Types of Business Loans

Back to blogPosted by Scott WegmannPosted on Money & Metrics

Starting a business is exciting, but you most likely don’t have the funding to get everything going right away. Looking into which type of loan you might need can be daunting if you don’t know exactly what would be best for your new business. There are several types of loans to consider:

SBA Loans

SBA loans are loans that are backed by the Small Business Administration. These types of loans are available through online vendors and commercial banks. Interest rates are set and regulated by the federal government. These types of loans typically have lower interest rates due to the stiffer requirements to qualify. Loan amounts available to business owners range from as low as $5,000 to upwards of $5 million dollars. Interest rates for these types of loans can be as low as %5 but it varies by applicant. Some of the downsides to getting these types of loans are that you have to have an extremely strong credit history to qualify and the application process can be lengthy; sometimes taking nearly 3 weeks to complete. Another positive for this type of loan is that you do not have to be in business for a long time in order to qualify for this type of loan and longer repayment windows are usually available for this type of loan. You can learn more about SBA loans here

Business Term Loan

This is a more traditional type of loan. These types of loans allow borrowers to take a lump sum of money. The amount available typically ranges from as low as $1000 to as much as $500,000. There are only a few downsides to these types of loans. If you have poorer credit you may be required to list your loan provider as an additional interest in your business until your loan is paid off. Another downside is that there are often penalties for paying these types of loans off early. The perks to this type of loan include a fairly quick time frame to qualify for the loan. Applications are processed within days. These types of loans also make it a lot easier to borrow a larger amount of money with more predictable and consistent payment amounts. There are also few to no restrictions on what the loan can be used for (as long as it is relating to your business.) The average interest rates for these types of loans vary anywhere from 7% to 30%. Business term loans do not require collateral to be provided.

Business Line of Credit

This type of loan is designed to be used more like a credit card. This line of credit can be more useful to businesses that have lower credit ratings. This type of loan typically has better rates than credit cards. Average APR rates are 7% to 25%, and repayment terms are usually between 6 months and 1 year, but exact terms vary depending on your business’ revenue and credit score. The perks for this type of loan include flexible funding, fast approval times and lower APR rates with higher borrowing amounts available. The only cons to these types of loans are that you may need to provide collateral if your credit is poorer and if you are late or miss a payment the penalties are usually pretty costly. Not sure if you would prefer a line of credit or a business credit card? Here is some more info to help you decide.

Invoice Factoring

Invoice factoring (AKA invoice financing) is when you sell your unpaid invoices for an advance of anywhere from 60% to 90%. The financing company collects payment from your client or customer to pay off their advance and gives you the remaining sum after they collect their additional fees. Some companies will advance the full amount of an invoice but charge a weekly fee while you repay the advance but it depends on the company. It is typically very easy to qualify for this type of loan as your invoice serves as collateral for repayment. This type of loan is often able to be approved within the same day as you apply. This method is also a great way to help with notoriously tardy paying customers as the financier takes on the task of getting payment from the customer. Want to know more about how to utilize invoice factoring? Click here for more.

Merchant Cash Advances

These types of loans offer a lump sum of money upfront in return for a percentage of your daily credit card transactions. The maximum amount you can borrow at a time is around $250,000. The only downside with these types of arrangements is that the interest rate can be very high. There are no set repayment terms, you continue paying until the total amount owed is paid off. This type of loan would be best suited for businesses with very poor credit or very limited trading history. It is a useful way to get lump sums of money quickly. It also typically takes very little time to be approved.

Equipment Financing

Standard business loans can cover purchasing new equipment. However, there are loans that are specialized in financing equipment you are purchasing for your business. This type of loan is very useful because the item you are financing is used as the collateral for the loan. With the risk being so much lower, this typically means much lower APR rates. APR rates for equipment financing vary from 8% to 30%. This also helps businesses who need new equipment but may not have the best credit. The only downside to this option is that as the equipment ages it depreciates in value. This means that by the end of your loan terms you may have paid more than the actual value of the equipment. This type of loan typically offers longer repayment term options and funding is usually available within just a few days.

Are you still questioning what type of loan option may be best for your business? Perhaps you should consider working with a loan specialist. Visit our website or stop into one of our locations to let us help you and the future of your business!

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