Your Guide to The Different Types Of Business Loans
Selecting the right business loan depends on several factors like the reason for your requirement, terms, rates and eligibility qualifications.
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According to a survey report generated by Forbes in 2018, the U.S. had the highest mortgage loan takers. Student loan takers rank second among the residents of the U.S., with 44 million borrowers standing at $1.5 trillion.
Although loans act as a gear to bring the finances on track, businesses need to manage them well.In case you lack enough money to fund your studies or kick start a new business, explore the options available in the market to avail the loan.
Small business owners have multiple financing options when in need. The various types of loans are:
Term Loans
A term loan is a commonly offered business financing. It offers finances for a one-time investment to a small business. You are given a lump sum amount of cash that has to be repaid with interest over a specific period.
Term loans are offered by online lenders, traditional banks and credit unions. Generally, a term loan ranges from $2,000 to $5 million with payment rates up to 10 years. Online lenders offer up to $1 million and are able to process funds much faster than traditional banks.
Pros:
– Get lump sum cash to invest in your business
– Offer a high range of borrowing amounts
– Funding is offered within weeks by online lenders as compared to several months by offline or traditional banks.
Cons:
– You need a personal guarantee or collateral of an asset like business equipment or real estate.
– In case you default, the collaterals will be sold.
– Online lenders have higher loan costs for term loans than traditional banks.
Ideal for:
– Growing and expanding businesses
– Borrowers with good credits and financially stable business who want immediate funding.
SBA LOANS
The small business administration or SBA guarantees loans offered by banks as well as other lenders. The repayment period ranges from 7 years for working capital. For buying equipment, it ranges between 10 years and 25 years for purchasing real estate.
Pros:
– The government guarantees it, offering the lowest rates of the market
– You can borrow amounts as high as $5 million.
– Offers longer repayment periods.
Cons:
– It isn’t easy to qualify the eligibility criteria for an SBA loan
– There is a very lengthy and cumbersome application process.
Ideal for:
– Expanding businesses or refinancing existing debts
– Businesses having a healthy credit and can wait a considerable period for fund approval.
BUSINESS LINES OF CREDIT
A business line of credit is far more flexible than a term loan, being provided funds only up to your credit limit. This will help you to manage cash flow, make an unexpected expenditure or buy inventory.
Pros:
– Only pay interest on the money drawn by you
– Flexible borrowing terms
– Does not require any collateral since it is unsecured
Cons:
– Might have additional costs like drawing fees and maintenance fees.
– Requires high credit and substantial revenue
Ideal for:
– Businesses that require finances for a short time.
– Helps to manage cash flow and handle emergency expenses.
EQUIPMENT LOANS
A loan taken by businesses to buy equipment is termed as equipment loan. The long term usually lasts up till the expected lifespan of the instrument. The equipment itself serves as the collateral. The rate of interest depends on your business’s strength and the value of the equipment being bought.
Pros:
– By owning the equipment, you can build equity on it.
– If you have strong credit, you are eligible for competitive rates.
Cons:
– An initial down payment might be a requirement
– The technology of the equipment can be outdated much before the payment term.
Ideal for:
– Businesses that have an immediate requirement for new equipment.
INVOICE FACTORING
You might have pending invoices that customers have not paid, but you are in a dire need for money. In this case, if the invoice payment terms are 60 days, you can get the money for those invoices through invoice factoring.
The pending invoices are sold at a discount to a factoring company. They are responsible for collecting the payment dues from the customers.
Small businesses can take this option to turn invoices into fast cash. This will help business owners to make payments to employees and handle other expenses.
Pros:
– You receive fast cash against pending invoices.
– It has a much easier approval method compared to traditional funding options.
Cons:
– It is more costly compared to other loan options as you have to give away your invoices at a discount
– You permanently lose the collection and control over your invoices.
Ideal for:
– Businesses needing money and have invoices that are pending.
– Businesses having reliable customers with extended payment terms of 30, 60, and 90 days.
INVOICE FINANCING
Similar to that of invoice factoring, the only difference is that instead of selling all the unpaid invoices to the factoring company, the invoices are used as collateral to get advance cash.
Pros:
– You get the cash very swiftly without any formalities and processing time.
– Customers will not be aware that their invoices have been put up for financing.
Cons:
– Costly, compared to other loaning options
– You still have the responsibility of collecting the payment against invoices that are pending
Ideal for:
– Businesses having immediate financial requirements and having invoices that can be kept as collateral.
– Businesses that do not wish to give over control of their invoice collection.
Fill Out All The Documents Necessary for the Business Loan
Regardless of the loan that you apply for, you need a few documents to process it.
Financial institutions often reject an application or delay the process due to improper documentation submitted. Make sure you find out what are the requirements of your lender and compile the necessary documents before filling out the loan application.
