How to find the business lending option thatâs right for you.
When it comes to financing, entrepreneurs and small business owners in Texas have many options available to them.
There are many different types of small business financing, from business lines of credit to short-term loans to invoice factoring to merchant cash advances. Each comes with its pros and cons. The right one for your business will depend on:
- How quickly you need money
- What you need it for
- Your credit history and ability to pay back the financing.
Here are the most popular loan types in Texas, an overview of each, what they can be used for, and their pros and cons.
U.S. Small Business Administration (SBA) loans: Most popular loan option for Texas small businesses
Many Texas small business owners became familiar with the SBA because it managed the popular Paycheck Protection Program (PPP) loans during the coronavirus pandemic. The reality is that the SBA offers many more forms of financing.
SBA loans are popular with Texas small business owners because the Small Business Administration guarantees a portion of them. This means they usually come with the lowest interest rates and most favorable terms of any form of small business financing. The SBA backs the loans to encourage business growth in the United States.
The SBA offers many different small business loan programs, including SBA 504 loans, 7(a) loans, and microloans, which can be used for different purposes. The issue: Your company must be well established, and you must have good credit scores, to qualify for this type of financing.
- SBA loans come with some of the lowest interest rates available.
- You can borrow up to $5 million with certain SBA loan types.
- The financing typically comes with relatively favorable repayment terms.
- It isnât easy to qualify for this popular type of financing.
- The application process is rigorous, and it can take weeks or even months to be approved. You will likely need to submit a business plan and other paperwork to qualify. (SBA disaster loans are the exception. Approvals and funding typically happen quickly.)
- You can only apply through SBA-approved financial institutions.
Bottom line: SBA loans are best for strong-credit borrowers who can wait a while to get approved for funding.
Term loans: Best for significant business funding needs
A term loan is a common form of business financing. You receive a lump sum of cash upfront. Then you repay it with interest over a predetermined period, referred to as the term.
A short-term loan can be used for financial emergencies, to purchase inventory, for working capital and other things, or to cover smaller business repairs and improvements. Short-term loans are typically paid back in one year or less. Long-term loans are usually used for larger things, such as expanding a business, buying a vehicle, or purchasing a business property. Terms for long-term loans can be several years to decades. Some, like loans used to purchase commercial real estate, can have terms of up to 30 years.
You can apply for term loans through traditional banks and for-profit small business financing companies, lenders approved by the U.S. Small Business Administration (SBA), and online and alternative lenders. The application and approval process through SBA-approved and traditional lenders can be weeks or months. An online or alternative lender could approve you in a single business day or less because they often have more flexible underwriting standards.
- Interest rates for term loans are relatively low.
- You can typically borrow more money than other types of financing.
- You may use term loan money for many small business purposes.
- You may be required to make a personal guarantee or put up collateral, such as an asset like real estate or business equipment, that the lender can sell if you default on a term bank loan.
- Costs and terms vary. Term loans from online lenders usually come with higher interest rates and less favorable terms than those from traditional banks and SBA lenders.
- Only companies that have been in business for several years and that have solid credit histories qualify for term loans.
Bottom line: Term loans are ideal for established small businesses with good credit that need significant financing.
Business lines of credit: Ideal for small emergency funding needs
A business line of credit provides access to funds up to a pre-approved limit. You only pay interest on the money you borrow. It offers more flexibility than a term loan, and you always have access to cash when you need it.
- Business lines of credit provide access to cash when youâre faced with financial emergencies.
- They come with reasonable interest rates.
- Business credit lines are typically unsecured, so thereâs no business or personal collateral required.
- Business lines may come with added or hidden costs, such as maintenance and draw fees.
- Financing amounts are relatively small.
- Business owners with bad credit will likely not be approved.
Bottom line: Business lines of credit are ideal for short-term financing needs, handling cash flow, or dealing with unexpected expenses.
Equipment loans: Top option for financing equipment
Equipment financing helps small business owners purchase equipment, including things like manufacturing machines, computers, and communication systems. Equipment loans typically come with low interest rates because the equipment backs the loan. The loan’s term typically is roughly equal to the expected life of the equipment.
Equipment loans are usually the most affordable way to finance equipment purchases.
- Itâs relatively easy to qualify for equipment financing.
- You can apply for equipment financing through a seller or manufacturer.
- You could lose a critical piece of business equipment if you canât make loan payments.
- You may need to make a significant down payment on the equipment before you get financing.
Bottom line: Equipment loans are typically the best way for Texas businesses to finance equipment purchases.
Business credit cards: Good for paying everyday business expenses
Much like business lines of credit, business credit cards are revolving lines of credit. You can draw from and repay the card as needed, as long as you make minimum monthly payments and donât exceed your credit limit. Business credit cards are typically best used for regular business expenses like travel, office supplies, and utilities. They are a great way to separate business expenses from personal ones, which is particularly important at tax time. Using them to borrow for major purchases doesnât make sense because interest rates are relatively high for this form of financing.
