Loans that might be supported by the Small Business Administration (SBA) are attractive for small business owners because they provide quite a number loan sizes, flexible repayment terms, and most importantly, low interest rates. Simultaneously, some alternative lenders charge almost 80% APR, you could get SBA-backed loan for 7% APR, depending on the term and amount of loan that you are looking to borrow.
Here’s a review of SBA and alternative lending options available for small business owners.
SBA Lending Programs
7(a) Loan Program
SBA 7(a) loans, the SBA’s primary lending program, are the most simple, common and flexible form of lending. They can be used for a variety of reasons, including working capital; purchase of equipment and machinery, purchase and construction of land and new buildings; maintenance of existing building; establishment of new business, operation or growth of an existing business; as well as debt refinancing.
Maximum amount of SBA 7(a) loan is $five million, and the business borrowers can apply through a participating lender. The maturity of loan is up to 10 years for working capital and up to 25 years for fixed assets.
The SBA provides small loans to new small businesses. The funding can be used for working capital or the purchase of inventory, furnishings, or equipment; however they cannot be used to pay current debts or buy property. The SBA makes funds available to particularly designated intermediary lenders, which are nonprofit organizations with experience in lending and technical help. Those intermediaries then provide loans as much as $50,000, with the average loan being about $13,000. The loan repayment terms range primarily based on several factors, such as the loan amount, planned use of funds, requirements determined by the intermediary lender and the requirements of the small business borrower. The maximum repayment term on SBA microloan is six years.
Real Estate And Equipment Loans
The CDC/504 loan offers businesses with fixed-rate, long-term funding for important assets, consist of property and equipment. The funding under this program is normally regulated with the SBA offering 40% of the total project costs, a participating lender covering up to 50% and the borrower putting up the remaining 10%. 504 loans can be used to purchase buildings, land or long-term equipment; to assemble or renovate facilities; or to refinance debt in reference to business expansion.
The Small Business Administration presents low-interest disaster loans to businesses of all sizes. SBA disaster loans can be used to reestablish or replace real estate, equipment, in addition to stock and business assets that were broken or destroyed in a declared disaster. The SBA makes up to $2 million funding to businesses affected by disaster.
Alternative lenders provide the same lending programs as given by the SBA, in addition to funding options that the SBA does not provide, such as the following;
Working Capital Loans
Working capital loans are especially designed as short-term funding solutions for small businesses in need of cash to help smoothly run their daily business operations. Working capital loans are available from both traditional and alternative lenders.
The benefit of a working capital loan is that it provides small businesses the ability to keep their operations running even as they look for different approaches to increase sales. As with benefits, there are some drawbacks of working capital loans, which include short repayment terms and higher interest rates.
Business Equipment Loans
Other than the Small Business Administration, both alternative lenders and banks offer their own types of equipment financing programs. Equipment loans and leases offer cash to small businesses for equipment, like copiers and laptops, or things which include heavy machinery, and automobiles. Rather than paying for large purchases at the same time upfront, equipment loans allow small businesses to make monthly payments on the objects.
One benefit of equipment leasing is that they can be often less difficult to get as compared to some other types of funding programs, because the equipment being bought or leased serves as collateral in this setting. These equipment loans maintain your business cash flow, given that they don’t require a massive down payment and may provide some tax benefits.
Merchant Cash Advance
Merchant cash advances are made to businesses based totally on the volume of its monthly credit card sales. Businesses can usually get an advance of 125% of their monthly sales volume. The repayment terms for repaying cash advance vary by lender. Some lenders take a small percentage from borrower’s daily credit card sales, while some take fixed amount of cash from business merchant account.
The benefits of cash advances are that they may be surprisingly easy to acquire, funding can be acquired in a couple of days. The biggest disadvantage is the expense and the high interest rates up to 30% monthly, but it depends on the amount and lender.
Business Lines Of Credit
As with working capital loans, the business lines of credit offer small businesses cash for daily cash flow requirements. These lines of credit are not suggested for large purchases, and are only available for as short as 90 days to as long as several years. With a business line of credit program, you take only what you want and pay interest only on what you use, as opposed to the entire amount. Business lines of credit are normally unsecured and don’t require any collateral. Additionally, they have longer repayment terms and give you the potential to build up your credit score in case you make the payments on time. The disadvantages are the additional charges and that they put small businesses at risk of building up debt of large amounts.
Franchise financing is especially designed for business owners who need financing to help open their personal franchise business. Franchise financing program provided by traditional and alternative lenders can be used for paying franchise costs, working capital and purchasing equipment.