The Different Types of Business Loans Explained
If you have money on your mind, you’re not alone. According to some estimates, about six in ten small businesses struggle with cash flow on a regular basis.
For small business owners, the headaches related to funding can feel overwhelming, especially when you don’t know if you’ll have enough to cover costs.
That’s where business loans come in. The right types of business loans can help your business thrive instead of simply surviving—but how do you know which one’s right for you? Here’s what you should know about business loans.
1. Business Term Loans
These are the traditional loan option for many businesses. With a term loan, you’ll borrow a lump sum that you’ll repay over the course of a specific time period—usually around five 5 years, though you can find both longer and shorter terms available.
The interest rates for this will hover somewhere between 7%-30% on average, and you won’t need to provide collateral.
2. Business Lines of Credit
A business line of credit acts in much the same way as a credit card. Your business will have a maximum credit limit and can spend up to that amount. You’ll pay interest on the money you borrow, and the APR rates are often in the same range as the interest for business term loans.
For this type of loan, you’ll have between 6 months and a year to repay what you owe. You may need to provide collateral in some cases, depending on your company’s credit rating.
3. SBA Loans
These loans get their name from the U.S. Small Business Administration (SBA), but this organization doesn’t provide the loans itself. Instead, the SBA partially guarantees loans from banks and lenders, which minimizes risk and encourages them to offer more small business loans.
These loans can range from $5,000 to $5 million, and the APR rates will be much lower than the options above. However, there are several different types of SBA loan programs, so you’ll need to find the one that suits your needs.
4. Equipment Financing
You can use any type of business loan to purchase expensive equipment for your company, but an equipment financing loan is dedicated to this specific purpose. With this type of loan, you’ll use the equipment you’re buying as loan collateral. This can lower the average APR rates, and it also opens up opportunities for businesses with lower credit ratings to secure a loan.
The loan amount will depend on the equipment you’re purchasing, of course. You’ll repay the loan in small increments over a few years, and though you may find long-term options available.
5. Commercial Real Estate Loans
Like equipment financing, this type of loan is designed to help businesses with a single purchase. If you’re seeking a commercial property, you can use the property itself as collateral for the loan. Again, this can net you lower APR rates and open doors regardless of credit.
You can use a commercial real estate loan to purchase property, to build a new property, or to fund upgrades to your existing property. Like home mortgages, these are long-term loans paid off over the course of years or even decades.
6. Invoice Financing
This type of loan can help with cash flow shortages due to outstanding invoices.
If you opt for invoice factoring, your lender will pay a small percentage of your unpaid invoices before collecting the rest of the payments from the invoiced customers. Once the invoices have been paid, the lender will repay you in full, minus any interest fees you’ve agreed to.
With invoice discounting, on the other hand, the lender will pay a small percentage of your unpaid invoices while you wait for them to be paid. Once you’ve collected, you’ll repay the lender, in addition to interest and fees.
7. Quick Loans
As the name suggests, a quick loan is a loan that helps you fund your business fast, often within a few days or even hours of the application. With loan amounts ranging from $5,000 to $100,000 or more, quick loans offer you money for a variety of business purposes, from the costs of upgraded equipment to new inventory purchases.
Typically, you won’t need collateral, and these loans are flexible enough to suit a range of industries.
As you would expect, microloans are small loans, bearing amounts of $50,000 or less. This is one of the best business loan types for businesses that just need a little extra money to fund their project or goal.
You can use a microloan for a range of purposes, from startup costs to expansion to working capital. Given their financial limits, however, these small business loans are often best for startups, sole proprietors, or smaller companies.
9. Personal Loans
Getting business loans for a startup or smaller company can be tricky, which is why some business leaders opt to take out a personal loan instead. The terms of these loans will vary depending on your personal credit history and finances.
It’s worth noting, however, that these loans may offer even smaller amounts of capital than a microloan, in the range of $35,000-40,000. As a result, you may need to combine multiple sources of funding to reach your goals.
10. Merchant Cash Advance
For companies with lower credit scores, the types of business loans available may be limited—which can be an issue when you need fast cash to cover an emergency situation. With this type of small business loan, your lender will offer capital in exchange for a fixed percentage of your credit and debit card sales. This way, you’ll pay less on days when you’ve earned less revenue and more on days when your business is doing well.
While this can be one of the more effective types of small business loans for fast emergency cash, you must be sure your cash flow can handle it. The APRs for these loans can be steep, even reaching into the triple digits in some cases.
Know the Types of Business Loans
As you consider your next steps, knowing the types of business loans can help you decide which one is right for your company. Don’t forget that if you’re looking to secure a business loan, we can help! As long as you meet our basic requirements, we can help you fund your company’s growth.
Complete our request form online to get the process started, or contact us with questions.