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At some point in your business journey, you will likely find yourself in need of more capital. Whether it’s to accelerate growth or cover a seasonal cash flow shortfall, adequate financing can prove beneficial for small business owners.
In fact, the vast majority (82%) of small businesses close their doors due to poor cash flow management. Another 29% simply run out of cash.
Fortunately, there are many small business lending solutions available. Banks, online lenders, and even family and friends can help you secure the money you need to grow your business.
To help you navigate small business lending, we outline the different types of loans and share statistics on approval rates and average loan amounts to help you choose the right option for your business.
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There’s no shortage of small business loan options available to you—but each has its own pros and cons, as well as different repayment terms. The repayment terms are extremely important to pay attention to. For example, if your business has a large cash flow cycle, short-term business loans with frequent payments could leave you in a cycle of debt payments.
A business loan is a lump sum of money that small business owners can get from banks, online lenders or other financial institutions. Companies have a set deadline to repay the lender. (95% of business loans have fixed interest rates.)
These can be short-term, medium-term or long-term loans, and depending on the lender, the time to receive funding can vary significantly. For example, medium term business loans take longer to be approved through a bank versus an online lender.
Short-term business loans have a short repayment period (usually between 18 months and 3 years), while medium and long-term business loans have longer repayment periods (up to 10 years).
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The US Small Business Administration (SBA) is a government-backed loan available through various lenders, including banks and credit unions. SBA loans are beloved for their enviable interest rates and loan terms.
There are many variations and options when it comes to SBA loans, and amounts can vary from $75,000 to $5 million, so be sure to check the SBA website for the right type of loan for your business.
There are many avenues to explore if you are looking for money to start a business. A popular route is a small business loan, such as an SBA microloan, which is a loan of up to $50,000. managed by non-profit community lenders and can come with favorable interest rates and terms. Tina Orem, Small Business Expert at Nerd Wallet Business Line of Credit
A line of credit is a one-time payment that small business owners can use for expenses—such as inventory, rent or new machinery. Unlike business term loans, major banks provide companies with a line of credit without fixed repayment terms. It is a short-term loan that can range from $1,000 to $250,000.
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According to the Small Business Credit Survey by the Federal Reserve Bank, 54% of US small businesses applied for a business loan or line of credit in 2018.
Specially designed for financing equipment, this type of business loan can help you buy the commercial refrigerator, tractor or computer equipment you need. Lenders will lease equipment to you while you pay for it in monthly installments. Once the amount is paid, your business will own the equipment.
According to the Equipment Leasing and Finance Association, nearly 8 in 10 US companies use some form of financing when purchasing new equipment. Banks were the primary lender for 43% of equipment finance deals.
A personal loan is a type of financing based on personal credit to help accelerate business growth in a short amount of time. It’s available from credit unions and banks and typically ranges from $1,000 to $50,000.
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A merchant cash advance (MCA) is a type of financing that allows small businesses to borrow against future earnings. Lenders provide companies with quick access to capital. The money is returned based on a percentage of future daily sales.
A business credit card is a simple way to make your everyday spending work for you. Once approved by a bank, you’ll have a revolving line of credit to use for business purchases. Small businesses can use credit cards for short-term cash flow fluctuations.
Accounts receivable financing allows small businesses to borrow against unpaid invoices for working capital. You pay back the principal amount to a lender when the invoices are paid, along with weekly charges that act as interest.
For store owners, Capital is a financing option that has no application process. It is mainly used for development financing and has a fixed duration of 12 months. Small businesses can borrow between $200 and $2 million. The loan is automatically repaid as a percentage of your sales.
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We weren’t big enough as a business to get approved for a bank loan…that’s when we found out about Capital. They already had access to all our business data and quickly made an informed decision about how much money we were entitled to. We received the money in our bank account a few days later. Helena Price Hambrecht, co-founder of Haus Average loans by loan type and lender
The average small business loan amount is $663,000. This applies to all business loans regardless of loan type. Don’t worry if that number sounds high. In the US and Canada, a small business is defined as a company with fewer than 100 employees, so the size of loans can vary greatly depending on the size of the company—from a few thousand dollars to over $5 million.
Here’s a breakdown of the different types of business loans available to small businesses and their average loan amounts.
Loan sizes also depend on the lender. Here’s a breakdown of average loan sizes by lender type.
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Before submitting your business loan application, it pays to understand which types of small business financing have the highest approval rates. Getting approved for a loan can be difficult: 48% of small businesses said their small business lending needs were met. And only 20% of small businesses qualify for the full funding they applied for.
Research shows that merchant cash advances have the highest approval rate at 87%. This is followed by equipment loans (86%), business loans (79%) and business loans (70%).
Approval rates can also vary depending on the lender they come from. Biz2Credit’s Small Business Lending Index lists loan approval rates for each type of lender as of May 2021:
Securing small business financing isn’t always easy, especially from traditional sources like big banks. Lenders may choose to reject applications for many reasons, but the most common reasons are as follows:
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Although there are many small business ideas, starting a business can be expensive depending on the industry you are in and the size of your team. According to research, the average small business (defined as 4 or fewer employees) spends $40,000 in its first year.
If you are not making enough revenue to sustain your first year of business, you should consider borrowing options. You could also apply for a personal loan if other applications are rejected due to a lack of established business credit—a common issue for early-stage startups.
To increase your chances of being approved by a traditional lender, write a business plan, including how much money you’ll need at various stages and how you plan to allocate any funding you receive. Managing your small business finances well and the expensive financing you may need before you get started can save you a lot of headaches (and rejections) down the road.
Working capital is the cash your small business can spend. It’s the difference between your assets/income and your total expenses — including accounts payable, inventory and payroll costs.
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Securing a small business loan helps increase working capital. The more you have in the bank, the better your cash flow. This helps reduce the risk of not being able to pay for expenses (such as inventory) because you don’t have enough money.
Seasonal gaps also cause short-term cash flow problems. If, for example, you increase ad spend before the holiday season, you may not see revenue until months later.
Financing options such as accounts receivable financing and merchant cash advances are good options here. Applications are processed quickly with these types of loans and approval rates are higher, so you can cover unexpected bills in no time. (But keep in mind: the faster the loan, the higher the interest rate in most cases.)
Inventory management is one of the most important things in running a small business. You can’t monetize if you don’t have inventory to sell. Financing your small business can help you purchase a larger volume of inventory.
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With capital, for example, you can borrow anywhere from $200 to $2 million. Merchants like Quartz & Rainbows use this funding to buy inventory, buy inventory
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