What Types of Businesses Qualify for Small Business Loans?

In olden times, taking a loan to boost one’s business was an idea that used to be scorned at and deemed to be a pathway to misery, but that is no longer a scenario today. With the times and mentality of people changing, business loans have stood out to be a convenient method for people who wish to start their own business or are already running one.   There are endless reasons a business may need a loan, and managing all of them with limited funds can be quite a tricky task. To that end, small business loans are a savior and can help businesses get the necessary funding to get off the ground. But, what is a small business loan?   Small business loans are specifically designed for small and medium-sized business owners to help them meet their business operation needs at competitive interest rates. Whether you are a business owner in a launch mode or an expansion mode, small business loans help you cater to the financing needs when you see an opportunity to take your business to the next level.   In this article, we will walk you through the different types of loan options available to business owners and related details to help you navigate and overcome any dilemmas you may have when seeking small business loans. Let’s get right to it!  

10 Types of Best Business Loan Options for You

How can I get a small business loan? What are the different loan options for me? If these are the questions haunting your mind, here are the top 10 types of business loans that could work for you:  

Startup loan

If you’re wondering what type of loan is best for starting a business, startup loans may just be the answer! As the name suggests, these loans are for new ventures and new entrants in the business space. In such cases, since the company applying for a loan does not have a good credit record to support their loan application, the business owner's personal credit history is considered for determining the trustworthiness of the business seeking a loan.   Furthermore, the principal amount, interest rate, and tenure are also decided based on the expected turnover figures that the business is capable of achieving. Also, the company is required to submit proof of its existence for at least one year to be eligible for funding from lender companies.  

Business line of credit

A business line of credit can be thought of as a credit card that allows business owners to borrow a certain amount as and when a need arises. Herein, you only pay interest on the amount you borrow. It is one of the best funding options that you can look forward to for short-term funding requirements.   Just like you use a credit card through which the lender company allows you a credit limit, you can use the business line of credit as per your requirement and keep paying the money you owe to get access to the same credit limit again.   Besides the advantage of getting a loan when you most need it, such credit cards also lure customers with lucrative cashback offers, insurance covers, and credit points. But these credit cards may be a bit pricey when it comes to the rate of interest levied and thus should be opted for after proper evaluation of your business needs and requirements.  

Term loans

For small business loans, term loans are one of the most common and best options businesses opt for. Such loans are borrowed from credit unions, online lenders, or traditional banks. A lump sum is given to the business seeking the loan, and as per the decided loan tenure, the business is further required to pay back the funds along with the interest amount.  

Merchant cash advance

When a business applies for a merchant cash advance, the merchant company analyzes the daily credit card sales and the loan amount applied to determine if it is a worthy deal to finance your business. If the company finds you eligible and you qualify for such a cash advance, you get a lump sum in one go which is further paid back by the borrower on a daily basis, mostly through bank drafts.   The amount that is paid daily is dependent on a certain percentage of the credit card sales you incur on a daily basis. The fees may differ from one company to another and usually ranges between 2 to 3%.  

Equipment Financing

As the name suggests, these loans are given to manufacturing companies that require the installation of costly machinery and equipment for business operations. Many times a business may be required to purchase new machinery owing to new innovations and technology arriving in the market. This is so that they can keep up with the current trends.   Besides purchasing equipment, these loans can also be used for buying office furniture, vehicles, and trucks, wherein businesses are involved in the automotive sector.   The loan tenure for such loans is based on the estimated lifespan of the equipment purchased. In case of a loan default, the machinery serves as collateral and can be seized by the lender company. These loans also stand applicable for company assets that need frequent replacement.  

Working capital loan

These loans are for small businesses to tap into some extra cash to manage daily business expenses and to fight any financial crunch that they may encounter during peak and off seasons. Every business needs funds to cater to its day-to-day operational needs, and one of the best ways to get these funds in your basket when you fall short of money is to seek working capital loans. It can help you get access to funds until your revenue generation gets back on track.   These loans are mostly opted for by manufacturers, retailers, wholesalers, and service-providing businesses that are into import and export and can be availed in the form of term loans, invoice factoring, SBA loans, and lines of credit.  

Business loans for women

Specially curated for women, such business loans are devised to support women entrepreneurs who wish to run small or medium-sized businesses. There are certain special schemes and government initiatives in place that help women to get access to business loans to fulfill their dreams of running a business.   There are numerous advantages of such business loans for women, such as flexible payment tenure, quick approval, faster loan processing, and a lot more to drive entrepreneurial success for women.  

