January 07, 2020
If you’re ready to launch or grow your business, the financing options can feel overwhelming. The first step to securing capital is knowing the different types of loans available for small business owners—and the pros and cons of choosing one over the other.
Small Business Administration (SBA) 7(a) Loan: This small business loan program is the main way the SBA, a U.S. government organization, offers financial assistance to small business owners. Within the program are several loan types, with some eligibility decisions made by your lender and some made by the SBA. Loan amounts, terms, fees, interest rates, and more vary by the loan. For example, there are Veterans Advantage SBA loans that come with reduced fees and SBA Express loans that reduce the turnaround time for SBA review. You’ll want to find an SBA-approved lender who can help you determine the best option for you.
Merchant cash advance (MCA): A merchant cash advance, also known as a merchant loan, is designed for businesses with credit scores that may have a difficult time securing a traditional loan. You get a sum of cash in exchange for a share of your future credit or debit card sales, or you can repay it with set withdrawals (plus fees) from your bank account.
Crowdfunding loan: Crowdfunding allows you to set up a campaign online with your fundraising goal and request money for a specific project. Typically, you’ll offer something to supporters in exchange for their contribution. That may be your product or service, or it may be a share of stock in your company.
Similar to crowdfunding, peer-to-peer lending sites like Lending Club help connect established businesses to investors. It works somewhat like a loan in that you’ll pay interest and have a three- or five-year repayment period. However, instead of financing your loan, Lending Club simply services it. The site’s investors choose whether or not to invest in your loan.
Equipment loans: If you need an expensive piece of equipment or machinery—for example, manufacturing lines, company cars, or restaurant ovens—you may look into an equipment loan. Equipment loans are designed to help you cover the cost of adding new equipment and/or replacing old, outdated equipment that is too costly to repair.
If the equipment you need will likely become outdated fast, you may find leasing is a better option. The Equipment Leasing and Finance Association recommends leasing only if you plan to use the equipment for three years or less.
Looking for Options Specific to Your Business? Read:
Using Your Home Equity to Fund Your Business
If you are a business owner and a homeowner you have an additional option: Tapping into your home equity. Many business owners think twice about options like a home equity line of credit because there is the possibility of losing your house. This is particularly true if you’re just launching a business, as there’s no guarantee it will take off.
But a home equity investment can give you the capital you need now in exchange for a share of the future value of your home. Since it’s an investment, not a loan, you have no monthly payments or interest. Once the term is up, you can either buy out the investment or simply repay it when you sell your home.
No matter what option you use to start or grow your small business, you’ll want to carefully weigh your options and get the help of an expert to make sure your choosing the one that will best position you for personal and professional success.
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.
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