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6 of the most common types of small business financing
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For the first time since the start of the coronavirus pandemic, small businesses reported an increase in revenue in 2022 and an increase in employment over the past 12 months. That’s according to the Federal Reserve’s 2023 Small Business Lending Survey. The study also confirmed that the share of for-profit organizations has increased significantly.
About 40% of employers surveyed have applied for financing in fiscal year 2022. This is a significant increase from last year, when only 25% reported receiving financial aid. Current levels more closely resemble app levels before the pandemic. Nearly 4 out of 5 business finance applications are at least partially completed, but only about half are fully approved, the study shows.
As companies struggled during the pandemic, many were ineligible for traditional financing and turned to government recovery programs instead. At the time of the most recent survey, some recovery programs were still available and 34% of employers had requested pandemic-related financial assistance in the past 12 months. But when those pandemic-related programs ended, the share of companies that switched to traditional financing through loans, lines of credit or merchant cash advances rose again.
Faithful used the Small Business Loan Survey to identify the most common sources of financing that small businesses apply to. The sources of finance are determined by the proportion of businesses seeking each funding. The findings include only small businesses that are employers.
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#5. personal loan
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Application Rate: 7%
– Proportion of applicants at least partially approved: 70%
Personal loans are now easier to get through “peer-to-peer” lending, where individuals or companies are matched with lenders online. The average annual percentage rate (or APR) for a two-year personal loan in May 2023 was 11.23 percent, according to the Federal Reserve. By comparison, the average interest rate on a credit card was about 19 percent. One major plus for personal loans: they can be used for almost any purpose.
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#5. Merchant Cash (Cash Payment)
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Application Rate: 7%
– Proportion of applicants at least partially approved: 90%
A merchant cash advance is an advance for future sales, in which the financial provider buys those futures at a discount with quick cash now. If you are the merchant, you must allocate a percentage of your credit card and debit transactions, sometimes with an additional fee. Among the benefits, collateral is lower, credit scores are lower than traditional loans, and the financial provider can be flexible about delivery.
However, since merchant cash advances are often out of control, the costs can be higher than with a traditional loan, and a merchant who defaults can be sued. They do not have interest rates like commercial loans; Instead, their financing costs are provided at factor rates. Unlike interest rates, factor rates are decimal numbers set by finance providers. It is multiplied by the financing amount to calculate the total amount a merchant must transfer. Factor rates can vary widely from 1.1 to 1.5, according to NerdWallet.
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#4. Car or equipment loan
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Application Rate: 12%
– Proportion of applicants at least partially approved: 87%
Equipment financing helps business owners pay for expensive investments in equipment, machinery and vehicles that can make all the difference to companies trying to grow. Typically, the instruments purchased are used as collateral for the loan. Equipment financing companies, like banks and small business administrations, offer loans – rates ranging from 4% to 30%, according to NerdWallet.
Car loan prices are rising, and the average annual interest rate for new car loans is 7% in March 2023, up from 4.5% a year ago. In recent months, prices have been the highest since 2008. Monthly payments on new car financing are also higher than ever. In March, the average monthly payment reached $730, according to the automobile website Edmunds.
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#3. SBA loan or line of credit
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Application Rate: 23%
– Proportion of applicants at least partially approved: 64%
Small business loans do not have a minimum loan amount, but the popular 7(a) loan is capped at $5 million. Federal support provides access to low-rate bank financing, with different types of loans and lines of credit and eligibility criteria. By reducing risk for lenders, the SBA makes it easier for small businesses to get the financing they need. The most common SBA loan is known as a 7(a), with interest rates ranging from 7% to 9.5%. One possible problem is that it may take a few months to be approved. The SBA offers direct low-interest loans, but only when there is a publicly declared emergency.
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#2. Business loan
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Application Rate: 34%
– Proportion of applicants at least partially approved: 66%
A small business loan is intended for many expenses associated with running a business, from the immediate need to pay off unexpected bills to projects such as expansion. In addition to SBA availability, business loans are available from community and commercial banks, online lenders, and peer-to-peer lenders. There are different types of loans such as micro loans and quick repayment programs for small loan amounts or commercial real estate loans for purchasing property. One of the most common types of loans is a fixed rate and interest rate (or factor rate) loan that can be used for a variety of purposes.
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#1. Line of credit business
An old woman sits in a business window sewing.
Application Rate: 43%
– Proportion of applicants at least partially approved: 76%
A business line of credit provides the amount of credit a business can draw and receive in cash. Interest is charged on the amount borrowed, just like a cash advance on a credit card. The advantage is that a business can borrow as needed to meet an unexpected opportunity or expense. Costs vary by lender and depend on credit scores, business income and other criteria. Amounts available can range from $2,000 to $250,000, with rates around 10% and above, according to Forbes.
Data reporting by Paxtin Merton. Story editing by Jeff Inglis. Copy editing by Tim Bruns.
This story originally appeared on Credibly and was developed by
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