Types of Small Business Loans

Types of Small Business Loans

The main types of financing providers in the United States are bank loans, SBA loans, and alternative financing options.  During this article, we will briefly discuss all 3.

Bank Financing

Business loans guaranteed by large banks and credit unions typically provide the best interest and terms.  Often Interest rates range between 5-9%. Typically, the loan term will range from 1-10 years, dependent on numerous factors. In this vein, for commercial real estate mortgaging, standard bank loans will offer amortization periods of up to 25 years, similar to a conventional home mortgage.

The drawback to going directly to the bank is that they have the most strict guidelines for approval.  Bank financing comes with strict credit checks, collateral requirements, and cash flow prerequisites. In addition, the paperwork that banks require can be intense. Typically, this includes three years of financial statements and business tax returns, accounts receivable and accounts payable aging schedules, and a debt schedule.

Small Business Administration (SBA) Loans

Small Business Administration (SBA) business loans are provided by banks, credit unions, and nonprofit financing institutions. They provide both lines of credit and traditional term loans to new and existing small businesses throughout the U.S.

SBA lenders don’t provide financing opportunities directly to the business owner. Instead, the bank will provide the loan, and the SBA covers a percentage of the financing. By doing this, the SBA hopes to improve small business lending practices while also mitigating risk to the lenders, making a “win-win” situation for everyone involved.

The SBA is a federal government entity that partners with financial institutions; therefore there are stringent documentation requirements that are in many cases similar to normal bank loans. This includes, but isn’t limited to: three years of financial statements and business tax returns accounts receivable and accounts payable aging schedules, a debt schedule, and personal financial statements and tax returns for all owners.

Alternative Financing Options

Alternative small business funding, which we specialize in, can often be a middle ground between the strict guidelines of bank financing extremely high-interest options.

These business financing options provide affordable short-term and medium-term funding to small businesses for companies that either does not have the credit history needed to be approved for the bank or have not established a long enough track record of success to be approved by a bank.  The best part of this option is that the funding can be very fast once we have all the required documentation.  In some cases funding can take place within 3-4 weeks.

Generally, the required documentation to obtain alternative financing will include:

  • Credit reports
  • 3+ months of business bank statements
  • Two years of business tax returns
  • The previous year’s profit and loss statement
  • A debt schedule
  • A year of personal tax returns and financial statements

Summary

There are many financing options for small businesses.  The one that is the best for your business depends on your credit history, timetable, interest rate sensitivity, and your ability to collect and gather the need for data. If you would like to speak to someone about the process and what path is best for you our team of consultants can help you through the process.

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