Loans have always been an entrepreneur’s best friend. It not only provides financial stability to the existing business but sets up a strong base for the new businesses in the market. Understanding and choosing the best loan option is of utmost importance if you want to use the full advantage that small business loans brings to your business. Every business is different and so are the loans that are on offer in the market. There are various types of loans depending on various requirements of the borrower.
This type of loan needs a collateral or an asset from the borrower’s side for e.g. house, car etc. as a security deposit against which a loan is provided. If the loan is not repaid back within the terms and conditions agreed upon then the lender has the right to repossess or sell the collateral to regain its lost money. The interest rate is normally lower compared to other methods of loan options available as the loan is secured. One can keep the equipments or other assets in the business as collateral also.
Unsecured loans are those loans where the borrower is not asked to present its collateral or any other assets against a loan. Various banks and other financial institutions provide unsecured loans in cash to the borrower. The interest rates are comparatively higher and hugely depend on the type of funding and the size of your business amongst other factors.
In order to promote small scale business, the government has set up SBA (Small Business Administration), a federal agency to provide loans to the small entrepreneurs. Here the government has its own set of both private and public lenders willing to work with SBA through which business loans are provided. There are separate criteria that a small business must fulfill in order to be a part of the various SBA Loan programs. The various types of SBA loans are:
General small business loans 7(a): The most common type of general loan that SBA arranges through its pre-approved lenders. The maximum loan amount is $5 million; however there is no minimum loan amount set. Interest rates for the 7(a) loan program are decided between the approved lenders and the applicant seeking an SBA loan and vary according to the time frame and scale of the business.
Micro loan program: This program arranges loans up to $50,000 to facilitate small businesses and approved not for profit child care centers to grow. The requirement of the loan again differs from lenders to lenders arranged by the SBA. Collateral or assets of the entrepreneur and personal guarantee are some of the requirements for seeking micro SBA loan program. 6 years is the maximum term allowed for repayment. Interest rates vary from time to time but it generally hovers around 8-13%.
Real estate and equipment loans CDC/504: CDC(Community Development Center) loans are provided to finance fixed assets like equipments and real estate development. The loan amounts are decided by the lenders looking at the goals that the business strives to achieve. CDC loans are more of a community based improvement programs. The fixed assets are used more of a collateral and the interest rates are generally higher than the current market rates. Maturity terms are normally of 5 to 10 years.
Disaster Loans: SBA provides loans at low rate of interest where disaster had struck and is declared by the government as a disaster area. Even non-entrepreneurs are eligible for a disaster loan by the SBA for longer periods of time with low interest rates.
Line of Credit
This is a kind of loan where an arrangement is made between the bank and the customer. The bank permits the entrepreneur to maintain a maximum loan balance limit. The borrower can go ahead and withdraw money within the limit agreed between them. The interest is charged only the amount of money drawn from the account. This helps a great deal to an entrepreneur to keep a tab on his expenses and pay only to the extent of what is used.