Needing more money to fund your business can be a significant obstacle. You might need to invest on a large scale or to cover some minor expenses, but whatever it is that you need, there are different types of loans that can help you get the finance you require.
However, with so many different kinds of loans available, choosing the right one for you and your business can take time and effort.
To help you out, here’s a list of the seven most common types of loans that can be used for business finance.
1. Payday Loans
These short-term loans are designed to meet immediate cash needs, such as payroll or inventory. Generally, you can borrow up to a certain percentage of your monthly income, and the loan is due in full on your next payday. Payday loans are a go-to option for many people because they’re easy to apply loans, and you don’t have to provide any collateral.
The downside is that they come with extremely high-interest rates and fees, so it’s essential to read the fine print before you apply. Also, because these loans are due in full on your next payday, you could be in serious financial trouble if you can’t repay them on time.
2. Conventional Bank Loans
These are probably the most popular type of loan, as they provide long-term financing with low-interest rates and flexible repayment terms. You need good credit to qualify for one of these loans, but they make a great option if you have the necessary qualifications.
Conventional bank loans could be the right option for you if you need to fund a significant expansion or want to refinance existing debt. Also, if you have a good relationship with a banker, you could get access to more competitive interest rates.
3. SBA Loans
The Small Business Administration (SBA) offers several loan programs to help small businesses secure the financing they need. These loans are usually made in partnership with local banks, so they come with attractive and favorable repayment terms. Because the SBA guarantees a portion of the loan, lenders are more likely to approve them.
SBA loans come with more extended repayment periods and lower interest rates than conventional bank loans, making them an attractive option if you have good credit and need long-term financing. But they require a lengthy application process, so make sure you give yourself plenty of time to prepare and submit your application.
4. Business Lines of Credit
These short-term loan products are similar to a credit card in that you can draw on the funds repeatedly. It makes them especially useful for businesses with ongoing financing needs, such as startups and seasonal businesses.
A business line of credit also provides financial flexibility because you only pay interest on the funds you use. Similar to credit cards, no collateral may be required for approval. Depending on the lender, you may be able to secure a credit line without any personal guarantee.
5. Merchant Cash Advances
A merchant cash advance (MCA) is a lump-sum loan that you repay with a percentage of your daily card sales. These loans are often used as short-term financing and come with high fees and interest rates. Therefore, they should only be considered if you need the funds quickly and don’t have access to other sources of financing.
MCAs are best suited to businesses that rely heavily on credit and debit card payments, as the loan is repaid with a percentage of those sales. Because there’s no fixed repayment schedule, you don’t have to worry about making regular payments; instead, you repay the loan until it’s paid off.
6. Invoice Factoring
Invoice factoring, also known as accounts receivable financing, is a loan secured by unpaid invoices. You can use this type of loan to get immediate access to cash and free up working capital. However, you’ll have to pay a fee for each invoice that’s factored—typically between 1 and 5 percent—so it’s essential to read the fine print before you agree to any financing.
Invoice factoring is an excellent option for businesses with consistent income but doesn’t always have access to working capital. Because these loans are based on unpaid invoices, you won’t need good credit or collateral to qualify.
7. Equipment Loans
These loans are specifically designed for businesses that need to purchase or lease equipment. The equipment usually secures the loan, so you’ll need to put up some collateral to be approved. Because the lender can repossess the equipment if you default on the loan, they typically offer more favorable rates than other types of financing.
The advantages of an equipment loan are that you can use it to finance 100% of your purchase and that the loan itself is typically tax-deductible. The downside is you may be unable to qualify if your business has a bad credit score.
Final Thoughts
No matter your loan type, it’s essential to research and understands the terms before signing up. Make sure you carefully weigh all your options and select the best fit for your needs and budget. With due diligence and careful planning, you’ll be able to find the right loan for your business.
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