Lenders are awarding fewer small business loans. Knowing what type of loan best fits your business needs, and finding lenders that specialize in those loans will help you to increase the likelihood of getting funding. There are a wide variety of loan options out there. Loan products vary by lender, interest rates change based on loan product type, and loans fit different categories and perform in different ways. For example a secured loan may carry a lower interest rate and a longer term. Understanding what is available is a must if you want to succeed in getting funding in the business world.
First let’s take a look at loan categories. You have a few options, secured or unsecured, long or short term. Secured loans use assets for collateral, unsecured are based on credit worthiness. Short-term loans must be repaid in a year or less. Long-term loans may mature anywhere between one year and seven.
Next, let’s look at interest rates. The type of loan you get will impact the amount of interest you will pay. SBA loans, for example, typically carry low interest rates from 5.8% to 8.5%, where as merchant cash advance loans are going to carry very high interest of 18% to 22%. Understanding that the cost of the loan will be tied to the type of loan, loan product, the term, and whether or not it is secured is critical. Interest rates for business loans vary from about 3% to over ten times that amount.
Last, understanding the variety of loan products available will help you select the loan that best fits your needs, and increases your chance of getting funding. For example, if you are a doctor, lawyer, or dentist, you could get a professional loan at 5% to 10% interest, which might be a better option for you than an equipment financing loan, even if you are using it to finance the purchase of equipment. The following lists a few of the loan products available to businesses, and the average interest rates they tend to carry.
- SBA loans- 5.8-8.5%
- Accounts receivable factoring loans- 10-15%
- Merchant cash advance- 18-22%
- Start-up loans- 5-7.5%
- Franchise start up loans- 10-30%
- Business acquisitions- 4.75-7.5%
- Line of credit- 5-24%
- Professional loans- 5-10%
- Equipment financing- 8-25%
- Construction financing- 7-8%
- Hard money equity loan- 15-30%
- Working capital loans- 3-7%
- A/R or P.O. Financing- 8-30%
- Peer to peer loans- 6-36%
Take time to explore and understand your business financing options, and look for a lender that specializes in the loan type that best fits your needs.
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