3 Common Loan Types to Fund a New Small Business

Starting a new small business can be exciting, but the process of locating ways to fund the business might be challenging. You might have to explore several options before you find one that will work for your business. Here are a few examples of common loan types to fund new small businesses. 

1. SBA Loan

The Small Business Administration is a government agency that was designed to promote small business growth in America. The government realized long ago that the strength of this country's economic system was directly tied to the success of small businesses. Therefore, as a small business owner, this could be one of your best options. 

With an SBA loan, you will still be going through a regular lender. The SBA itself does not write loans. However, they insure loans that regular lenders make. When they insure a loan, the chances of your approval go up. The bank knows that their risk level is reduced because someone else will pay part of the loan back if you default. If your credit is not perfect, this is most likely the best way to go because you will be required to have some sort of credit.  

2. Commercial Loan

Another option you have is a commercial loan. With a standard commercial loan, you will be dealing only with the bank or lender that you apply with. They will scrutinize everything on the application. They will make sure that you have good credit, cash reserves, and a good payment history. They will want to know everything about your potential business and they will want to be convinced that it will work. While there is usually a little more scrutiny with this type of loan, the advantage is that you can get a lower interest rate. If you qualify for this loan it is typically because you have a good credit score. With a good credit score, they can offer you a lower interest rate. 

3. Private Loan

Another popular method of financing a new business is through private loans. This is done outside the realm of the banking industry and takes place between individuals. With a private loan, you need to locate an investor that has money and is willing to lend it. You could use a friend or family member for this, or someone that you do not know. There are many private investors out there that are looking for good businesses to invest in. They might want a share of the equity or they might simply require a good interest rate. The interest rates that you get from a private loan will usually be higher than you would get from the banking industry.