Owning a small business can be financially challenging, but there are several options to help you finance your business no matter its size. Read on for more information about the most common lending options for small businesses from SBA loans to merchant cash advances and how to choose the one that’s right for you.

Loan application

Traditional Installment Loans

A traditional installment loan is the most common and well-known type of small business loan. This type of loan goes by many names including a bank loan, installment loan, or term loan. These names are often used interchangeably to refer to a loan given by a bank or credit union that has a fixed monthly payment amount with a set loan term and interest rate. You could also have 3 months loans, 6 months loans, depending on the preferred payment method that you choose.

Pros:

  • Competitive interest rates
  • Different loan periods available (short-term and long-term)

Cons:

  • May be difficult to acquire if you are a newer business
  • Requires good credit

SBA Loans

An SBA loan is an installment loan that is backed by the federal government. SBA stands for U.S. Small Business Administration. Because these loans are backed by the government, they may offer lower interest rates; however, they may also be more difficult to acquire due to stricter eligibility requirements.

SBA 7(a) Loans

There are different types of SBA loans with the most common being the 7(a) loan. The maximum loan amount for this standard SBA loan is $5 million. Loans up to $25,000 can be unsecured while loans for more than that must be secured using business assets. 7(a) loans usually take between one and two weeks for disbursement, but they may take longer.

SBA Express Loans

If you need funds faster, the SBA express loan may be the right option for you. You can borrow up to $350,000 ($25,000 unsecured) and have the money deposited in your account within 36 hours after you apply for the loan.

Merchant Cash Advance Loans

One of the fastest and easiest ways to finance a small business is to get a merchant cash advance loan. You can receive up to $500,000 based on your business’s average credit card sales.

Merchant cash advance loans are more like payday loans than traditional bank loans. They are generally easier to acquire than bank loans which makes them ideal for newer businesses and businesses with less-than-perfect credit. After you apply for a merchant cash advance, you can usually expect to get your money within a few days, which is also very similar to the funding terms of consumer payday loans. Instead of making a set monthly payment like with an installment loan, your payments are taken as a percentage of your business’s revenue which makes it easier to afford payments when revenue fluctuates.

The trade-off with merchant cash advances is that they usually have higher interest rates and fees than installment loans. They may also have shorter loan terms with the average loan term being 6-12 months.

Other Unique Financing Options

When financing your small business, don’t be afraid to get creative. Some other common but less traditional finance options include:

  • Business credit card
  • Microloan
  • Crowdfunding

Business Credit Card

The main benefit of a business credit card is that you only borrow what you need and can borrow more at any time up to the credit limit on the card. You can also rack up credit card points to use as travel credit or other rewards just like a consumer credit card. The downside of a business credit card is that it may have a higher interest rate than many business loans. It also requires a good credit score.

Microloan

Microloans are small business loans of up to $50,000. They are similar to installment loans in that they usually have low interest rates and a set recurring payment and loan term. You can apply for a microloan through the SBA or a private lender.

An advantage of microloans is that they often have less strict requirements for eligibility, so start-ups can acquire them. Many microloan lenders also specifically aim to finance businesses owned by underserved populations such as women and people of color.

Crowdfunding

Crowdfunding means raising funds for your business through small donations from a lot of people usually through a website such as Kickstarter or Wefunder. Crowdfunding is a relatively new financing option that has become increasingly popular in the past few years.

The main benefit of crowdfunding is that the money doesn’t have to be paid back; however, each website has specific terms for using its platform to raise money. Crowdfunding provides an alternative option for start-ups that are unable to acquire funding through loans, cash advances, or credit cards.

The Bottom Line

With so many vastly different financing and lending options available today for small businesses, the real task has become understanding each one so that you can make the smartest financial choice for your business. It’s really about knowing how much money you need and what specific types of loans you qualify for. From there, you can determine which of the available options is the best fit.