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10 Types of Small Business Loans you Must Know
There are many types of small business loans for startups you must know and get to know which one is really okay for your growing business.
The right business loan for your business will depend on when you need the money and what you will be doing with it. Everything – from the business line of credit to invoice factoring and more – all with its pros and cons.
In this article today we will take a look at 10 types of small business loans you must know. Knowing these types of loans will help your business when the time comes for you to apply for small business loans.
This article will also help you to know what loans are best for small businesses.
Below are the top 10 types of small business loans you must know. Long term loans and rates for small business loans are different depending on the lender.
We will then look at the Pros and Cons of all the types of small business loans and what loan type is best for what kind of business.
You can see our previous article on How to secure a business loan to know more about small business loan requirements.
1. Term Loans
Term Loans are the most common form of business financing. You get some lump sum amount of money in advance, which you will pay back with time.
Some online loan apps offer long term loans of close to or even more than $1 million and they provide funding faster than traditional banks that as well provide small business loans.
- Get money in advance to invest in your business.
- It allows you to borrow a higher amount of money compared to other types of small business loans.
- Faster funding if you use an online lending platform other than a traditional bank that will take weeks or even months to get the fund.
- You may need collateral or a guarantee – This is an asset which the lender can sell in a situation where you cannot pay back the loan.
- The cost can vary as term loans from an online lender can be higher than when you take from a traditional bank.
- Small businesses looking to expand
- Borrowers with good credit and a strong foot in business who want to waste no time in getting access to funds.
2. SBA Loans
These kinds of loans are guaranteed by the Small Business Administration. It is offered by Banks and other lenders.
The payment period largely depends on how you plan to use the money. It is 7 years for working capital and 10 years for buying tools and about 25 years for real estate deals.
- They have some of the lowest rates in the market
- It is possible to borrow up to $5 Millon
- Long term repayment
- Qualification for this kind of loan is very hard
- Long and tough application process
- Businesses looking to expand or finance some existing debts
- Strong borrowers who can wait for a longer period of time for financing
3. Business Lines of Credit
This type of Loan provides you access to funds that is exactly up to your credit limit and you will pay the interest only on the money you were able to draw. It provides a greater level of flexibility than a term loan.
- It provides a more flexible way to borrow
- No collateral is required
- This can attract other costs like maintenance and draw fees.
- Strong revenue and credit is needed
- Managing cash flow and handling unexpected business expenses
- Best for seasonal businesses
4. Equipment Loans
The equipment loans help you in buying any business equipment needed for the smooth running of the business. The equipment loans are mostly matched up with the equipment’s expected life span and it serves as the collateral for this type of loan.
The rate is dependent on the value attached to the equipment and the strength of your business.
- The equipment is yours and you build equity in it
- You can be lucky enough to get competitive rates if you have strong credit and business funds.
- You may have to provide a down payment
- The equipment can become obsolete faster than the strength of your business financing.
- Businesses that want to own equipment outrightly.
5. Invoice factoring
Imagine that your business has a number of unpaid customer invoices which are paid in about 60 days. If you need money now, you can get it for those unpaid invoices through the invoice factoring type of loan.
You would sell the bills to a factoring company, which would be in charge of collecting payment from the consumer when the invoice was due.
- Instant 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 clients who pay on time (30, 60 or 90 days)
6. Invoice financing
Invoice financing is similar to invoice factoring, except rather than selling your unpaid invoices to a factoring company, you use them as collateral to obtain a cash advance.
- Quick money.
- Your customers 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.
7. Merchant cash advances
You are given a large sum of money upfront that you can use to fund your company.
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.
- Fast money.
- Financing without a commitment.
- 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.
8. 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 companies 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 enterprises may indeed be eligible.
- Fast 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 firms that have a good personal credit score.
- Borrowers who are ready to take a chance on their credit score.
9. 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 expenses.
Nonprofit organizations and mission-based lenders offer microloans, which are small loans of $50,000 or less.
Startups, newer firms, and businesses in underserved areas are often eligible for these loans.
- The price is low.
- Other services, such as consultation and training, may be given.
- Loans of a smaller volume
- It’s possible that you’ll have to meet strict eligibility criteria.
- Startups and small companies in underserved areas.
- Businesses that require only a minimal amount of capital.
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