4 Types of Debt Financing for Small Businesses

There are several different types of debt financing that small business owners can apply for. Before applying for debt financing, you need to understand what your financing options are and how to get approved for them.

The best way to get approved for financing is to understand what banks and lenders expect of you so you can do the best to meet their expectations. For example, if you want to get a business line of credit if you need to have a credit score of at least a 680. Today we will go over the different types of debt financing to help you understand the options that are available to you and what is best for your business.

Long Term Debt Financing for Small Businesses

Term loans such as secured business loans, unsecured business loans, equipment loans, and SBA loans are long term debt. Small business owners find long term debt financing appealing because that of their lower interest rates. Businesses that are well established are the best candidates for long term financing. Long term financing usually requires you to provide collateral or own a business that is generating revenue. Each lender has different requirements so the type of collateral will depend on their requirements and the amount of revenue the business should be generating.

The following are the types of long-term financing that is available to small businesses.

Unsecured Business Loans – this loan does not require collateral and a good personal credit score to get approved. Your business might need to generate a minimum amount of revenue for a specific period of time for you to qualify for approval. Unsecured business loans can have interest rates of 6% to 20% with a payback term of 6 years or more.

Secured Business Loans – secured business loans require you to pledge collateral to have your loan request considered for approval. Sometimes you can get away with a low personal credit score compared to an unsecured loan. The key to get approved for an unsecured business loan is consistent cash flow and a business that has been in operation for some time.

Equipment Loans – you need a good personal credit score to qualify for an equipment loan. This type of loan is used for purchasing equipment that has a long life and does not become obsolete fast.

SBA Loans – you can obtain a micro loan under $50,000, working capital loan over $250,00 or a line of credit through SBA financing. The SBA does not lend the money directly, but they provide the funds to intermediaries (banks and financial institutions) and then they lend the money to you.

Short Term Debt Financing for Small Businesses

Credit cards are considered short term debt. Short term debt has higher interest rates than long term debt. Short term financing are similar to lines of credit which can be ongoing, meaning you can have it for as long as you want as long as you make the monthly payments.

You might need to provide collateral to get approved and having a good personal credit history is required.

What You Can Pay with Short Term or Long-Term Debt Options

Equipment, Supplies, and Inventory – depending on your business industry, you will need equipment, supplies, and inventory to fulfill sales requests. Purchasing this with an unsecured business loan or line of credit is the best move.

Marketing & Advertising – when you do marketing and advertising right, you will attract new customers for your business. Having a target market is one of the best revenue generating activities you can implement after obtaining debt funding.

Employees – you need employees to help your business make money. Debt funding can be used to pay your sales team.