The Ten Types of Business Loans You Need To Know
Term loans, SBA loans, and business lines of credit are all examples of business loans. Examine your choices.
There are many various forms of small-business loans, each with its own set of advantages and disadvantages, ranging from a business line of credit, to invoice factoring, to merchant cash advances. The best option for your business will be determined by when you need money and what you need it for.
The ten most common types of business loans are shown below. Lenders have different loan terms, rates, and requirements.
- Term Loans
A term loan is a frequent method of obtaining capital for a business. You are given a big sum of money up front, which you must repay over time with interest.
Online lenders can make term loans up to $1 million and can provide cash faster than traditional banks.
- Get money up front to put into your company
- Allow you to borrow a larger sum of money than other sorts of loans
- If you utilize an online lender rather than a traditional bank, you can get money in a few days to a week instead of several months.
- It’s possible that the lender will ask for a personal guarantee or collateral, which is an asset like real estate or business equipment that the lender can sell if you default
- Term loans from online lenders are often more expensive than those from traditional banks
- Businesses who want to grow
- Borrowers with good credit and a strong business who don’t mind waiting a lengthy time for funding
- SBA Loans
These loans, which are issued by banks and other lenders, are guaranteed by the Small Business Administration. SBA loan repayment durations are determined by how you intend to use the funds. They range from seven to ten years for working capital, ten to twenty-five years for equipment purchases, and twenty-five years for real estate purchases.
- Some of the most competitive rates available
- You can take out a loan of up to $5 million
- Repayment terms are lengthy
- It’s difficult to qualify
- The application process is long and arduous
- Businesses that want to expand or refinance their debts
- Borrowers with good credit who are willing to wait a long time for funding
- Business credit lines
A business line of credit allows you to borrow money up to your credit limit, and you only pay interest on the money you use. It can provide you more options than a term loan.
- Borrowing options that are flexible
- There is usually no need for collateral because these loans are unsecured
- Additional expenses, such as maintenance and draw fees, may apply
- It’s necessary to have a lot of money and good credit to qualify
- Needs for short-term finance, cash flow management, or dealing with unforeseen expenses
- Businesses that operate only during certain seasons
- Equipment loans
Equipment loans, which may include semi truck financing, assist you in purchasing equipment for your business. (Cars, vans, and light vehicles are all eligible for business auto loans.) The period of an equipment loan is usually matched to the equipment’s estimated lifetime, and the equipment serves as collateral for the loan. Rates will be determined by the equipment’s value as well as the strength of your business.
- You are the owner of the equipment and have built up equity in it
- If you have good credit and a good business, you can get competitive rates
- You may be required to make a down payment
- Equipment can become obsolete far faster than the term of your loan
- Businesses interested in purchasing equipment outright.
- Invoice factoring
Consider the following scenario: your business has outstanding customer invoices that are due in 60 days. If you need money right away, invoice factoring might help you receive cash for those overdue invoices.
You’d sell the bills to a factoring business, who would then be in charge of collecting payment from the customer when the invoice was due.
- Quick cash for your business
- Traditional funding methods have a higher acceptance rate
- When compared to alternative options, it is expensive
- You lose control over how your invoices are collected
- Businesses in need of quick cash due to unpaid invoices
- Businesses with dependable customers who pay on time (30, 60 or 90 days)
- Invoice financing
Instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to secure a cash advance.
- Quick money
- Your consumers will be unaware that their invoice is being funded
- When compared to alternative options, it is expensive
- You’re still in charge of collecting payment on the invoice
- Businesses who need to convert unpaid invoices into cash quickly
- Businesses that want to keep their invoicing under control
- Merchant cash advances
You are given a large sum of money up front that you can use to fund your business.
Rather than making a single fixed monthly payment from a bank account, as you would with a term loan, you pay back a merchant cash advance by withholding a percentage of your daily credit and debit card sales, or by making fixed daily or weekly withdrawals from a bank account.
- Quick money
- Financing without a guarantee
- Some of the most expensive borrowing costs – up to 350% in some situations
- Cash flow issues can arise as a result of frequent repayments
- Businesses with a large volume of credit card sales and the ability to handle frequent repayments
- Businesses that are unable to obtain funding elsewhere and cannot wait for funds
- Personal loans
A personal loan might be used to fund a business venture. It’s a viable option for startups, as banks normally won’t lend to businesses that haven’t been in operation for more than a year.
These loans are approved completely on the basis of your personal credit score, but you’ll need good credit to qualify.
- Startups and smaller businesses may be eligible
- Quick funding is available
- Borrowing costs are high
- Borrowing sums of up to $50,000 are available
- Failure to repay might have a negative impact on your credit score
- Startups and newer businesses that have a good personal credit score
- Borrowers who are ready to take a chance on their credit score
- Business credit cards
Revolving lines of credit are what business credit cards are. As long as you make minimal monthly payments and don’t go over your credit limit, you can use and repay the card as needed.
They’re great for covering recurrent expenses like travel, office supplies, and utility bills.
- You can earn points for your purchases
- There is no requirement for a security deposit
- High cost, with a variable rate that could escalate in the future
- There may be additional charges
- Continual business costs
Nonprofit organizations and mission-based lenders offer microloans, which are small loans of $50,000 or less.
Startups, newer companies, and businesses in underserved areas are often eligible for these loans.
- The price is low
- Other services, such as advising and training, may be given
- Loan amounts are smaller
- It’s possible that you’ll have to meet strict eligibility standards
- Startups and small businesses in underserved areas
- Businesses that require only a minimal amount of capital
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