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From the SBA to invoice factoring companies, there are several different entities that offer ways for businesses to obtain the funding they need. — Getty Images/howtogoto

If you can’t afford to bootstrap your business but can’t or don’t want to obtain investor capital, taking out a business loan is a great option to get the funds you need to start or grow your company. However, there are many different types of business loans to consider, all of which can offer different benefits for different circumstances.

For business owners who are considering borrowing money, here’s a guide to the basic types of small business loans and how to apply for them.

Types of small business loans

Traditional or term loans

A term loan, which is also referred to as a traditional loan, is financing borrowed from a bank that has to be repaid over a set period of time. This could be either a short or long period, ranging from a few months to several years. The size of the loan you may receive depends on several factors, including the lender’s requirements and the loan amount requested, as well as your business’s industry, size, and history.

SBA loans

The Small Business Administration (SBA) funds several loans that are guaranteed by the federal government. The most common type of SBA loan is the SBA 7(a) loan. It has a maximum limit of $5 million and is generally used to purchase real estate, as well as for working capital and debt refinancing. The SBA 504 loan also has a maximum limit of $5 million dollars and must be used for major fixed assets, such as existing land or building new facilities. SBA microloans are extended up to $5,000 with the intention to help small businesses grow and invest in their working capital, inventory, and equipment.

[Read more: How to Apply for a Small Business Loan for Your Startup]

Equipment financing loans

An equipment financing loan is one that allows owners to purchase equipment and machinery for their operations. Businesses can use a loan toward office equipment and devices for employees or to manufacture products. The size of the loan is determined by the value of the equipment it is being used for. Unlike other loans, businesses will need to make a down payment before receiving the loan. Most equipment-financing lenders have term limits of up to 25 years and a minimum of $1 million.

The most common type of SBA loan is the SBA 7(a) loan. It has a maximum limit of $5 million and is generally used to purchase real estate, as well as for working capital and debt refinancing.

Merchant cash advances

A merchant cash advance (MCA) allows businesses to access a lump sum of cash through a lender in exchange for a portion of their future sales. Unlike typical business loans, the cash advance is repaid through business sales on a routine basis. This is a good lending option for small businesses that need access to cash quickly and that generate a high volume of sales.

Specialty loans

Specialty loans are approved for businesses that meet certain requirements. These can be based on the owner’s age, gender, ethnicity, or the industry the business operates in, such as the medical, agricultural, or nonprofit fields. These loans are not available to everyone, but they can be a helpful resource to any business that is eligible for one. The SBA, for example, offers several loans for minority-owned small businesses.

[Read more: 10 Resources for Minority-Owned Businesses]

Other business finance options

If you are denied for one of the above types of loans, you can explore loans from alternative non-bank lenders, or pursue one of these other financing options:

  • Government and private grants. Countless grant programs exist for small businesses that meet certain requirements. These grants are typically funded by the government or by private corporations and don’t require their recipients to pay back the funds they receive.
  • Lines of credit. A line of credit allows businesses to withdraw the amount of cash they need and only pay interest on the money they take out. This is a flexible option for businesses that only need extra cash on occasion.
  • Invoice factoring and financing. An invoice factoring company will front you the money for your unpaid invoices, minus a fee, so you can get instant access to cash. Then, your customer directly pays the full invoice amount to the invoice factoring company.
  • Crowdfunding. Crowdfunding campaigns through sites like Kickstarter and Indiegogo have become a popular way for businesses to raise money from a large number of backers who each contribute a small amount of money in exchange for incentives like free products/services when the business launches or even a stake in the company (if it’s through an equity crowdfunding platform).

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published June 02, 2022