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What You Need to Know About Small Business Loans

As a business owner, you may find yourself seeking a business loan in order to take the next step in your company! Whether you're looking to buy new equipment or invest in a new avenue for your business, finding the right loan for you may prove more challenging than you'd originally anticipated. Like with personal loans, there are many different types of small business loans and you'll need to make sure you have the right documentation when you apply. Read on to learn more about business loans and how you can apply today!

Preparing for Taking out a Loan

First and foremost, contact your accountant. They'll be able to help you financially plan for your business and gather your paperwork. Your accountant can also help you decide the best type of loan to pursue based on your type of business and your current finances.

For many loans, you will need to provide many types of documentation including, but not limited to:

  • The amount of money you would like from a loan

  • Detailed plans of what the money will go toward

  • The type of entity you are

  • Your personal and business credit scores

  • You business plan

  • Business balance sheets

  • Business bank account statements

  • Licenses

  • Permits

  • Leases

  • Assets

  • Liabilities

While this may not be an all-inclusive list, gathering your paperwork is a great first step in preparing to take out a small business loan!

5 Types of Business Loans

There are different types of small business loans that can fit different needs for your business depending on the amount you need and the length of the loan you want to take out!

1. SBA Loans

The most common type of long-term loan is the SBA loan. The U.S. Small Business Administration has tons of different funding programs to help you get the money you need to grow your company. SBA backed loans also come with unique benefits depending on the loan. For example, some programs don't require collateral or have lower interest rates than competitor small business lenders. On the Small Business Administration's website, there's a lender match you can use to explore small business lenders that may be the best fit in funding your small business loan. They can also provide financial advice as experts in small business!

2. Business Line of Credit

Similarly to a personal credit card, a business line of credit allows you to borrow up to a certain amount and you only pay interest on the amount you borrow. This is also potentially a more long-term plan, as you can reuse and repay as often as you need as long as you don't exceed the limit. In addition, you can find some business lines of credit that are unsecured.

Online or bank? Online small business lenders may have looser qualifications, but they may also charge higher rates with lower credit limits. How you borrow is ultimately up to you (of course!), but it may be helpful to chat with your accountant or financial adviser to make sure you have all the facts before making such a big decision.

3. Invoice Financing

Think of invoice financing as borrowing money against your accounts receivable. Especially for businesses that don't invoice regularly or want to improve their cash flow, this may be a great option for you! Essentially, your unpaid invoices are used as collateral for your loan. There are a few different way to structure this type of financing. The two most common are factoring or discounting.

Factoring: Your company essentially sells your outstanding invoices in accounts receivable to the lender who will pay you a percentage of what the invoices are actually worth. After receiving payments for these invoices, they will take a percentage out for you and then keep a percentage and any fees associated.

Discounting: The main difference between factoring and discounting is who is collecting the invoice payment. Discounting allows your company to collect the payment rather than the lender, and then the lender advances your business up to 95% of the total invoice amount minus fees and interest.

4. Equipment Financing

If you're a business using machinery or equipment to offer your product or service, at some point you will likely want to replace or upgrade your equipment. Equipment financing may be a great choice for you! Similarly to a car loan, you would use your loan to purchase the equipment then pay back the loan in fixed payments with interest over a period of time. With an equipment financing loan, your newly purchased equipment would serve as your collateral. If equipment financing doesn't seem like quite the right fit, you could also explore equipment leasing with a buy-out option!

5. Merchant Cash Advance

Many view merchant cash advances as a last-resort loan, but it's important for you to understand what they are in case this may be the best fit for your company. These are typically best for companies where a majority of their income comes from credit or debit card sales. The lender will give you a lump sum in exchange for part of your future credit or debit income OR an upfront lump sum with fixed debits from your bank account. The Automated Clearing House, or ACH, would handle these withdrawals. Depending on which path you choose, you will have to pay different amounts of interest and fees. The most attractive features of these types of loans are that they are unsecured and they are quick. However, like with many unsecured loans, interest rates are typically higher and fees are, too. Be sure to read the fine print extra carefully for these types of loans or have your business lawyer take a peek!

There are many types of small business loans that may be right for your business, and we hope this overview helped give some guidance on the type of loan you might pursue. Like you taste in food, your finances are a very personal choice and everybody has slightly different tastes in how they manage!

Do you have a story about your business loan experience? Share with us:


Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at

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