Business overdraft

This is a special type of facility offered by banks to their account holders wherein they are allowed to make cash withdrawals even if their bank balance is zero. Thus, the borrower is required to pay interest only on the amount he/she uses. It is a facility provided to those customers who have fixed deposits in their name in a particular bank or financial institution.   With that said, the person who gets to enjoy such a facility cannot withdraw any whimsical amount they desire. Instead, they have a cap on the withdrawal amount as sanctioned by the financial institution, which is decided based on the borrower’s credit history, relationship with the bank, repayment history, and cash flow.  

Invoice financing

For businesses that are into products and services and have unpaid customer invoices, it can be challenging to manage the cash flows until the payments are cleared. But for such businesses, the owners can seek invoice factoring loans (also known as discount financing and invoice financing), which can be taken on the outstanding invoices to help manage the cash flow.   Usually, about 80% of the pending invoice amount can be financed for such loans, and once the outstanding invoices are cleared, the business is required to pay back based on the decided interest rate and tenure.  

Loan against property for SME

As the name suggests, a secured business loan demands collateral placement against the loan amount sanctioned to businesses. These loans are for businesses that require 50 lakhs or more and require the applicant to mortgage their property in exchange until the loan amount is repaid.   Generally, 70% of the evaluated value of the property staked is given in the form of a loan, and the tenure may be anywhere between 15 to 20 years, varying based on the discretion of lender companies.  

A Guide to Choosing the Right Small Business Loan

The above checklist might have given you a brief idea about how to avail of small business loans, but the catch lies in choosing the right type of loan and lenders.   Here’s a quick rundown of a few factors that should be taken into account while selecting the right small business loan:  

Borrow wise

The first step to start, even before applying for a loan, is to understand the purpose for which you wish to seek a loan. Different lender companies and banks serve numerous funding options, but all of them have cater to different purposes. Make sure you are aware of all the details so you can opt for a specific loan that fits your bill.  

Pull on the right numbers

After you identify your purpose for seeking a loan, the next step is to pull off the correct numbers by determining how much you actually need. The number should be exact, neither less nor more.   You may easily get tempted to borrow a bigger amount than what is needed, but remember - loans do not come for free, and you also have to pay interest on the loan amount you take, which increases as you increase the loan amount.   On the other hand, taking a loan amount less than what you need can again land you in a financial crisis, making you look for other loan options in little to no time. This is why you need to be exact about the loan amount you plan to apply for.   The same stands true when you have to figure out the loan tenure: The greater the loan tenure, the higher the interest rate, and vice-versa. So, do not unnecessarily stretch the loan tenure till your hair turns grey to lower the EMI burden. Work out the math, and once you are sure how long you can stretch the number of EMIs without feeling the pinch in your pockets, go ahead and finalize the loan duration.  

Run a quick check on your creditworthiness

Now that you have a clear vision of how much you need and till when you can repay the same, it’s time for you to focus on your credit health. Every Tom, Dick, and Harry cannot get a loan approved in their name; you have to meet some eligibility requirements to qualify for a small business loan.   Right from your annual turnover to your personal credit score, business vintage, and bankruptcy history, all such factors are taken into consideration by the lender companies. Make sure that you are all geared up to pass such tests, and even if your history is not up to the mark, try to improve your credit score so that lender companies can place their trust in you.  

Explore all possible alternatives

Your search does not end when you gain a clear understanding of the loan features you are looking out for; you need to also know where to drop your anchor with a plethora of lender companies in the market. To ace this task, you have to conduct high-end research on the different lender companies and their loan offerings, interest rates, etc., and compare all the fish in the sea to come to a conclusion.   Does the lender company approve a big loan amount? Do they allow you low EMIs? How much upfront fee do they charge? Ask these questions, set your priorities, and decide because the decision is all based on what matters to you the most.  

Disbursal mode

Small business loans are usually disbursed via two modes- disbursal via line of credit and lump sum loan. The former is a revolving credit type loan in which the borrower can withdraw any money based on their needs and requirements, with the maximum withdrawal amount restricted to the credit limit as allowed by the lender company.   On the contrary, the latter is an installment loan credited to the borrower's account in one go.   With that said, it is you who has to decide between the two options because if you need a small and frequent amount to run your business, a business line of credit may be your go-to strategy. In other cases, when you need a huge sum at once, an installment loan can prove to be more fruitful for you.  

