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Understanding Different Types of Small Business Loans

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Starting a business requires capital. Where you get it can be the most important decision in your career as an entrepreneur. While many small business owners use at least some savings, many also turn to the help of a small business loans to either help get started or help support growth after they've launched. Whether it's through a bank, backed by the government, or from a friend, small business loans come in all shapes and sizes. Some of the most popular options include:

  • Friends and Family: One of the cheapest and quickest options is asking family or friends for a loan. While it's never easy asking for money, loans from relatives or friends can be gotten quickly and without interest.
  • Government: While the U.S. Small Business Administration does not make direct loans to small businesses, it does set the guidelines for loans made by its partners, which include lenders, community development organizations and microlending institutions. When a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty that the loan will be repaid. However, SBA-guaranteed loans are not available to small businesses that have access to other financing on reasonable terms. The requirements for SBA loan change as the governmentalters its fiscal policy and priorities to meet current economic conditions.
  • Conventional Loans: These are loans from private lenders that are not guaranteed by the government. The terms of the loan, which are often for larger amounts, are based on numerous factors, including how much is being borrowed and what it is needed for.
  • Equipment: Equipment loans and leases provide money to small businesses for office equipment, like copy machines and computers, or things such as machinery and tools. Instead of paying for the large purchases up front and all at once, equipment loans allow business owners to make monthly payments on the items. In order to be approved for an equipment loan, banks typically require a history of operations.
  • Lines of Credit: Also called working capital loans, these provide small businesses with day-to-day cash flow needs.  Not recommended for larger purchases, lines of credit are available for as short as 90 days to as long as several years. Payments are based on how much is borrowed.

Other types of loan options that small businesses have at their disposal include inventory financing, accounts receivable financing, vehicle financing, credit cards and letters of credit.

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