in size and guarantees. In this case, the loans are up to 10 years for working capital and up to 25 years to purchase fixed assets.

SBA Microloan Program

Just as it sounds, the microloan program provides smaller loan amounts for small businesses with a few employees or startups. These loans are being processed by the SBA and provided by community-based organizations and nonprofit agencies. This option is excellent for entrepreneurs who are not eligible for other business loans.

This program can offer you up to $50,000 of funding. However, there are some restrictions on the way you can use the funds. You cannot purchase real estate or pay an existing debt. In case you are looking for working capital to strengthen your cash flow, buy more inventory, or expand your business, this loan can be a good fit.

If you are looking for a more significant amount than $50,000, you should check a different loan product.

SBA CDC/504 Loan

An SBA 504 is a business loan guaranteed by the SBA, provided by the CDC and lenders (banks, online lenders). With this type of financing, your business must be a for-profit business. This loan is used for buying fixed assets, for example, real estate, construction equipment, software, land, vehicles, and machinery.

Like equipment financing, you need a down payment, usually about 10% of the loan amount.

With this lending program, The maximum loan amount is $5 million. For manufactures and green energy-related companies, it goes up to $5.5 million. As mentioned briefly above, borrowers need to contribute 10% of the total cost of the asset. The banks will lend 50% at their rate and terms, and the CDC will lend 40% as a second loan.

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Applying for a traditional loan from a bank can be a very challenging process, but today, small businesses can utilize other alternatives. Lenders offer a wide array of financing products, but every business must carefully analyze its options before applying for any loan.

How do Business Term Loans Work?

As mentioned briefly above, a term loan is a classical definition of a business loan. This type of financing comes in different variables: a short-term loan, a mid-term loan, or a long-term loan. A term loan provider gives you access to capital upfront for business purposes. Once you have been given the loan, you start to repay it over a set period with fixed and equal payments.

For this, interest rates start from 6% up to 99%. The repayment period varies between 3 months to 5 years with online lenders and up to 10 years with traditional banks. The funding amount you can qualify for ranges between $5k to $5 million. However, requirements and rates vary greatly between different banks and lenders. The rates and terms mostly depend on a few main factors; credit score, annual revenue, time in business, and profitability.

Business Term Loans vs Business Line of Credit

Small business loans can help you, but the question is, what is the most suitable type of loan for you? The main differences between a business term loan and a business line of credit are the repayment period and the intended use of funds.

With a business term loan, you get access to a lump sum of cash. Then, you start repaying the loan with a fixed monthly payment right away, even if you have not used the funds just yet.

A term loan is a better fit for businesses looking to buy an expensive piece of equipment or to purchase additional inventory. Unlike term loans, a business line of credit provides you with an ongoing pool of funds. This means that you can use the funds repeatedly whenever the balance is cleared in full. With this type of financing, you can withdraw a portion of the cash and pay the interest plus fees on the specific amount borrowed.

How Can I Qualify For A Business Term Loan?

If you’re looking for working capital with a prime rate and relatively quick funding process to other loans, a term loan is probably an ideal option for you. However, this type of financing has some requirements that you will have to meet.

To become eligible for a business term loan involves multiple factors. What matters for lenders is your time as a business in the industry, credit score, and the annual revenue of your company. Usually, a term loan offers better rates and longer periods than other working capital loans. As a result, qualifying for a term loan can be more challenging due to stricter qualifying requirements.

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How does it Differ from other Financial Solutions?

Unlike other business loans, a business line of credit provides you with the flexibility to utilize any portion of the available credit. A credit line provider gives the business access to a specific amount set by a credit limit that one cannot exceed.

When you draw from the credit line, you will pay a draw fee, typically 1%- 3 plus interest on the portion borrowed. This type of financing is a form of a business loan combined with a personal line of credit. You pay a weekly or a monthly payment plus fees until the amount borrowed is paid in full.

The term line of credit sometimes refers to revolving credit. Because after the balance is cleared, you can reuse the credit line amount repeatedly. However, there are a few lenders who will ask you to reapply for renewing your credit line. Renewing your line of credit should not be very challenging as long as you have made your payments on time.

Unsecured VS Secured Line of Credit

Typically, a business line of credit is an unsecured type of debt. This means that most of the time, you will not be required to put up collateral. However, for higher amounts or longer repayment periods, lenders may ask you for a personal guarantee.

If you need funding for any amount exceeding $150,000 and don’t have an asset to use as collateral, you may have to look for other products such as a merchant cash advance or an unsecured term loan.