- Using suitable business credit cards, you could earn cash back, travel rewards, and other perks on your business purchases.
- Business credit cards can be an excellent way to pay for everyday business expenses.
- Business credit cards are high costs, and variable interest rates could rise significantly during todayâs period of high inflation.
- Many credit cards come with hidden fees.
Bottom line: Business credit cards are a smart way to pay business expenses, especially if you pay them back immediately and take advantage of perks.
Microloans: Best financing option for startups
Microloans are precisely what the name suggests. Theyâre small loans, typically $50,000 or less, offered by nonprofit organizations, nonprofit lenders, small business community development centers, and community development lenders. Peoplefund and BigAustin are examples of microloan providers for local businesses.
These loans are generally made available to startups, newer businesses, companies with minority owners, and businesses operating in disadvantaged communities in cities like Dallas and Houston.
- Microloans are typically low-cost.
- Many come with value-add services, such as business consulting, information on entrepreneurship, and training on skills for small businesses.
- You canât get a microloan for a major purchase.
- Microloans usually come with stringent eligibility requirements.
Bottom line: Many community lenders offer microloans in Texas. They could be worth seeking out for startups that meet their qualifications for funding.
Tip: While technically not loans, many startups that qualify for microloans may be able to get small business grants. This is free money given out by community organizations and foundations to encourage business growth. The Texas Enterprise Fund is known for providing grants to businesses in the state.
Did you know: The Texas Small Business Development Center (SBDC) is a great source of information for Texas startups and small businesses.
Personal loans: Possible funding option for startups
You can use a personal loan for business purposes. Itâs often an option for startups because traditional banks and many online lenders wonât approve financing for businesses with no operating history. Approval for these loans is based exclusively on your personal credit score, so youâll need good credit to qualify. You can get personal loans from your bank (for example, Texas Capital Bank) or credit union.
- Startups and newer businesses may be able to qualify for a personal loan.
- The application and loan approval process for this type of financing is relatively straightforward when compared with small business loans.
- Personal loans often come with high borrowing costs.
- If you fail to pay back your loan, it could negatively impact your personal credit score.
Bottom line: In many cases, a personal loan could be the only financing option for startups and other new businesses.
Invoice factoring: Appropriate for businesses with many overdue invoices
Invoice factoring is a possible solution for Texas businesses experiencing cash flow issues because of unpaid customer invoices. You can get money for those outstanding invoices through invoice factoring. You sell your outstanding receivables to a factoring company at a discount (often a significant one). The factoring company is responsible for collecting those overdue invoices.
- Invoice factoring is a fast and easy way to get cash in an emergency.
- Itâs easy to get approved, even for business owners with bad credit scores.
- Invoice factoring is costly when compared with other financing types.
- The invoice collection process could negatively affect your relationship with customers.
Bottom line: Invoice factoring could be a solution for Texas small business owners facing a cash crisis because of unpaid invoices. Just be aware of the high costs and the impact collections could have on customer relationships.
Invoice financing: Possible option for businesses that have unpaid accounts receivable
Invoice financing is often confused with invoice factoring, but theyâre different things. Instead of selling your unpaid invoices to a factoring company, you use them as collateral to get a cash advance. You pay the money back when you collect on the invoices.
- You can get cash fast with invoice financing.
- The application process is straightforward compared to other small business financing types.
- Invoice financing is costly compared with other options.
- Youâre responsible for collecting the invoice payment.
Bottom line: Invoice financing could be a more sensible borrowing option for Texas businesses experiencing cash flow problems due to unpaid receivables than invoice factoring.
Merchant cash advance: The last financing resort for many small business owners
With a merchant cash advance, you receive a lump sum of money that you can use as business financing. Instead of making a single fixed payment each month from your business bank account (like you would with a term loan), you make payments on a merchant cash advance either by withholding a percentage of your daily credit and debit card sales or through fixed daily or weekly withdrawals from a bank account.
- Itâs easy to apply for a merchant cash advance, and youâll get funding fast.
- Thereâs no need to securitize funding with a merchant cash advance.
- Merchant cash advances have some of the highest borrowing costs of any small business financing type.
- You must pay the money back frequently, which could lead to cash flow problems.
Bottom line: Merchant cash advances are often the borrowing option of last resort for desperate Texas small business owners.
Small business financing in Texas: Which option is right for you?
There is no one-size-fits-all loan option for smaller organizations in Texas. Whatâs important is that you use the information in this guide â and do your homework â to find the right choice for the loan amount, your creditworthiness, and your business needs.