by Katerina Nikolas

Created on: August 02, 2010

When the time comes to start a new business or to put a cash injection into an existing small business the most usual route is to apply for a small business loan. However traditional business loans issued to sole proprietors, limited companies or partnerships, which typify most small businesses, often come with the request for collateral. One of the biggest mistakes which small business owners can make is to take a home equity loan which puts their property at risk if the bank wants to call in their loan.

A much better option is to go armed with a solid business plan and seek assistance through the U.S. Small Business Administration (SAB). The SAB works with lender partners who provide loans to small businesses which are guaranteed by SAB, which is an independent federal agency which works to promote and assist small businesses. The guarantee they offer on loans means that lenders who otherwise may turn down small business applications have a security in place which allows them to extend unsecured loans to those who need funds for a variety of purposes.

Loans can be issued to start up businesses, buy existing businesses and to fund necessary items such as computers, equipment, and even allow businesses to invest in premises they need. However there is one drawback to loans issued with a SAB guarantee and that is they are only available to those who have not received a reasonable loan offer elsewhere. This means that those with the necessary credit score and the security to offer as collateral against a loan may still need to use a more traditional bank loan which carries greater risk of both loan recall and the loss of ones collateral.

In such instances small businesses may have no option but to apply for a traditional bank loan which will take far longer to process than a loan obtained through a partner lender of SAB. A traditional bank loan will also offer less flexible terms and come with a fixed repayment schedule, whilst it is possible to obtain a loan through a SAB lending partner which can have deferred options and interest only options which are particularly beneficial to businesses which have seasonal trade.

As an alternative to a small business loan it is worth considering a merchant cash advance which is a shorter term loan which is provided without the need for credit checks. They are available to existing businesses which have been trading for at least six months and process a certain amount of their transactions through either Visa or MasterCard. The loan is advanced and the repayments are made directly from a percentage of credit card sales and paid to the lender by the credit card processor.

The drawback is the higher interest rates which merchant cash advances carry, but there is no risk to ones collateral and they can be arranged in a speedy fashion. As they tend to be over shorter periods of time than loans they are a viable solution for a small business needing a cash injection.

These three available types of loan, the traditional bank loan, a guaranteed SAB loan and a merchant cash advance, are the optimum ways to obtain a loan for ones business, and should always be utilized in preference to sub prime lending loans or funding via credit cards. For both traditional loans and SAB loans one should ensure that a solid business plan is available with realistic projected growth and profit margins, and a full explanation as to how any negatives occurred on ones credit report.

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