A business loan is a loan that is obtained for business purposes. And just like other kinds of loans, debt is being created to help the business achieve a goal, while the debt is repaid back as agreed with added interest. Types of business loans include SBA loans, microloans, term loans, equipment loans, and more.
A small business owner who is considering financing a business should compare the financing options before making a conclusion on the most suitable option. Consider the rates, terms, qualifications you have, and your business needs.
So, if you’re seeking a business loan, check out the business loan types provided below to make your decision.
1. Equipment loans
Just as the name implies, you can acquire equipment for your business with equipment loans. The loan term is typically matched up with the expected life span of the business equipment, and it is given as collateral for the requested loan.
The loan rates you receive are dependent on the strength of your business and the value of your equipment. You can equip your business with the required equipment needed to run. And don’t expect to receive cash to purchase them. These loans are provided directly to the equipment provider where you’ll be getting them.
Equipment loans should be best considered for businesses that want to own the equipment outright, and the advantage of this type of business loan is that the equipment you get becomes yours and you can build equity in it. You’ll also be able to receive competitive rates if you have strong credit and business finances. But then, you may have to come up with your own down payment. And the equipment you are getting may become quickly outdated when compared to the length of your financing.
Microloans are offered by mission-based lenders and nonprofit companies and are generally provided to new businesses, startups, and those in less-opportune areas. As the name implies, microloans are small loans – can be $50,000 or even less. The cost is low, but one good side is that you’ll likely receive services such as consulting and training.
But for this small loan amount, you’ll likely have to be subjected to some strict eligibility requirements. Microloans are only suitable for startups, businesses that are located in disadvantaged communities, and probably big businesses that only require a small loan amount for specific financing.
3. Term loans
Term loans are common ways to finance a business. A considerable amount of money is paid upfront for your business, and you repay with an agreed interest rate over a length of time. You’ll receive this type of business loan from online lenders that offer up to $1 million with quicker measures of funding, unlike most brick-and-mortar finance institutions. They are best considered for businesses that want to expand, and by borrowers who have a strong business and good credit.
Term loans offer higher loan amounts of business financing. And since online lenders do not have to be subjected to expenditures faced by most traditional banks, there are fewer or no fees required in applying. No paperwork either. And you’ll receive your funding – if you are found eligible – within days, and the repayment pattern can stretch out for several months.
To get this type of loan, you may require a personal guarantee or collateral. The collateral could be an asset such as business equipment, or real estate which can be sold if you default. Oftentimes, traditional banks would offer term loans with lesser costs to online lenders.
4. Invoice financing
With invoice financing, you sell unpaid invoices to a factoring company and use these invoices as collateral for loans without the knowledge of your customers. One of the positive sides of this kind of loan is fast cash. Businesses that want to get fast cash on their unpaid invoices and also maintain control over the invoices may want to consider this.
But then, it is more expensive when compared to the other options of business financing. You’ll also still be responsible for collecting payment on the invoice.
5. SBA loans
SBA loans are guaranteed Small Business Administration loans that are provided by banks and other lending institutions. Loan repayment terms are considerably long. You can repay from 7 years of working capital to about 10 years for acquiring equipment, and up to 25 years for acquiring real estate.
SBA loans offer up to $5 million with some of the lowest rates available on the market. Businesses that want to refinance existing debts or expand their operations should consider this type of business loan. You’ll only have to be prepared for its long and rigorous process of application.
6. Invoice factoring
Invoice factoring works closely like invoice financing but unlike the latter where you’ll provide unpaid invoices for fast cash and still be responsible to receive the unpaid money from customers, invoice factoring allows you to sell the unpaid invoices to factoring companies who are then responsible for collecting the money from customers when the invoices are due.
So, if you need fast cash and can’t wait for long to receive payment on unpaid invoices, you can consider this form of business loans to finance your business. It is fast and has easy approval, unlike traditional funding options. But then, you lose control over the collection of your invoices and they are also more costly.
7. Business lines of credit
A business line of credit offers more flexibility when compared to a term loan. The funds you’ll get are only up to your credit limit. And since it is typically unsecured, you do not have to provide collateral for this business loan type.
Business owners faced with unexpected expenses or seeking short-term financing would find this suitable. But then, you’ll require strong credit and revenue and additional costs such as draw and maintenance fees.
8. Personal loans
You already know about personal loans. You can use them for business purposes too. New business owners should rather opt for personal loans since most traditional banks do not provide business loans to businesses that have not had any operating history. So, you’ll get approved only based on your personal credit score, and you’ll need good credit to be qualified.
This form of financing provides individuals with small loan amounts and if you default on the payment, you only risk hurting your credit. The cost of borrowing is also high.
9. Merchant cash advances
Merchant cash advances provide you with upfront financing for your business. And instead of having to pay a fixed monthly figure from a bank account as in the case of term loans, you’ll pay either by weekly withdrawals from a particular bank account or by withholding debit and credit card sales daily.
The kind of business financing is considerable for fast cash and unsecured financing, but be sure that your business has high and consistent credit card sales and can handle frequent repayments. You’ll also likely run into very high borrowing costs which may be up to 350% in some cases.
10. Business credit cards
These business loan types are revolving lines of credit. So long you make minimum monthly payments without exceeding the credit limit, you can draw from the card and repay as required. Consider them suitable for financing travel plans, utilities, office supplies, and other ongoing expenses for your business.
While this loan type requires no collateral, you’ll receive rewards on your purchases. But it often attracts extra fees. You may also experience high borrowing costs with variable rates that may rise.