As you assess your business financing options, it’s important to understand the various types of loans available to your small business. Here’s a quick overview of seven of the most popular types of business loans.
Term loans are what most people think of when they think of business loans. With these types of loans, you borrow a specific amount of money and repay it over a specific term, typically one to five years. Terms vary depending on the lender, the purpose of the loan, your credit rating and other factors. For instance, you may have a fixed or variable interest rate.
Term loans are available from both banks and nonbank lenders. Lenders want to know what the purpose of the loan is and require a strong business credit rating and collateral.
The term “SBA loans” is misleading because the Small Business Administration (SBA) doesn’t actually lend money to small businesses. It sets guidelines for loans made by its lending partners, then guarantees a portion of the loans will be repaid. This makes lenders more willing to lend to entrepreneurs.
SBA loan requirements are financial statements, strong credit ratings and collateral. They include many types of loans; the most popular is the 7(a) loan for general business needs. For small loans (under $50,000), consider a microloan. To buy fixed assets, such as equipment or commercial real estate, look into the CDC/504 loan.
Small businesses that need working capital to handle temporary cash-flow gaps are turning to short-term loans available for a variety of purposes, including providing capital for payroll or inventory, refinancing other debts or paying taxes.
These types of loans are similar to traditional term loans in that you borrow a specific amount of money and pay it back over a set term. However, you’ll typically pay higher interest rates and must repay the loan faster; for example, daily payments (as opposed to monthly) are common.
Equipment loans are similar to auto loans. You take out a loan to buy equipment, using the equipment itself as collateral even though you haven’t purchased it yet. If you default, the lender repossesses the equipment.
Equipment loans generally have fixed term lengths, fixed interest rates and fixed monthly payments. The maximum term length is the expected life of the equipment itself. These types of loans are fairly easy to get, depending on your business’s credit rating, business history and the equipment purchase.
If you’ve ever taken out a home equity line of credit or credit card, you know how a business line of credit works. Lines of credit can be unsecured, or secured by collateral such as inventory or equipment. Lines of credit can be used for many purposes, such as working capital.
Advantages of these types of loans: You don’t make payments or pay interest until you tap into the funds. A “revolving” line of credit can be tapped over and over, without having to reapply. And as long as you make payments on time, interest rates are generally lower than with conventional term loans.
Do you have a B2B business with substantial accounts receivable? If so, invoice financing (or accounts receivable financing) can provide a fast version of a business loan. In these types of loans, you receive an advance for a percentage of the value of your accounts receivable (typically about 80 percent). The lender pays you the remainder, less any fees, when you collect on the receivables.
Invoice financing requires no credit check or collateral. However, fees are typically higher than for conventional business loans.
If customers often pay you by credit card, consider a merchant cash advance. These types of loans involve minimal paperwork and can be approved and funded in as little as 24 hours. The lender provides an advance on expected credit card sales; you give the lender part of your credit card sales each day (plus a fee) to repay the advance. However, merchant cash advance loans are expensive, with APRs as high as 80 percent, so make sure the loan is worth this cost.