Female small business owner applying for small business loan
Essential Guide to Small Business Funding Small Business Funding

What is a Small Business Loan?

Lack of working capital and other cash flow woes are the most common problem reported by small business owners, especially when they’re planning for growth. Many enterprises face up-front costs before the anticipated income starts rolling in, but what can you do to kickstart your growth if you don’t have cash-on-hand to fund your ambitious plans?

That’s where small business loans come in.

The word “loan” can be a turn-off for many small business owners, especially if you’re an established business and have settled into a comfortable working rhythm with steady profits every month. But small business loans are nothing to fear—in fact, they can have a significant impact on your business’s bottom line.

A lot of anxiety around small business lending stems from simply not understanding the terminology or how small business funding works. We’ll explore different types of small business loans in a later section of this guide, but here, we’re going to focus on the basics—what is a “small business loan”?

What is a small business loan?

It’s actually pretty simple.

A “small business loan” is initiated when a borrower—typically you, the business owner—borrows a sum of money from a lender (such as a bank, or an alternative lender like Greenbox Capital®). The sum of money that you borrow is based on an agreed-upon set of pre-specified terms for repaying the principal of the loan plus interest over a period of time.

In other words, if you own a business and borrow money from a lender on behalf of your business with a promise to pay it back, you’ve taken out a small business loan.

Where can you get a small business loan?

Small business loans are typically available from three sources:

  1. A bank or credit union: This is the most traditional source of capital. Banks and credit unions are particularly well known for providing term loans. They are a good option for most businesses, but typically have higher, less flexible qualification criteria, and most applicants are rejected.
  2. Small Business Association (SBA): “SBA loans” are technically provided by a bank, but they are guaranteed by the Small Business Association. This helps reduce the lender’s risk and encourages lenders to approve more loans for small businesses. SBA loans generally have the best terms, but they are the hardest to acquire, sometimes taking months for approval.
  3. Alternative Lenders: Also known as “online lenders”, alternative lenders like Greenbox Capital are often ideal for shorter term funding, as well as for applicants traditional banks won’t approve, such as businesses with low credit. These lenders offer a number of small business loans with flexible terms based on your business’s history and potential.

Common Types of Small Business Loans

There are many different types of small business loans, each with their own set of terms and qualifications. We explore them in more detail in this guide, but here’s a quick overview to get you started:

Term Loan

Description Lump sum repaid at regularly scheduled intervals over length of term, plus interest.
Typical Term Length 1-5 years
Cost of Capital Lower than other funding options
Approval Difficulty Higher than other funding options, with in-depth applications and long wait times
Common Uses
  • Buying real estate
  • Purchasing another business
  • Renovating or remodelling
  • Planning long-term expansion
Other Considerations May carry early repayment charges

Short Term Loan

Description Similar to a term loan, but with a shorter term length
Typical Term Length Varies by lender
Cost of Capital Higher than other funding options
Approval Difficulty Easier application process with less paperwork and faster approvals
Common Uses
  • Short-term funding needs
  • Immediate or emergency funding needs
Other Considerations Ideal for applicants with low credit

Merchant Cash Advance

Description A “non-loan” form of financing in which a lender provides working capital up front in exchange for a portion of your future credit and debit sales.
Typical Term Length Shorter terms, typically less than 1 year
Cost of Capital Higher than other forms of loan
Approval Difficulty Streamlined application process with greater chance of approval
Common Uses Funds can be used however business owners choose
Other Considerations Fees are charged based on a factor rate rather than traditional interest/APR rates

SBA Loan

Description Low cost loans offered by intermediaries and guaranteed by the SBC (or BDC in Canada)
Typical Term Length Longer terms
Cost of Capital Lower rates than other funding options
Approval Difficulty Very difficult, sometimes taking months
Common Uses
  • Purchasing or upgrading real estate
  • Purchasing machinery, equipment, inventory, or supplies
Other Considerations Multiple types of SBA loan are available depending on your needs

Invoice Factoring

Description Leverage unpaid invoices to gain access to working capital.
Typical Term Length 60-90 days
Cost of Capital Varies by lender and invoice amount
Approval Difficulty Easier than other loans because financing is secured by invoice
Common Uses
  • Cover operating expenses
  • Fill in cash flow gaps
Other Considerations Many types of invoice financing are available

Business Line of Credit

Description Provide a maximum credit amount from which funds can be drawn and repaid as needed.
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant, typically lower than other forms of funding
Approval Difficulty Varies by applicant
Common Uses
  • Cover operating expenses
  • Purchase inventory
  • Fill seasonal gaps in cash flow
  • Cover unexpected emergency costs
Other Considerations
  • Can be fixed or revolving
  • Can be secured or unsecured

Equipment Financing

Description Financing specifically designed to purchase new equipment
Typical Term Length Varies by lender
Cost of Capital Varies by lender and applicant
Approval Difficulty Easier than other loans because financing is secured by equipment
Common Uses Purchasing new equipment
Other Considerations Can only be used to purchase new equipment

Commercial Real Estate Loan

Description For the express purpose of purchasing or improving commercial real estate.
Typical Term Length 20-30 years
Cost of Capital Varies by lender and LTV
Approval Difficulty High
Common Uses Purchase or improve commercial real estate
Other Considerations Property acts as collateral to secure the loan.

Microloan

Description Small loans under $1,500 offered by non-profit organizations
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant
Approval Difficulty Moderately difficult
Common Uses
  • Covering start up costs and operating expenses
  • Purchasing inventory or equipment
  • Boosting marketing and promotions
Other Considerations Ideal for underserved entrepreneur communities

Personal Loan for Business Use

Description Loans based on your personal financial profile, not your business
Typical Term Length Varies by lender and applicant
Cost of Capital Varies by lender and applicant
Approval Difficulty Easier than other forms of business funding, especially if you have good personal credit
Common Uses
  • Purchasing real estate or equipment
  • Remodelling or renovating
  • Boosting marketing and promotions
  • Stocking up on inventory and supplies
  • Continuing education and training
Other Considerations Business loans are always recommended for businesses who can qualify

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