What Types of Small Business Loans Are There?
Updated: Jan 10
Seeking out a small business loan can often be a dizzying process. What’s a reputable funding source, and what isn’t? Will I get approved for a loan? Is there a way I can get a loan that can benefit me beyond just accessing money?
We’ll cover all these questions and more as we outline the most popular types of small business loans, from banks to online lenders to microloans and crowdfunding.
If you’re looking for more beyond this, check out our Ultimate Guide to Getting a Small Business Loan in 2021, where you’ll find access to more in-depth information on the ins and outs of small business loans.
Bank Loans and Small Business Administration Loans
Probably the most traditional route for small business owners, banks and the Small Business Administration (SBA) can connect you with loans to grow your business. However, it should be noted that bank lending has declined significantly for small businesses in recent years, and if you’re a business younger than 2 years, you’re going to have an even tougher time getting a loan from them.
Banks have their own kind of lending criteria depending on where you go, and often offer loans for specific business needs, such as loans for real estate, vehicles, equipment, lines of credit, and so on.
The SBA doesn’t lend money outright, but rather connects small business owners to other lenders with more universal guidelines through their loan programs. This streamlines the process to make it easier for small business owners to find and apply for loans, although it doesn’t necessarily make it easier for them to get approved.
Merchant Cash Advances
If there ever were a kind of small business loan where the image of a haunted house with a “Beware all ye who enter here” sign on the gate would accurately represent it, it would be a merchant cash advance.
Merchant cash advances are easy to apply for, accessible because they’re often offered online, and ubiquitous. If you just Google “small business loan” a merchant cash advance is sure to be the first ad to pop up.
While you might be tempted by the fast access to cash, it often isn’t worth the ensuing debt and other problems associated with merchant cash advances.. This is why we advise caution when working with these kinds of loans.
Often, merchant cash advances are exorbitantly expensive, with APRs of up to 94% (or even more). These terms can even change throughout the loan agreement, if you’ve agreed to variable interest rates, which make it even more difficult to keep up with paying back these loans.
Online lenders often have unclear terms in the fine print, and those that take off a percentage of credit card sales mean that you as the borrower have far less control over how you pay back your loan, and have a tightened cash flow.
Luckily, there are alternatives to merchant cash advances, such as the loans talked about here. They may not be as magically instantaneous as an online lender might be, but they’re definitely worth it in order to keep you from getting entangled in high-interest debt.
If you’re not looking for a large loan, you might want to consider a microloan. Microloans are a form of lending that has really deep historical roots and has been used throughout the world, from boosting women’s entrepreneurship in developing countries to helping Main Street businesses get up and running.
Microloans are really helpful for small businesses that are just starting out because they often come with very low interest rates. If you take out a microloan and successfully pay it off, it will then open the doors for more lending opportunities in the future for your business!
Projects you might want to use a microloan for are for circumstances where you might need one small specific piece of equipment, or if you need some working capital to get prepared for a larger-than-usual order.
For example, many entrepreneurs in the retail or food space get microloans to get themselves outfitted with all the capital needed to set up a booth at a farmer’s market or festival stand. Beyond just their products, they’re going to need tables, tents, warming and cooling equipment, display stands, a point-of-sale system, etc. This would be a perfect opportunity for a microloan!
Different lenders will have different criteria on what accounts for a microloan, and a microloan can be funded by many different needs. Some traditional lenders offer microloans, or you can crowdfund them. The SBA considers a microloan to be anything under $50,000, while Kiva, a microloan crowdfunder, offers microloans from $1,000 to $10,000.
Crowdfunded Small Business Loans
Finally, there are small business loans that you can crowdfund from your closest customers, family members, friends, and community at large! If you’re looking for a loan that has more bang for your buck in terms of marketing potential and customer relationship enhancement, you should consider a crowdfunded small business loan.
You might be more familiar with gift or reward crowdfunding, like with GoFundMe or Kickstarter. This is when a business raises funds from their community, but they don’t give anything back other than thank-yous or maybe perks such as a free t-shirt.
Loan crowdfunding is a similar premise, except you get to actually pay back those who invest in your campaign principal plus interest. This is preferential in many ways for small businesses, as it incentivizes people to invest - because wouldn’t you rather get money back plus interest than get a t-shirt?
Because of this incentive, loan crowdfunding also helps to strengthen your relationship with your customers and community. Think about it this way: if a customer invests in your business, they want to see you succeed, because that means they’ll also succeed. Because of this, they’ll be more likely to come to your business and spend money, as well as hype you up to their friends so that they’ll come and spend money at your business.
Small businesses that crowdfund loans through Honeycomb Credit see on average a 60% year-over-year revenue increase after running their crowdfunding campaign, due to these relationships.
Other factors in this growth are that crowdfunding campaigns often come with press attention (especially if you’re one of the first businesses to offer a loan crowdfunding campaign in your area), and also just generally help get your business out in front of more people.
As you can see, crowdfunding your small business loan can help you grow your business by accessing the capital you need, and also has many benefits besides the money that can boost your growth.
Access Fair Loans from Your Neighbors
Getting a loan for your small business doesn’t have to be scary, especially if you choose to crowdfund it from your community! Find out more about how you can grow your business with crowdfunding by heading to www.honeycombcredit.com/grow, and fill out the form below for more information.