Types of Business Loans
Funds can never be enough for anybody. People would always need more funds to cater to different needs. It is why there is a need for loans. Even businesses sometimes might need to take loans to fund projects or stay afloat.
If you are a business owner looking for loans then, this article is for you. Knowing what kind of loans you have access to gives you options to make sound financial business decisions. Here are the major types of business loans and how to access them.
What are Business Loans?
The term ‘loan’ has been defined in different ways. A loan is an amount of money that is lent to another person with an interest and a promise that it would be paid back at a specific time frame. It is believed that with the collection of a loan, one is creating debt.
A business loan, as the name suggests, is a loan that is intended specifically for business reasons. It allows a business (small or large) to borrow money for a certain period and pay it back with interest accrued.
Some of the reasons businesses require a business loan include business expansion, inventory increase, hiring and recruiting of employees, moving, expansion of market strategy, invoice payment, upgrade, and so much more. However, a business cannot willy-nilly decide to collect a loan. Business loans aren’t released until certain requirements for loan collection are met.
What are the different types of business loans?
Business loans aren’t limited to bank loans any longer (especially when small businesses don’t joy it). Today, there are other options for small businesses that can’t access a bank loan to explore. They include the following:
This is similar to traditional bank loans. Term loan involves lending money from a small business money lender, then paying back with a timetable. This means that the payment is divided into set amounts that are to be paid monthly or yearly (depending on the agreement). This way, the business can pay back a loan with interest per term and easily instead of paying it all at once. The only hiccup with this type of loan is that the interest rate is much higher than a normal bank loan.
SBA stands for Small Business Administration. This organization is aimed at assisting small businesses scale with ease. Technically, US-SBA doesn’t directly give out loans to small businesses. They simply guarantee the loan that is given by other small business loan options or lenders. With SBA loans, lenders feel more encouraged to give out loans to small businesses. They also help to reduce the risks involved.
Invoice financing involves collecting a cash advance from a lender. With this type of loan, a business can get a certain percentage of the total amount of an invoice from the loan organization. The cash advance can be about 60-80% of the total. The loan comes with an interest deduction from the remaining 20-40% of the total amount. After the invoice has been paid, the loaning company would release the remaining funds to the business.
A business line of credit
A business line of credit loan works a little like a credit card. In this type of loan, a specific amount is given by the lender to the business. This amount can be fixed by the business or the lender (depending on the agreement). The amount can be withdrawn at any given time the business chooses and immediately the business withdraws from the total money, the interest begins to count.
There will also be a fixed time given to the business to pay the loan back (with interest) in full. There are three different types of business lines of credit loan: Unsecured, Secured, and Short-term. The secured business line of credit loan requires collateral which can be in form of a property or a piece of equipment. The unsecured type comes with a much higher interest rate.
Business Credit Card
Unlike the business line of credit loan, some businesses opt for credit cards. The cards are used just like a regular credit card with the same benefits attached. Although some businesses frown at this type of loan, others prefer to use credit cards for business emergency needs.
Microloans, as the name implies, is a type of loan for businesses that do not need a large amount (less than $50,000). These are the loans usually requested for startup purposes, expansion, and small projects.
The maximum term for payment is usually about 6 years. Also, most lenders prefer the intervention of SBA during the release of such loan type. The interest rate is also relatively low when compared to other types of small business loans.
This is for businesses that need to acquire major sets of equipment, pieces of machinery, or other inventories. Here, the business is offered an equipment loan or lease to fund the purchase of the machinery. Then the loan is paid back to the lender in the same way as bank loans.
Commercial Real Estate Loans
Similar to the Equipment loan, this loan is best when a business is trying to acquire a land property for whatever reason. The property would be collateral for the loan to be collected. However, there is no fixed procedure nor payment schedule. It depends on the lender and the amount that was loaned.
Merchant Cash Advance
The system of application for this loan is the same as with term loans or traditional bank loans. However, the payment procedure is different. Instead of paying a fixed amount periodically or at once, the money is being deducted from the business’ daily credit/debit sales. It can also be deducted by the lender from the business’s bank account daily or weekly (depending on the agreement). However, the interest rate is usually very high if it complies, but it doesn’t put any pressure on the business.
Personal loans for a business
Some people might not trust other options aside from a bank. And that is why there is a solution that involves the traditional bank loan. A business owner can request a loan as an individual from a bank, then use the loan for his/her business. The system and method of application are similar to collecting a normal personal loan. The only difference is the purpose of the loan.
This usually involves many investors. To access a crowdfunded loan, a business pitches an idea or the idea of its business to many investors. If the investors buy the idea or see potential in the business, they invest money into the business. This amount would be paid back in percentages to the investors depending on the agreement.
Business Acquisition loan
When a business wants to purchase a franchise, it usually looks for different types of business financing options available. This is because, most times, the money isn’t in a safe somewhere waiting. One of the options includes a business acquisition loan. With this loan, certain amounts would be lent to the business with a payback term of about 10 to 25 years. Although the money doesn’t get released on time, the interest rate is usually very low.
Other types of loans you may find include the credit line builder, accounts receivable financing, short-term loans, invoice factoring, startup loans, business term loans, and commercial mortgage.
What is the best loan type?
For every type of business loan, there are pros and cons. However, there are cogent factors that determine whether or not a business can apply for a type of loan. This means that not all small businesses should apply for the same type of business financing options.
For example, B2C businesses that do not involve the use of invoices cannot request invoice financing/factoring loans. Businesses with a more appealing service or product would prefer to use the crowdfunding loan type than others. While businesses that do not need a large amount would opt for more microloan types.
This means there are certain things to keep in mind when choosing which type of small business loan you should opt for. Some of them include the interest rate on the loan amount, the limited amount that can be requested, or how fast is the funding.
Besides, the purpose of the loan is another major factor to keep in mind when picking loans for small business owners. Some businesses might also lookout for whether or not a collateral/guarantor is required.
The all-time best loans for business do not exist, in that sense. The best one is the one that meets the needs of both the lender and the business in the most suitable way.
How can a business access a loan?
Despite the numerous small business loan options available, many businesses still might not know how to access a loan nor where to begin. Below is a step-by-step guide on how to access a business loan.
- Choose the most suitable type of loan for your business out of the options available.
- Search for lenders that offer the type of small business loan you need.
- Compare between different lenders or small business loan options.
- Check your business with the business loan requirement of your lender to see if your business is qualified for the loan.
- Ensure that all the documents required are complete, authentic, and up-to-date.
- Go ahead to apply.
The time between application and loan release might take a few days to a few weeks. However, the money lending company would need to be sure that a business would pay back a loan with the interest. Most companies begin with smaller amounts then move on to larger amounts after trust has been established.
A business would need to request a loan at one point in time or the other for various reasons. Although there are many business loans available as highlighted above, you have to be sure you can pay back the loan you are applying for. You can hire a financial adviser to help you make the right decision. Always remember, loans are not bad business decisions, knowing the type of loan to opt for and the best way to apply can make a positive difference to a company’s growth and development.