Getting a business loan is probably one of the most stressful processes for a small business owner. It can be difficult to navigate, and even if you have a great idea for your company. It’s always good to know what types of loans are available to you so that you can make an informed decision about which type works best with your needs. Here’s what you need to know about six common types of business loans:
Traditional Term Loans
Traditional term loans are a type of financing that provides businesses with a lump sum of money and then requires repayment over a set period of time. During this period, interest accrues on the loan amount at an interest rate set by the lender and agreed upon by both parties in advance. Once all payments have been made in full, you own your property free and clear!
In addition to paying back principal plus interest each month during your term period, there may also be fees associated with closing costs associated with obtaining this type of loan.
SBA Loans (Small Business Administration Loans)
The Small Business Administration (SBA) is a government agency that provides financial assistance to small businesses. Loans from the SBA are usually made through banks and other lenders, who then sell them on the secondary market.
The SBA offers several types of loans, including:
Loans — These are long-term financing products with fixed interest rates for established businesses with good credit scores. They can be used for working capital or major equipment purchases, such as real estate or machinery;
Microloans — Designed for new or growing businesses with less than $250K in sales;
Sole Proprietor — For self-employed individuals who want to expand their business but do not have collateral for traditional bank financing;
Business Lines of Credit
Business lines of credit are a form of revolving credit that allows you to borrow money as you need it, rather than in one lump sum. They typically offer interest rates lower than those on other types of loans and can be used for both business and personal expenses.
Business lines of credit are offered by banks, credit unions and other financial institutions. These lenders will review your business’s financial statements before approving the loan request; they may also require collateral or security deposits from borrowers who have less than perfect credit scores, a requirement that varies among lenders but is typically higher than other types of loans.
Equipment financing is a type of loan that allows you to purchase equipment for your business. Can include anything from computers to forklifts and warehouse equipment. The benefit of this type of loan is that it allows you to buy new equipment without having to pay for it all at once. As you use the equipment, it will depreciate (or lose value) over time until it’s paid off completely, at which point you own the item outright and no longer need to make payments on it.
Equipment financing comes in two main types: lender-provided or third-party vendor financing. Lender-provided means that your bank offers these types of loans through their own internal lending department while third-party vendors provide them only through other companies they work with such as finance companies or leasing firms.
Equipment loans for small business are secured by the products being bought, therefore their size depends on the down payment and equipment value. The finest equipment financing businesses provide 25-year terms and $1 million or more.
Invoice financing is a type of asset-based lending. It’s a short-term loan that is repaid when the customer pays their invoice. Invoice financing can be used to fund working capital and inventory, as well as other business expenses.
Because you’re using your invoices as collateral, invoice financing can be faster than traditional bank loans because there are fewer steps in the approval process.
If you’re a small business owner with a good credit score and a solid business plan, microloans may be an option. Microloans are typically under $25,000, which makes them more affordable than larger loans. They can be used to fund almost any type of business need, from buying inventory to paying for marketing expenses to renovating a storefront.
Microloans are available through banks and other financial institutions that lend money directly to people who want to start their own businesses but don’t have enough collateral or income history to secure traditional bank financing (like SBA loans).
As you can see, there are many loan types available for small businesses. We’ve covered the most popular ones here, but if you still aren’t sure which option is right for you, it may be worth talking with an expert who can help guide you through the process.
Disclaimer: We are not responsible for the financial advice given in this article.