Importance of a business loan

Working capitals and cash flow need continuous replenishment for the effective functioning of a business. But not everyone has enough money to cater to these needs, and even if you have, there might be certain restrictions on the funds you can spare for funding your own business. This is where the need for small business loans comes into the picture.   Here are a few reasons why seeking loans for your small business can actually boost your enterprise:  
  • Most business loans are liability-free
  • Easily accessible
  • Offers interest rates that can be afforded
  • Helps you fulfill your dreams of starting a new venture.
  • Loans help in expanding operations
  • Gets you working capital in no time
  • Helps you get funds for buying machinery and other necessary equipment
  • Helps in managing the cash flow better
  • Allows flexibility in the usage of the funded amount
  • You do not have to share profits like you have to while getting an investor on board
  • Small business loans are available at reasonable rates
  • Aid in tax deductions

Which Types Of Small Businesses Receive The Most Funding?

As per a 2020 report, it was found that the below-mentioned industries receive the most funding from lender companies and banks:
  • Dentistry
  • Manufacturing companies
  • Alcohol
  • Retailing electronics
  • Marketing
  • General consulting
  • Software development
  • Hotel, lodging, motel, inns
  • Doctors/ Physicians
  • Auxiliary health services
These businesses are more prone to receiving funds from lender companies owing to the profit they incur annually, their proof of revenue, good credit score, and similar other factors, which makes it easy for lender companies to trust them with extending loans.  

Questions to consider before choosing a business loan

There are a few questions you need to ask yourself before picking on a business loan. Gone are those days when only banks were meant to be the one-stop solution for seeking small business loans. With a diversified maze of lenders and different types of loan products available these days, it is crucial for business owners to be more savvy and astute at evaluating the lender companies beyond their little hiding room.   Here’s what you need to ask the lender company when applying for a small business loan:  
  • What is the interest rate charged?
  • Do you have a loan offer that fits my business needs?
  • How long will it take for the loan to be processed?
  • Can I apply for a loan online?
  • What documents will I need to produce to apply for a small business loan?
  • Is there collateral required for applying for a small business loan?
  • Is there any possibility for a loan modification or loan renewal?
  • What are the terms and conditions of the loan I am applying for?
  • Is there any additional one-time fee for the loan application?
  • What will be the payment schedule?

The bottom line

Business needs for finance revolve around multiple aspects such as leasing an office, purchasing machinery, expanding business, and a lot more. The above-mentioned loan options can help you decide on which type of financing suits your business at its best.   With that said, you also need to know that your search does not end while choosing the best loan offer but also extends to choosing the right lender company that can loan you capital at competitive rates. As India’s first recurring revenue trading platform, BrigeUp is one such company that can take away the stress from your financing goals. It has a simple application process designed to make funding available to you. Upfront. Instantly. Quickly.   At present, BridgeUp primarily caters to a few select industries such as SaaS, insurance, edtech, media, and service-sector-based companies. But at its core, BridgeUp is for everyone: small, medium, and expansive enterprises included!   As a one-stop financing destination, we have on offer a handful of loan products that you can apply for as per your loan requirement and qualification. So, what makes you wait?   If you’re looking forward to applying for a business loan, call us at +91-9819660287, email us at [email protected], or drop in a query here in this contact form.  

Small business loan FAQs

  1. Who can apply for small business loans?
Any individual between the age of 21 to 65 years running a business can seek small business loans. They can be proprietors, manufacturers, private limited companies, partnership firms, self-employed individuals, traders, trusts, etc.  
  1. When can you expect a small business loan to be disbursed?
It generally takes a week's time for loan disbursals once you qualify for a small business loan.  
  1. What is the difference between secured and unsecured small business loans?
Secured business loans require the placement of collateral by the loan seeker so that the lender companies have a safer bet in case the borrower defaults on the loan. In contrast, no collateral is required in the case of unsecured small business loans, and the qualification for such loans is based on the creditworthiness of the borrower.  
  1. How much loan amount can you apply for in case of unsecured funding?
There is no such fixed amount that you can apply. Whilst some lender companies may offer you a loan of up to 25 lakhs, the loan amount sanctioned can vary from one lender to another.  
  1. What happens when you miss an EMI?
If you miss paying an EMI on the due date, you may be charged hefty penalties for the same and may also cause a black dot in your credit history. Furthermore, based on the severity of your case, missed EMIs may also lower the chances for you to get a green signal for other loans in the future. Additionally, if you miss the EMIs frequently, legal action can also be taken against you.  

Zeus Dhanbhura

Zeus Dhanbhura

CEO at BridgeUp