What are the Types of Business Loans

What are Types of Business Loans

There are many types of business loans, ranging from business lines of credit to invoicing factoring to cash advances. Each has its pros and cons. The best type for your business depends on what you are looking for and when it is needed.

These are the top 10 types of business loans. Lenders can vary in terms, rates, and qualifications.

10 Types of Business Loans

1. Term loans

A term loan can be used for business financing. A lump sum of cash is paid upfront. Then, you repay the loan with interest over a set period.

Online lenders can offer term loans up to $1 million and provide quicker funding than banks offering small-business loans.

Pros:

  • To invest in your business, get cash immediately
  • These loans allow you to borrow more than any other type of loan.
  • Online lenders are faster than traditional banks and can usually provide funding in a matter of days to weeks, rather than several months.

Cons:

  • You may need to provide collateral or a personal guarantee — such as real estate, business equipment, or other assets that the lender is able to sell in case of default.
  • There are many costs to consider. Online lenders tend to charge higher interest rates than traditional banks for term loans.

Best for:

  • Businesses looking to expand.
  • Borrowers with good credit and a solid business are willing to wait for funding.

Also read: Top 10 Business Credit Cards for Startups

2. SBA loans

These types of loans are guaranteed by the Small Business Administration. The repayment terms for SBA loans vary depending on how you intend to use the money. The repayment periods vary from seven to ten years for working capital, to 25 years for equipment purchases, and 25 years for real property purchases.

Pros:

  • These are some of the lowest rates available on the market.
  • The maximum loan amount is $5 million
  • Repayment terms are long

Cons:

  • It is difficult to qualify.
  • It is a long and tedious process.

Best for:

  • Companies looking to refinance or expand existing debts.
  • Borrowers with strong credit are able to wait for funding for a long period of time.

3. Business credit

Business credit allows you to access funds up to your credit limit. You pay interest only for the money that you have drawn. This can offer more flexibility than a traditional term loan.

Pros:

  • Flexible borrowing options
  • Most often, the loan is unsecured and no collateral is required.

Cons:

  • Additional costs may apply, including maintenance fees and draw charges.
  • Strong credit and revenue are required.

Best for:

  • Management of cash flow, short-term financing, and handling unexpected expenses are all possible.
  • Seasonal businesses.

4. Equipment loans

Equipment loans allow you to purchase equipment for your company, sometimes including semi-truck financing. ( Business auto loan is available for cars, vans, and light trucks. The term of an equipment loan is usually matched with the expected equipment life span. The equipment acts as collateral. Rates will vary depending on the equipment’s value and the strength of the business.

Pros:

  • The equipment is yours and you can build equity.
  • If you have good credit and business finances, you can qualify for competitive rates.

Cons:

  • It is possible that you will need to make a down payment.
  • The life expectancy of your financing can make equipment obsolete faster than its duration.

Best for:

  • Companies that wish to purchase equipment.

5. Invoice factoring

Let’s suppose your company has unpaid invoices from customers. These are usually paid within 60 days. Invoice factoring is a way to get cash for unpaid invoices.

The Invoices would be sold to a factoring company, which would be responsible to collect from the customer the invoice due.

Pros:

  • Cash flow for your business.
  • It is easier to approve than traditional funding options.

Cons:

  • Comparable to other options, the cost of this option is much lower than others.
  • You have no control over the collection process.

Best for:

  • Businesses that have unpaid invoices need cash quickly.
  • Businesses that have reliable customers who are willing to pay on a long-term basis (30, 60, or 90 days)

6. Invoice financing

Invoice financing works in the same way as invoice factoring. However, instead of selling unpaid invoices to factoring companies, you use the invoices for collateral to obtain a cash advance.

Pros:

  • Quick cash
  • Customers won’t be able to tell if their invoice is being paid.

Cons:

  • Comparable to other options, the cost of this option is much lower than others.
  • The invoice payment must still be collected by you.

Best for:

  • Businesses seeking to convert unpaid invoices into quick cash.
  • Companies that wish to keep control of their invoices.

7. Merchant cash advances

A lump sum of cash is paid upfront. This money can be used to finance your business.

Instead of making one fixed monthly payment from your bank account like you would with a term loan, you pay on a merchant advance by either withholding a portion of your credit card and debit card sales each day or by withdrawing fixed amounts from a banking account every other week.

Pros:

  • Quick cash
  • Unsecured financing

Cons:

  • The highest possible borrowing costs — as high as 350% in certain cases
  • Frequent repayments can cause cash flow problems.

Best for:

  • Businesses that are able to handle frequent repayments and have high credit card sales.
  • Businesses that are unable to get funding elsewhere and cannot wait for capital.

Also read: Top Financial Tools to Easily Manage Business Finances

8. Personal

A personal loan can be used for business purposes. This is a good option for startups as banks don’t typically lend to businesses without an operating history.

These loans are approved based on your personal credit score. However, you will need to have good credit in order to qualify.

Pros:

  • Newer and startup businesses are eligible.
  • Quick funding

Cons:

  • High borrowing costs
  • You can borrow as little as $50,000
  • Credit can be damaged if you fail to repay.

Best for:

  • Start-ups and newer companies that have strong personal credit.
  • Borrowers who are willing to take on credit risk.

9. Business credit cards

Revolving credit lines are available for business credit cards As long as you pay the minimum monthly payment and do not exceed your credit limit, you can use the card to draw and repay it.

These funds are best used to finance ongoing expenses such as travel and office supplies.

Pros:

  • Redeem points for your purchases
  • No collateral is required.

Cons:

  • High cost with variable rates that could arise.
  • Extra fees may apply.

Best for:

  • For ongoing business expenses.

10. Microloan

Microloans can be small loans of $50,000 or less that are offered by non-profit organizations and mission-based lenders.

These loans are typically available to new businesses, startups, and those in disadvantaged areas.

Pros:

  • Low cost.
  • You may also be offered to consult or training services.

Cons:

  • Smaller loan amounts.
  • It is possible that you will need to meet strict eligibility requirements.

Best for:

  • Start-ups and businesses in communities that are disadvantaged
  • Businesses that require only a limited amount of funding

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