Understanding Different Loans Available to Small Businesses

Starting or expanding a business can be exciting. Whether you are inventing a new product, using your skills to become your own boss, or expanding a business already in operation, there are many variables to consider. You have visited the Small Business Administration Office and collected helpful information and advice. Now it is time to make some decisions. Is your market research correct and your business plan sound? Do you have enough capital? Do you qualify for an SBA loan, or should you consider another route? Understanding the types of loans available to you is an essential first step in answering the loan question.

Secured and Unsecured Business Loans

You can get a loan from a traditional bank, and whether it is secured or unsecured will depend on your credit rating and available collateral. For a secured loan, you will typically get a lower interest rate, but have to put personal property (house, car, etc.) up as collateral to reduce the bank’s risk. Some business owners are hesitant to do this because of the effects it can have on their personal lives if their business is not as successful as they expected, or there is an interruption in the marketplace beyond their control. An unsecured loan will depend heavily on the borrower’s credit rating, and because there is no collateral, the bank will set a higher interest rate.

SBA Loans

These government-backed loans are often considered an attractive option because of their low-interest rates and longer payment terms. These favorable terms often translate into less interruption of a business’ cash flow. But these benefits come with some trade-offs. In order to qualify, a company must have already been in operation for two years, and provide a substantial amount of paperwork to demonstrate they have met the minimum revenue requirements and FICO scores. The application process itself can take up to three months, so this is not an option if your business needs the money more quickly.

You also may be eligible for additional loans if you are in construction, real estate, or trying to restructure your business model to buy out shareholders or change your capital structure. Working with your local SBA office or another financing expert will be critical to understanding these options. But if you are a mom-and-pop shop or other small business, understanding the difference between SBA loans, secured, and unsecured business loans will the first step in starting or expanding your business.