Which type of small business loan is right for you?

Expenses go hand in hand with running a new business. Business loans and financing can be used to manage day-to-day working capital, pay for equipment and other assets, or cover the cost of an expansion.

Each business loan or other type of financing will require a different application process, repayment terms, and optimal use. Business term loans and SBA loans can help purchase assets and inventory, lines of credit can help with cash flow, and small business mortgages help you purchase a property, expand, or refinance your current property.

The best type of financing for your company depends on your priorities, needs, and financial situation. Explore the small business loan and financing options below to discover how to get the type of credit best suited to your unique business plan.

Types of business financing

Business term loans. Business term loans can be used to purchase assets, such as equipment, support other business expenses, and increase your business’s ability to cover expenses and seize opportunities. Loan terms — the interest rate and repayment length — can be customized, and the rate structure can be fixed or variable. Because business term loans are typically paid back in fixed monthly payments, rather than one lump sum, they can free up cash flow and simplify budgeting.

Business lines of credit. Revolving business lines of credit (LOCs) are financing to support immediate expenses such as supplies, inventory, or other cash needs. A business draws funds from an LOC when needed and pays it back as able. Interest is only paid on the funds used. Lines of credit are renewed and reviewed annually, and typically have a low annual fee.

Hybrid flex loans. A hybrid flex loan acts as a line of credit for a set timeframe — such as 6-12 months — and then later converts to a fixed-term loan. During the first 6-12 months, you can make multiple purchases (inventory, computers, machinery, vehicles, etc.) and only pay the interest on what you borrow. Once that draw period ends, you make payments on the principal and the interest.

Small Business Administration (SBA) loans. Securing a small business loan from many lenders for a new business or other venture with a limited credit history is typically more difficult than getting a loan as a business with an established credit history. However, because SBA loans are backed by the government, businesses with a minimal credit history may qualify.

Types of SBA loans include:

• SBA Express Loans are typically for businesses that want to improve cash flow, refinance debt, or fund improvements, equipment, or real estate. There are fixed- or variable-rate term capital loans, as well as lines of credit with borrowing limits up to $500,000. They typically have the easiest SBA application process, quick approval times, flexible terms, and low, down payment requirements. Discounts are available for veterans.
• SBA 7(a) Loans are used for starting, expanding, improving, refinancing, or acquiring a business. They feature longer terms and lower down payment requirements than conventional loans. There are fixed- or variable-rate term loans with borrowing limits up to $5 million, and there is no repayment penalty (up to 15 years) for borrowers.
• SBA 504 Loans can be used to purchase or improve real estate. They are backed by the government and provide the long-term financing needed to purchase a new space, as well as needed machinery and equipment. There are fixed- or variable-rate term loans with borrowing limits up to $5.5 million.

Business credit cards. Business credit cards can be useful to cover everyday expenses and to monitor cash flow and maintain a budget by tracking spending. For a new small business, using a business credit card helps keep business and personal expenses separate, and helps to build a credit score. Depending on the type of card you choose, your business may also be able to earn reward points, which can be used to cover business travel or other expenditures. Small businesses can also take advantage of business credit card features, such as mobile apps for account monitoring on-the-go, online account management, and tap-and-pay options.

Compare your options

To determine the best type of financing for your business, ask yourself these questions:

• When do you need it? If you need cash quickly — and can start to repay it quickly — business credit cards may be the right fit. Lines of credit, term loans, and other forms of financing may give you access to larger amounts of cash, with better terms, but may take longer to get approved.
• How will you use it? Do you have a specific purchase in mind, such as property or equipment? Or, do you need financial flexibility to be ready for opportunities or unexpected expenses? Most business financing tools align with a certain type of need, so be clear about your expenses or working capital needs to help make a financing plan.
• What type of repayment terms are you looking for? Do you feel you may be able to pay back the loan quickly, with an upcoming infusion of cash? Or, are you looking for longer repayment terms? Short-term loans typically have faster repayment periods but higher monthly payments, while long-term loans often have lower monthly payments but higher overall interest.
• Do you want fixed or variable interest rates? Fixed rates stay the same over the life of the loan, while variable rates shift with the market. Fixed rates carry a benefit of a predictable expense over time, while variable rates may provide some savings if rates drop.
• What do you qualify for? Eligibility criteria will vary depending on a number of factors, including how established your business is, credit history, and revenue. Qualification requirements for an SBA loan include the type of business, where it operates, whether it meets the SBA’s size standards, its ability to repay the loan, and other variables. Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding from the SBA.

Qualifying for business loans

Lenders consider a number of factors when evaluating the risk of approving borrowers for business loans. Being prepared with the right information and documentation can help set you up for success.

Variables that lenders look at include:

• Credit score. If you are a new or small business owner, lenders may look at your personal credit score as well your business credit. This evaluation helps them determine your ability to manage and pay debt, and it may also determine the size of the loan you qualify for.
• Financial statements. Lenders want to understand the financial health of your company. To do this they will want to see financial statements, including balance sheet, income statement and cash flow statement. Some may want to see separate sales projections too. They will also want to review tax returns and bank statements.
• Business plan. Lenders may look for details on the purpose of the loan; a detailed business plan can showcase you are focused and serious. It should include current financials, a marketing/sales strategy, insight into your business’s market, track record of your management team, and other factors demonstrating how the loan would enhance your business.

We are committed to helping your business reach its potential. Our dedicated business banking professionals can help you find the right product to meet your business' needs. To learn more about small business loans, please call 1-800-428-7463, visit us online, or visit your nearest Citizens branch.