Running a small business is hard work.
It would be hard enough to manage a company if you had control over every variable. But as every small business owner knows, problems that are outside your control will materialize sooner or later.
For example, an employee driving a landscaping truck might cause a traffic accident, causing insurance premiums to shoot up. A fire might destroy a significant chunk of inventory in a retailer’s warehouse. A new restaurant might open up nearby, forcing a restaurateur to invest heavily in unexpected marketing and promotional activities to keep revenues up. The list goes on.
Because of the unpredictability of business, many small business owners are forced to look to outside sources of financing to keep their companies afloat during the more difficult periods. In fact, a recent study found that 53 percent of small business owners have applied for some kind of financing at least once over the last five years.
Are you a small business owner who needs some cash? If so, you’ll quickly find out that there are a number of different financing options at your disposal. You’ll have to do some research to figure out which financial vehicle makes the most sense for your specific situation.
In addition to figuring out how much money you need, how fast you need it, and which lenders are most likely to approve your small business loan, you’ll also have to consider the various loan terms associated with each lending option. While the specific parameters that lenders offer will vary on a case-by-case basis, generally speaking, here are the typical small business loan terms you can expect from the following financing options:
- Bank loans: While banks are lending fewer and fewer dollars to small businesses in the wake of the 2007–2008 financial collapse, it’s not impossible to secure funding from a traditional financial institution—it’s just unlikely. Banks tend to prefer signing off on loans that last anywhere from three to 10 years. The average loan size hovers near $500,000, but banks are occasionally willing to lend as little as $50,000 to small businesses. Interest rates will vary depending on the size of the loan, the length of it, and each borrower’s credit score, among other things. If approved, you should get your loan within two months. Keep in mind that you may be required to put up collateral in order to secure financing.
- Merchant cash advance: If your company generates a lot of income through credit card sales, you can opt to secure financing through a merchant cash advance. Essentially, this type of lending gives you money up front in exchange for a portion of your future credit card receipts. Merchant cash advances can be obtained rather quickly—within a business day or two. Depending on your volume of sales, you may be able to secure anywhere between $5,000 and $500,000 this way. Though merchant cash advances are short-term financial vehicles, you’re usually expected to repay them within three to 18 months—and they are quite expensive, with APRs reaching as high as 350 percent.
- SBA loans: Loans from the Small Business Administration (SBA) can be quite tricky to secure. In the event you qualify, it can take as long as three months before money is in your bank account. The SBA is willing to lend as little as $10,000 to small businesses; the average amount a borrower secures is about $350,000. SBA loans can last anywhere from three to 25 or even more years. Interest rates are determined by the length of the loan and how much money you’re taking out.
- Business lines of credit: Depending on your business’s needs, your history, and your creditworthiness, you may qualify for a business line of credit ranging from $10,000 to $500,000. If you qualify, you should be able to be approved pretty quickly. You can think of a business line of credit as a credit card for your company. Pay your balance off in full each month and you won’t have to worry about incurring hefty interest charges or maxing out your credit line. Business lines of credit are revolving. But beware that if you max out your credit line and are unable to pay it back, you may find yourself worse off than you were before.
- Loans from non-bank lenders: Unlike most financing options, non-bank lenders offer small businesses a streamlined approach to small business loans. Believe it or not, the application process can be wrapped up in 15 minutes or less. Once approved, money can be deposited in your business’s bank account within 24 hours. Non-bank lenders will generally offer loans that last anywhere from one to five years. Depending on your situation, you may be able to qualify for up to $1 million in funding. Because non-bank lenders are willing to fund businesses without requiring them to put up any collateral—even if they had suboptimal credit scores—these loans understandably have slightly higher interest rates.
Are you in the market for a small business loan? Don’t lock yourself into a contract you’ll regret down the line. Instead, look for an honest lender that is transparent about fees and rates. That way, there won’t be any surprises when it comes time to repay.