Types of Business Loans - How to Compare Your Options

Published July 3, 2019 by WC Team

Believe it or not, virtually every company needs a financial shot in the arm at some point. Whether you require additional cash to get started, want to expand or upgrade or have encountered an emergency that you do not have the cash flow to recover from on your own, it makes sense to learn about the various types of business loans and how your company could benefit.

SBA Loans

The federal government’s Small Business Administration (SBA) backs banks and other lenders in providing loans ranging from $5,000 to $5 million. Although the application process for these loans can be arduous and you will usually need a strong credit history, you can use the funds you receive for virtually any business-related purpose. What’s more, the APR is low, and payment terms are long. Learn more about SBA Loans here.

Traditional Business Loans

If you need to borrow anywhere from $1,000 to $500,000 for virtually any business-related purpose, a traditional loan from a conventional bank or credit union might be right for you. In general, the loan amount plus interest is repaid over the course of one to five years, and no collateral is required. Instead, you must show evidence of your monthly or yearly revenue and your credit history.

Business Line of Credit

Think of this type of loan as a credit card for your business. You are given a ceiling above which you cannot withdraw, and you only pay for what you use. When you have finished repaying the principle and interest, you can withdraw more money. These loans are perfect for businesses with a poor credit history and/or a low credit score. Approval can happen within a day, but be aware that APR rates are higher. Furthermore, you will earn a stiff penalty if you fail to pay on time. Learn more about line of credit loans here.

Invoice Financing

In this payment arrangement, you sell your invoices to a company, which then advances you anywhere from 60 percent to 90 percent of the total amount. After it recovers the money from your customer, you receive the remainder minus processing fees. Approval is fast, and these loans are usually easy to qualify for because the invoice itself serves as collateral. For many businesses, the higher fees are offset by the fact that another company is dealing with getting payment from delinquent customers.

Merchant Cash Advance

With this arrangement, you receive a lump sum in exchange for a set percentage of your daily credit card transactions. You pay until you have satisfied the loan, but there is no fixed term. If your business is just getting started or has a poor credit history, merchant cash advances can be ideal. However, interest rates are quite high.

Equipment Loans

Specifically for machinery and other equipment, these loans usually use the equipment itself as collateral. Loan terms are generally around five years or as long as the equipment is still usable. You can qualify for equipment loans even with poor credit since the machinery is used as collateral. However, it might be obsolete by the time you have finished paying for it.

As you can see, there are several types of business loans. To understand which is best for you, consider factors such as the amount you need, your business’s history and revenue, the length of the application process that you are willing to undergo, the length of time you estimate that it will take you to pay off the loan and how quickly you need the money. Once you have arrived at some semblance of an answer to these questions, the next step is up to you. Since everyone needs a little help sooner or later, bite the bullet and apply for the business loan you need.

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