What Types of Loans Are There?

Several types of business loans exist. Discover which one is right for you.

Businesses have a number of loan options for financing operations. These loans can help in growing a new business, purchasing equipment, or even fix cash flow problems. Whatever your needs, each type of business loan has its own rates, terms, and requirements. Below you can find a breakdown of the various business loan options to help find the right choice for your business.

Term Loan

With a term loan, a business receives a lump sum of money which they can repay to the lender over an agreed period of time. This loan makes the most sense for a business with good credit looking to invest money for expansion.

Pros

– Fast cash upfront

– Can receive large sums of money

Cons

– May require collateral such as business equipment

– Rates vary and may cost more than a bank loan

Merchant Cash Advance

With a merchant cash advance, businesses get a lump sum of money. However, instead of paying off the loan, the lender takes a percentage of daily credit and debit card sales or makes daily or weekly withdrawals from the business’ bank account. This loan makes sense for businesses with consistent credit and debit card sales with no other financing options.

Pros

– Unsecured financing

– Fast access to money

Cons

– High borrowing costs

– Difficult for budgeting

SBA Loans

In this loan, the Small Business Administration guarantees the loan offered by banks and lenders. SBA loans have longer repayment periods, ranging from seven years for working capital, 10 years for purchasing equipment, and up to 25 years for buying real estate. This type of loan makes the most sense for businesses with good credit looking to expand or refinance current debts. The loan takes time to acquire due to a tedious application process.

Pros

– Low-interest rates

– Can borrow up to $5 million

– Long repayment periods

Cons

– Difficult to qualify

– Lengthy application process

Business Lines of Credit

Business lines of credit give access to a certain amount of funds up to a credit limit. The borrower only pays interest on the amount of money withdrawn. This type of loan makes sense for short term financing needs to help manage expenses.

Pros

– Flexible

– No collateral required

– Short term financing

Cons

– May come with fees

– Requires good credit

Business Credit Cards

Similar to personal credit cards, a business can also get credit cards with revolving credit lines. Customers can withdraw as needed and will have to make minimum monthly payments.

Pros

– Earn rewards per purchase

– Doesn’t require collateral

Cons

– High-interest rates

– May come with additional fees

Equipment Loans

An equipment loan goes toward purchasing business equipment. Normally, the borrower will need to repay the loan for the expected lifespan of the equipment. Lenders use the equipment as collateral in case the business cannot repay the loan.

Pros

– Good rates for businesses with strong credit

– Goes toward purchasing equipment

Cons

– May require down payment

– May need to replace equipment before loan is paid off

Invoice Factoring

Invoice factoring helps businesses get access to fast cash for outstanding invoices. If a business has unpaid customer invoices, they can get the cash sooner through invoice factoring. In this type of loan, the business sells the invoices to a factoring company. The factoring company then takes on the responsibility of collecting the money for the unpaid invoices.

Pros

– Fast cash

– Easy approval

Cons

– Expensive loan

– Can become cumbersome to organize invoices

Invoice Financing

With invoice financing, businesses use invoices as collateral to access money quickly. This makes sense for business who need fast cash, but prefer to maintain control of their outstanding invoices.

Pros

– Fast access to funding

– Customers won’t know the invoice has been financed

Cons

– Costly rates

– The business still has responsibility of collecting owed money from the customer

 

Joe Schwartz | Loans Editor