Embarking on the entrepreneurship journey often requires more than a great idea and determination; it necessitates financial support to turn dreams into reality. If you can’t afford to bootstrap your business, taking out a business loan is a great option to get the capital you need to start or grow your company.
But do you know how to choose the best one for your needs and goals?
There are many small business loans and credit to consider, each fitting for a different business circumstance, with various advantages and disadvantages. Go through this primer to see what’s best for your growing company.
Here are the seven most popular types of business loans.
1. Term loans
Term loans are one of the most common types of business financing. It entails borrowing money from traditional banks, online lenders, or credit unions, which must be repaid over a fixed period (often at a fixed interest rate).
- Gain access to cash upfront for business investment.
- Allows for higher amounts to be borrowed than with other types of business loans.
- Securing term loans with the lowest rates and extended terms can be challenging.
- Borrowers may need to provide a personal guarantee or other collateral.
2. SBA loans
SBA loans are guaranteed by the U.S. Small Business Administration (SBA). There are several SBA loans, with the most popular offering being the SBA 7(a) loan.
- Lower interest rates.
- Allows eligible businesses to borrow higher loan amounts of up to $5 million
- Long repayment terms.
- Stricter and extensive qualification requirements.
- Lengthy and rigorous loan application process.
3. Invoice factoring
Invoice factoring, or accounts receivable factoring, is an alternative to small-business loans. It involves selling unpaid customer invoices to a factoring company for immediate cash. The factoring company advances a percentage of the invoice value and handles the collection from the customer. Once payment is received, they provide the remaining amount, deducting fees.
- Provides instant access to cash.
- Easier approval process.
- Costly finance option.
- Borrowers lose control over the collection of their invoices.
4. Business lines of credit
It is a type of financing that lets entrepreneurs borrow money on an as-needed basis. It works like a credit card, allowing borrowers to pay interest only on the money they’ve drawn. Once they’ve repaid funds, they can draw on the credit line again.
- Provide more flexibility than other financing options.
- Allows revolving access to funds.
- Unsecured loans.
- Often carries additional costs, such as maintenance charges and draw fees.
- Strong business credit and financials are required.
5. Equipment financing loans
These loans are designed to finance the purchase of equipment and machinery such as office furniture, semi-trucks, other commercial vehicles, and commercial fridges. The size of the loan is determined by the value of the equipment it is intended for.
- Equipment being purchased can be used as collateral for the loan.
- Longer repayment terms of up to 25 years.
- Some equipment lenders require a higher credit score and down payment.
- Equipment may depreciate faster than the financing term.
Microloans typically come in smaller loan amounts and have shorter repayment terms. Though some banks offer microloans, this financing option is more commonly provided by alternative lenders, like online and nonprofit lenders.
- Easily accessible to borrowers facing credit challenges.
- Less stringent qualification criteria.
- Interest rates are often higher than traditional bank loans.
- Personal guarantees and collateral are mandatory to secure funding.
7. Merchant cash advances (MCA)
An MCA gives businesses quick access to a lump sum in exchange for a portion of their future sales revenue. Unlike typical small business loans, the repayment in MCA happens through routine business sales.
- Give access to cash quickly.
- Easier qualification requirements.
- Expensive than other types of financing.
- Higher repayments can create cash flow problems.
The final word
Don’t feel rushed or pushed into a business loan. It pays to take your time and research to find the best business loan for your company. Carefully compare lenders and their loan terms before selecting the right financing option for your unique situation.
Want to know more about finance and accounting? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.