Example for Line of Credit

If you decided to test a new marketing campaign that added $5000 to your monthly budget for ads and content. You apply and obtain $30,000. This line of credit makes available $30,000 for you to use immediately. You don’t have to use the entire amount; you can take small portions and pay interest plus fees specifically on the amounts borrowed.

What Are the Advantages of a Business Line of Credit?

Making timely payments can help you increase of credit line and get better terms or other business loans in the future. The credit line also provides a safety net in case of unexpected expenses and cash shortages. Usually, you only have to apply and get approved once and then use the available funds repeatedly.

How to Qualify for Business Line of Credit

To be eligible for this type of financing, you must be in business for at least one year and have $100,000 or more in annual revenue. In some cases, for a higher amount and a longer duration, lenders may ask for collateral.

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What Is Equipment Financing and How does it work?

In its simplest terms, equipment financing is a form of a business loan that is used to secure fixed assets. An equipment financing loan provider gives you a loan with a fixed monthly repayment term to purchase new or used equipment.

Heavy machinery, trucks, construction equipment, staffing, and IT equipment are the most common types of equipment financed.

With equipment financing, the loan amount is based on the value of the equipment. Purchasing hard assets can be costly. Although a down payment of 10-20%is typically required, this way, equipment financing may still save you from using a significant portion of your capital.

Repayment Structure

Unlike invoice factoring or merchant cash advances, equipment financing has a fixed repayment structure. You make a fixed payment every month, which is the principal amount + interest over a set period.

Collateral

Before the lender grants you this type of loan, the condition of the equipment is inspected. In case of a default, the asset you purchased will serve as “insurance.” Therefore, the business lender wants to make sure that the equipment has a resale value.

Let’s assume you wanted to purchase an industrial machine that costs $100,000. It can pack thousands of bags and save you the cost of manpower. After you negotiated with the lender, you received a 6-year term at 6% secured against the machine. Once the loan is paid in full, you own the equipment free of any lien.

Equipment Financing vs Equipment Leasing

Equipment leasing is for the use of the asset during the repayment period. At the end of the term, you’ll have three choices to make; resuming the lease, unloading the asset, or purchasing the asset. After the loan is paid in full, the equipment will remain in your business’ possession. To finance the equipment will be a better option in case you are planning to use the equipment for the long term.

Equipment leasing is more suitable for small businesses that replace their equipment frequently. One of the advantages of leasing is that leasing is a form of “off-balance-sheet” product that can help you to reduce your liabilities.

What are the Advantages of Equipment Financing?

Using equipment loans to purchase hard assets allows businesses to preserve cash for potential expenses such as payroll, inventory, taxes, new contracts, or other unexpected business expenses.

Using a loan to buy expensive assets can increase the purchasing power of your business. However, the equipment you just purchased may increase your liabilities.

Who is Qualified for Equipment Financing?

Many small businesses will want to use this option to acquire hard assets, but lenders are usually more cautious with this type of loan. Typically, lenders require at least a year in business, at least $100K in annual revenue and a 600+ credit score. Thanks to the collateral, bad credit will not automatically disqualify you from getting an equipment loan.

The best industries for Equipment Loans

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What Is Invoice Factoring?

Invoice factoring is a term that is also known as account receivables factoring. Technically, invoice factoring is not considered a loan. Instead, the factoring company buys your unpaid invoice at a discount in exchange for a lump sum of cash. The factoring company will own the invoices. Then, they will collect their payments from your customers, typically within 30 to 90 days.

Example for Invoice Factoring

You create a $20,000 invoice to bill your customer. Let’s assume your customer usually pays after 30 days. It would help if you had that cash instantly to re-invest in your business. You decide to turn to a factoring company that advances you 90% ($18,000) of the amount minus a 5% fee ($1000). When the bill is due, the factoring company will collect their payment and will provide you with the remaining balance ($1000).

Traditional banks often require stellar credit or collateral, so this option turned out to be one of the most attractive financial products for small business owners. If you chose to use this kind of financing, make sure you know that a third party will interface with your customers.

What Should You Consider with Invoice Factoring?

There are a few things you should consider before proceeding into a borrowing position. A bit of research can help you decide the right solution for your business. Usually, factors and financing providers will advance you between 70-90% of the unpaid invoice amount. Although, only after checking out the billed client’s creditworthiness can we claim that each institution has some different risk measurements. With invoice factoring, the rates are usually between 1-6% per month, in addition to processing fees and ACH fees.

What are the Advantages of Invoice Factoring?

