If you’re planning to start your very own business or are looking for funds to grow your current one, applying for a business loan can be your viable option. However, there are several different types of business loans you can choose from, and each of them has its own perks and limitations.
To help you decide which type of loan to get, we have created this list of the 10 different business loan types out there. They’re as follows:
- Short-term Loan
A short-term loan is basically a type of loan which you should repay over a short period of time, often ranging from 3 to 18 months. The repayment period will vary from one lender to another, but some will allow up to a year while others only a few weeks depending on the amount borrowed.
With a short-term loan, you can receive financial funding for your business a lot quicker compared to other loan types. This makes it the perfect choice for unexpected emergencies, especially if you need one-time funding for your business that needs immediate attention. It also doesn’t involve an extensive application process than the other loan types.
Despite that, a short-term loan often comes with very high interest rates. Therefore, it’s only recommended to apply for this type of loan only when you need quick cash immediately.
- Long-term Loan
A long-term loan is just like the short-term loan except that repayment period is made over a period of years. This makes it an excellent option if you want a large amount of funding for your business without having to worry about repaying them in a short period of time.
Additionally, if you have a strong credit history, you will be able to enjoy low interest rates when you apply for this type of loan. The problem, however, is that the application process tends to be a lot longer and complicated. In fact, it can be quite time-consuming and normally involves tons of paperwork.
Apart from that, it’s also available only to established businesses. This makes it not an option for you if you are yet to start your own.
- SBA Loan
The Small Business Administration has its own business loan program that partially backs loans offered by commercial banks and online lenders in order to provide small businesses with financial aid. Through this type of loan, you’ll be able to enjoy more affordable interest rates, making it the preferred option for a lot of business owners.
Despite its long repayment terms and low APR rates, the application process for getting an SBA loan is long and time-consuming. However, as long you’re willing to wait, you can surely get the funding you need.
An SBA loan is categorized into three different types which are as follows:
- SBA 7(a) – this type of loan is perfect for almost all business purposes
- Microloans – these are designed to provide funding of up to $50,000 for new businesses
- CDC/540 – this type of loan is intended for purchasing major assets like real estate
- Equipment Financing
Though you can use the money you received from a loan to purchase equipment, an equipment financing loan is a dedicated type of loan which can be really helpful if you need funding to buy a new piece of equipment. Therefore, instead of using your loan to buy an expensive equipment, you can instead apply for equipment financing to handle the expenses.
The good thing with equipment financing is that it’s available for both established and new businesses. In fact, even business owners who have low credit scores will still qualify for this type of loan. Just like most business loans, equipment financing has some pretty good interest rates which normally range from 8 to 30% depending on certain factors.
The loan amount you can get will depend on the value of the equipment you plan to acquire, with up to 100% of its cost. Meanwhile, the funding will take around a couple of days on average to come through. Lastly, the loan term will last for as long as the equipment still functions, with an average of around 5 years.
- Invoice Financing
In some cases, small businesses will suffer from cash flow shortage because of slow-paying accounts receivables. If that happens, most business owners will resort to invoice financing as a means of keeping their business going.
Invoice financing is typically available in two options. One is invoice factoring in which a lender pays a business a percentage of its outstanding invoices. After that, he will then collect payment from those invoiced customers. After collecting payment, he’ll then pay the business the remaining balance. The other option is called invoice discounting in which a percentage of the outstanding invoice is paid to the business. After the business collects payment from customers, the loan is then repaid.
Compared to other types of loans, invoice financing is actually easy to receive. In fact, your credit score isn’t even a requirement. Also, since the invoices will act as the collateral, you will need any other collateral for the loan.
- Business Line of Credit
A business line of credit involves a pool of money where you can withdraw funds, repay them, then withdraw again later. Basically, a lender will extend which pool of money from which a borrower can take out from any time. It can be either fixed or revolving. When a line of credit is revolving, it means that the pool is replenished each time you repay your loans, thereby allowing you to take out funds again when necessary.
Each line of credit comes with its own credit limit which refers to the maximum amount of you can borrow. One of its biggest advantages is that you only have to pay interest on the money you use. For example, if you’re approved for a line of credit with a $100,000 credit limit and only took out $50,000 from the pool, you’ll only need to pay for that $50,000 along with its associated fees.
Due to how flexible a line of credit is, it’s often the best option for businesses who want financial aid in the event of an emergency.
- Merchant Cash Advance
With a merchant cash advance, you can receive a lump sum which you will have to repay for a set percentage of your credit card transactions every single day. Unlike other types of loan, it doesn’t have a fixed repayment term as you only have to keep on paying until the amount you borrowed is completely paid off.
The upside with this type of financing is that you have to pay less when business is slow, but you also have to pay more if your business is booming. On the downside, it’s perhaps the most expensive type of loan for business owners since the APRs can sometimes reach 100% or higher.
Due to that, it’s only a viable option if your cash flow can handle it and you don’t have any other options.
- Personal Loan
You can actually apply for a personal loan to use for your business. It’s often the choice for startup businesses since applying for other types of businesses loans can be complicated due to the lack of necessary documentation.
With a personal loan, you’re basically using your own credit score in order to have your application approved. Additionally, you will be the one held liable for the borrowed amount. Also, due to the higher interest rates for business loans often available for startups, most startup business owners would rather go for a personal loan to aid with their financing.
Despite all that, a personal loan has a fairly limited funding cap. This explains why it works best for startups since they don’t have a high funding requirement anyway. Also, the fact that you’re held liable for the debt can be quite troublesome if your business ends up failing.
- Business Credit Card
The last one is a business credit card which is basically a type of card you use for business purposes. In this setup, a lender will provide you with a set credit limit, and using the card, you make multiple charges until the credit limit is reached. Just like the line of credit, you only have to pay for the funds you used which can take months on average.
However, as the credit limit is often minimal, this type of financing is only ideal for dealing with cash flow shortages or emergency expenses. Also, you will have to pay off the balance as soon as possible to make sure you won’t have to pay interest month after month.
Conclusion
Looking for financial aid for your business, whether established or a startup, can be a hassle. Fortunately, there are loan referral agencies out there that will make the entire process a lot easier. One good example is Credit Star Funding. With their help, you can find the right funding you need for your current situation. They’ll even analyze your credit score and income to provide you with the best loan recommendations.
