As a small business owner, you may have a dream of your enterprise growing into a large corporation or a publicly listed company. However, expanding a company needs more capital to pay additional expenses such as new employees’ salaries and other operating expenses. According to the Wells Fargo Small Business Index, entrepreneurs start their business with $10,000 on average. Therefore, when it is time to grow a business, not every business owner has the savings to cover the increased cost. In this situation, entrepreneurs must apply for a small business loan.
What is a Small Business Loan?
A small business loan is a financial means to help new businesses obtain the necessary capital to support their growth. The 2019 Federal Reserve Report indicates that startups’ companies are now the primary source of U.S. job growth. Still, these new businesses are much more likely to have challenges in obtaining the capital. To solve this problem, organizations such as the Small Business Administration (SBA), and banks have loans that are specially for small businesses. These small business loans usually have fewer requirements and more flexible lending standards, making new businesses easier to access.
What are the Types of Small Business Loan?
1. Term Loan
The first type of small business loan is the term loan. The term loan is a lump sum of capital with a specific repayment schedule and fixed interest rate. The “term” in term loan stands for its fixed repayment term length, usually one to five years long. And the fixed interest makes the payment constant for the lifetime of the loan term. Small businesses can borrow capital from a lender and then pay back in a set borrowing term, which allows them to cover a large and one-time expense.
2. Line of Credit
The second type is the line of credit. The line of credit has more in common with a small business credit card than with a small business loan. Lenders will set a limit on the amount of capital for borrowing. Once the borrowers draw the fund, the interest begins to accumulate. When borrowers pay down the balance, the amount they pay will be available again. The line of credit allows business owners to obtain working capital quickly and build their business credit rating.
3. Equipment Financing
The third type of small business loan is equipment financing. This kind of loan is especially to pay for the company’s purchase of equipment and machinery. To apply for this loan, banks will require business owners to use the equipment as collateral. If the borrower can’t pay back, the bank will use the equipment to cover the cost.
4. Merchant Cash Advance
The fourth type is the merchant cash advance (MCA). It is a cash advance based upon the debit and credit card sales deposited in a business merchant account. Business owners can get an upfront sum of cash in exchange for a slice of their future credit and debit card sales. The Merchant Cash Advance is easy to approve. According to the Federal Reserve’s 2017 Small Business Credit Survey, 79% of businesses that applied for it were approved.
5. Invoice Financing
The fifth type of small business loan is invoice financing. Invoice financing works by using unpaid invoices as collateral to obtain an upfront sum of cash. With invoice financing, small business owners can typically get 85% of the value of their invoices in advance. Most of the 15% will be paid once the customer pays off the invoice. To use invoice financing, small business owners also need to pay a factor fee, usually 2%-4% of the invoice value.
6. Invoice Factoring
The sixth type of small business loan is invoice factoring. With invoice factoring, small business owners can get an upfront sum of cash based on the total value of their unpaid or outstanding invoices. Lenders will evaluate the risk of small business owners, and then typically provide 50%-80% of the invoice value. The invoice factoring also requires a factoring fee, which is generally 3%-5% of the invoice value.
What are the typical Business Loans Requirements?
When applying for a small business loan, checking business owners’ personal credit is usually necessary. Lenders also need to check the company’s cash flow and income. They will calculate the debt-to-income ratio of the business to assess the risk. Another thing lenders will check to determine the risk is the industry. If the type of business is at low risk, it will be easier to get the loan. Some lenders also require business owners to provide the current amount of debt and a track record of at least two years. For some collateral-based loans, borrowers need to offer assets for collateral.
Where to Apply?
Celeri Network provides all these six types of business loans. The loans Celeri Network offers are ranging from $5,000 to $5,000,000. To apply for a loan, business owners only need to fill out a simple online application, and no trips to the bank are required. Celeri Network also provides tailored loan options, which ensures the loan works for the company.