There are other types of working capital loans, but invoice factoring has become substantially popular in recent years among small business owners. This is because the requirements are more flexible than other business loans. As long as your client has been regular with his bill payments, you probably won’t have any issues getting funded.

Flexible Cash Flow

Cash flow is the fuel of your business. As long as your business has enough cash flow in its pipeline, the smaller odds are that your business will be impacted by unexpected financial distresses. For your business’s future, it is necessary to sustain positive cash flow and a solid balance sheet to take your finances one step forward.

Increase in Sales and Profits

Financing your invoices can help you boost your sales and capitalize on new business opportunities.

Easier to Qualify

Applying for this kind of financing would be more efficient and flexible in terms of conditions and availability. Assuming you are dealing with reputable companies.

Invoice Financing

With invoice financing, the lender gives you an up-front sum of cash against your unpaid invoices, typically 70-90% of the unpaid invoice amount. Your business is still responsible for collecting outstanding receivables owed by your clients. Once the bill is due, you’ll pay the lender back the amount borrowed, plus fees and interest. For example, you create a $10,000 invoice to bill your client. The invoice terms are net 30. The financing provider advances your business 80% of the invoice amount
($8,000). After 30 days, your client has sent a check for $10,000. After you receive the payment, your business keeps $1500, while the invoice factoring will receive the remaining amount of $8500. In total, you received 95% of the invoice value, while the invoice financing company receives $500 in fees.

Invoice Financing vs Invoice Factoring

Invoice financing is a similar process to invoice factoring. In both cases, the purpose of the product is to provide you with an option for funding against your account receivables. With invoice factoring, the factor buys your unpaid invoice and collects its payments directly from your clients.

With invoice financing, the lender grants you a lump sum of cash against your unpaid invoice, and your invoice will be used as a personal guarantee. Invoice financing is the better option if you want to maintain control over your invoices and deal with your customers directly. It works better with invoice factoring if you don’t mind giving up control of invoices to a third party.

The Best Industries for Invoice Factoring

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What Is a Merchant Cash Advance?

A merchant cash advance provider gives you an upfront sum of cash in exchange for a slice of your future receivables. With this option, instead of making one fixed payment over a set repayment period, you make daily or weekly payments plus fees until the advance is paid in full. Unlike with traditional bank loans, the requirements aren’t strict and the approval process is shorter than it is with any other business loan out there.

Here, the risk factor is calculated differently by lenders. Rather than showing a profitable business or having a top-notch credit score, the terms and the amount you qualify for are based on your monthly revenue. For example, a business owner with an 800-credit score will not get approved if his business makes less than $4,000 in average monthly sales. On the other hand, having a low credit will not hurt your chances of getting approved if your business is generating a large sales volume. With that being said, the rates are higher than business term loans, so calculating your ROI to employ this kind of financing is essential.

Repayment Structure and Cost

With a merchant cash advance, there are two different repayment methods.

The first option involves the lender deducting their portion directly from the business checking account weekly or daily. The second option to repay the advance is through your credit card sales. With this, the lender deducts their payments via a split of an agreed-upon percentage of credit card sales. However, this option is available only if most of your revenue comes from the POS system.

Example for Merchant Cash Advance

Suppose that you are looking to capitalize on a new investment. To take advantage of this cost opportunity, you turn to one of the MCA’s providers. You borrow $30,000 for a payback amount of $37,200 (fixed amount). This means the factor rate is 24% for the whole repayment period. Then, you repay the advance via ACH (weekly or daily) or as a specified percentage from credit card sales. Therefore, with an ACH payment, the repayment schedule is fixed. For example, if you received a term for 6 months, you will pay $1,550 weekly or $310 daily.

Is a Merchant Cash Advance Right for Your Business?

Whether you need to meet a short-term capital need, or you prefer keeping cash in your pipeline for other expenses, this type of financing can be the right fit. Most often, merchant cash advances are used by small businesses that are not qualified for traditional loans.

There are several types of financing alternatives when it comes to commercial lending. For the most part, this one is the easiest to qualify. Also, with a merchant cash advance, payments aren’t fixed. Therefore, the repayment amount is adjustable in case of a slow sales period. Moreover, the amount of paperwork you need to submit when applying for a cash advance is much smaller than for any other business loan.

How To Qualify for a Merchant Cash Advance?

The requirements are relatively more straightforward than for other business loans. Business owners with no collateral or a bad credit score can benefit from this option. However, other elements can impact the pre-qualification process, such as more than 10 insufficient funds a month, being less than 6 months in business, or a recent bankruptcy. 

The Best Industries for Merchant Cash Advance

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