Small business owners know that transforming a company from their imagination into a reality is a significant undertaking, and just the start of much needed hard work. Managing and growing a small business involves unique opportunities and challenges, many of which require more usable capital than is in their petty cash drawer. There are many types of lenders and loans to choose from, so shop wisely and read the fine print before signing on the dotted line.
Line-of-Credit Loans
Established small businesses with strong credit and a solid revenue stream may opt to establish a credit line loan with a bank. Unlike the lump sum offered with a term loan, revolving lines of credit allow the use of funds related to the owner’s business credit limit. The unsecured loan traditionally does not require collateral and is intended for day-to-day operational costs and as backup for emergency expenses. Lines of credit often have lower interest rates than business credit cards, however, be sure to thoroughly research potential fees for maintenance and withdrawals before jumping in.
Term Loans
Unlike lines of credit, term loans are more appropriate for capital expenditures and expansions than for operational costs. Term loans, offered by banks and a variety of online lenders, may require business owners to put up collateral as assurance of repayment. Funds come in a lump sum and are often available more quickly and at higher dollar amounts than with other types of loans. A regular schedule of payments and applicable interest rates, fixed or variable, are established at the onset of the loan. Buyer beware and be well informed as term loans from online sources may be approved and available more quickly, and can sometimes result in higher costs in the long run than bank loans.
Small Business Association (SBA) Loans
These loans are made through credit unions, banks and other lending institutions, but with the backup of the Small Business Association, an agency of the federal government. Lending partners are given a guarantee that any SBA loan given to a business will be repaid whether the venture succeeds or fails. Terms for repayment can be generous and interest rates are typically among the lowest available to most small businesses. As such, the SBA application process is arduous, lengthy and not for the faint of heart. The agency does offer guidance to borrowers from volunteer mentors who have owned and operated their own successful businesses.
This article was written by Valerie Heimerich for Small Business Pulse