Businesses and loans are two sides of the same coin. Loans can be a beacon of hope for enterprises struggling to make ends meet, or ventures attempting to expand. When an entrepreneur chooses the right kind of business loan and uses it strategically, the results can be astounding and groundbreaking.
However, such sound financial decisions are only possible when you possess the right kind of knowledge. Many people, including entrepreneurs, are not aware that there are many types of business loans, each designed for a different purpose. Sounds interesting? Join us, as we explore the 11 types of business loans and gauge their purposes.
Top 11 Business Loans Everyone Should Know About
1. SBA Loans
The first business loan on our list is an SBA (Small Business Administration) loan guaranteed by the federal government. It is an incredibly secure and highly sought-after loan as it comes with the assurance of repayment of up to 85 percent by the federal government in case the borrower defaults. Thus, the risks are reduced considerably for the lender.
The interest rates on SBA loans range from 2.8 percent to 13 percent. SBA loans are one of the most affordable ways for an enterprise to secure financing. However, the borrowing mandates can be quite extensive and arduous. For instance, your credit score should be 680 or above and the loan can take several weeks or even months to process.
2. Term Loans
The second type of business loan worth talking about is term loans. They are a great option for small businesses. With term loans, an enterprise can borrow money from traditional banks, credit unions or online lenders. Then, the funds have to be repaid over a fixed timeframe and often at a fixed interest rate.
The specific conditions of a term loan can vary, but a well-established enterprise might be able to borrow up to USD 500000 or more, receive repayment terms of up to 10 years and secure an APR starting from 9 percent. The greatest advantage of term loans is their competitive interest rates as compared to traditional lenders and faster applications. However, you might have to supply collateral for this type of funding.
3. Equipment Loans
Equipment loans, as their name implies, are small business loans intended to fund various types of equipment, including commercial cars and semi-trucks. Since the equipment serves as collateral to secure the loan, they are simpler to qualify for than term loans. However, your personal credit history and corporate financials will determine the precise conditions and interest rates. If your company has to buy equipment in bulk or wants to buy it now, equipment loans are perfect.
4. Short-term Business Loan
For enterprises that need cash in a hurry and are accepting repayment terms under three years, a short-term business loan is worth considering. Short-term business loans have a faster funding process and come with easier qualification terms. However, these loans feature some disadvantages, such as high APRs for some borrowers, expensive origination fees, prepayment penalties, etc. In addition, you might also have to agree to daily, weekly or biweekly payment drafts with some lenders.
5. Invoice Factoring
Invoice factoring is the fifth category of business loans that we have listed. Known by another name, accounts receivable factoring, it allows businesses to sell past-due client invoices for cash. A factoring company will offer a portion of the outstanding invoice value if it is authorised, and will thereafter handle the task of obtaining payment from the client. The business will provide you the remaining value after deducting the fees after receiving payment.
Invoice factoring is a great choice for enterprises who want fast cash and easy approval. But, the biggest disadvantage is that you lose over the collection of invoices.
6. Startup Loans
Young businesses that want to borrow money soon after establishment, before one year of establishment, can opt for startup loans. Startup business financing includes microloans, online loans and business credit cards. Startup loans are available to businesses with little to no established credit or operational history.
7. Commercial Real Estate Loans
Enterprises that need funding to buy commercial property can opt for a commercial real estate loan. Similar to equipment loans, the asset you are purchasing (property) serves as collateral to secure the loan. In the event of a default, the lender can foreclose and sell the property to someone else. To be eligible for a commercial estate loan depends on several factors, such as your business’s revenue and debt, cash flow, creditworthiness, and more.
8. Microloans
Microloans are a financing option that features small loan amounts and short repayment tenures. The interest rates for such loans are low and the eligibility criteria are often less stringent than other types of business loans. Enterprises can borrow up to USD 50000 with micro loans. Microlenders focus on underserved entrepreneurs, such as women and minorities.
9. Merchant Cash Advances
A merchant cash advance, sometimes known as an MCA, is a type of alternative financing that is typically not intended for small enterprises. An MCA company provides a one-time cash advance to a business in return for a percentage of future sales. Repayment from the business bank account might be made on a fixed debit basis or on a daily, weekly, or monthly basis. MCAs offer quick cash and flexible requirements. They can be very pricey, though.
10. Working Capital Loan
The penultimate business loan worth talking about is a working capital loan. For businesses that need assistance covering the costs of day-to-day operations, a working capital loan is a great choice. It is a short-term loan and may come with various advantages, such as competitive interest rates. The minimum credit score needed to be eligible for a working capital loan is 600. However, if you have a lower score, then you might qualify for funding with higher interest rates.
11. Personal Loans for Business Use
Last but not least, it is also possible to use personal loans for entrepreneurial purposes. These loans are suitable for startups, as banks do not lend to businesses with a lack of operating history. Startups can borrow up to USD 50000 but a failure to repay can hurt the credit.
Conclusion
So, there we have it, the 11 types of business loans worth considering. Whether you are a startup or an established venture, the list includes something for everyone. From working capital loans to equipment loans and SBA loans, the options are varied and you should choose the one best suited for your needs.
