Know Your Loan Options

If you own a small business, you may very well find yourself in need of financing to get your operations going or take them to the next level, particularly in a lagging economy. There’s a wide array of financing sources available, from angel investors to venture capitalists. But when economic times are tough, you’ll likely find the most practical financing option among the variety of small business loans specially designed to meet the needs of entrepreneurs just like you. Here’s a list of some of the more popular types of small business loans.

1. Working capital loans: These loans fluctuate with your business’s day-to-day cash flow needs. The maximum amount you can borrow is based on your accounts receivable. Also referred to as an operating loan or line of credit, these loans generally aren’t available to cash businesses like certain dining and retail establishments. Typically they aren’t granted to pay for inventory either.
2. Term loans: Term loans were established to help finance business needs like computers and other equipment. They require that borrowers make monthly principal and interest payments. The amount of principal you owe will decrease as you make payments each month. The length of a term loan should correlate with the useful lifespan of the piece of equipment being financed. For example, term loans for computers shouldn’t exceed three years. And most term loans have a maximum amortization period of five years.
3. Leases: The requirements are similar to those of term loans, because the risks to the lender are the same. However, there can be tax benefits to leasing. Leased goods are generally owned by the financial institution or a third party. Like term loans, the amortization period should closely match the useful life of the asset purchased.
4. Small Business Administration loans: Banks and other lending institutions offer a number of SBA-guaranteed loan programs to assist small businesses. They’re typically an option when a business falls slightly outside of a bank’s standard lending criteria. The SBA itself doesn’t make loans, it guarantees the loans made to small businesses by other institutions. Below are some of the most common types of SBA loans.

   
   7(a) loans: Designed to help most types of small businesses, these offer up to $1 million in financing for equipment, real estate, working capital, or purchasing an existing business. In most cases, the SBA will guarantee 75 percent of these loans and have a maximum amortization of six years. They were designed for existing businesses rather than startups.

   
   CDC/504 loans: These loans are typically used to purchase real estate and/or equipment by companies that are modernizing or expanding. This “brick and mortar” financing is delivered by certified development companies, which are private, nonprofit corporations set up to further the economic development of their communities. The SBA may guarantee as much as 90 percent of the appraised value of real estate needed for expansion.

   
   Microloans: These are designed to help startups purchase what they need to launch a new business, such as computers and equipment. You can borrow up to $25,000 for up to six years and interest rates won’t exceed prime plus 4 percent.

   
   Fastrak loans: Some large national banks are able to approve loans of up to $100,000 without consulting the SBA. The SBA may guarantee up to 50 percent of the loan value.

Susan Konig is a freelance writer in New York. She has been writing about finance for 15 years, for publications including Crain's New York Business, The New York Times, and Registered Representative, a national publication for financial advisors.