Everything You Need to Know About Business Loans

Businesses need capital in order to start or grow their operations - learn about different types & benefits associated with small business loans.

Everything You Need to Know About Business Loans

Business loans are a great way for entrepreneurs to get the capital they need to start or grow their business. There are many different types of business loans available, including term loans, SBA loans, business lines of credit, equipment loans, invoice financing, commercial real estate loans, and microloans. Each type of loan has its own advantages and disadvantages, so it's important to understand the different types of business loans before making a decision. Term loans are one of the most common types of small business loans and are a lump sum of cash that is repaid over a fixed period of time.

With a traditional term loan, you borrow a fixed amount of money up front and repay the money, with interest, according to a specific repayment schedule. A variety of lenders offer term loans, including banks and online lenders. Business lines of credit can create a cushion in the event of a cash flow emergency and are useful when you need money quickly. Banks often offer secured and unsecured lines of credit.

For insured lines, you must deposit some assets as collateral. SBA loans are an excellent product for small businesses and, aside from a traditional bank loan, are the most affordable sources of capital. New and established businesses can apply for SBA loans, but there are different SBA loan programs for different business needs. It's also important to note that while SBA loans are designed to help small business owners who can't qualify for traditional bank loans, they still require you to meet high requirements, including a strong business financial situation, a strong credit history and a few years in business. One of the most popular asset-based loans are equipment loans, also called equipment financing.

This type of small business loan is a potential option if you're looking for money to purchase new or used equipment. Instead of paying directly for expensive equipment, you can apply for a lease or loan of the equipment to finance the purchase. Equipment financing is available for established and new businesses, and even business owners with lower credit scores often qualify. Unlike other types of business loans, business owners with less than ideal credit can often qualify for equipment financing because the equipment itself secures the loan.

This way, you don't need to provide any other warranty; the equipment itself serves as a warranty. Loans for equipment have fairly affordable interest rates, ranging from 8% to 30%, depending on your company's age, credit and finances. You can use equipment finance to buy or lease a variety of types of equipment, which may include computers, appliances, and vehicles that you use in the course of your business. Another popular type of asset-based loan for businesses is invoice financing. With this type of business loan, you use your outstanding bills to get a cash advance from a lender.

Unpaid invoices act as a guarantee of the advance. With bill financing, a lender advances you a percentage of the total amount of your bill, usually between 85 and 90%, and withholds the remaining percentage. You can use the down payment to cover the company's expenses while both of you wait for your customers to pay. During that time, the lender will normally charge a weekly fee. Once your customer pays, the lender will return the remaining 10% to 15% minus the commission. Overall, invoice financing is a great option if you're having cash flow problems as a result of billing multiple customers who all pay at different times.

You can use the down payment to cover payroll, rent and other operating expenses. If your company wants to purchase commercial property such as a retail store, office building or manufacturing plant, you may want to opt for a commercial real estate loan. Like equipment financing, the underlying property acts as collateral for this type of commercial loan. Commercial real estate loans can have different structures depending on the lender you work with and the amount of financing you need. Banks provide commercial real estate loans with longer repayment terms and lower interest rates.

Hard money lenders are private lenders that work with a larger group of borrowers to offer commercial real estate loans. These lenders are more likely to offer hard currency commercial loans or global loans for the purchase of commercial real estate. With a global loan, you make smaller payments over several years based on a longer repayment period followed by a large lump sum payment at the end of the loan. If you can't pay the lump sum payment you may have to renegotiate the terms with the lender or refinance the debt.

A microloan can be a good option for those looking to launch a startup and for entrepreneurs with microenterprises (e.g., food trucks vendors and independent companies). The maximum term of SBA microloans is six years. Interest rates are usually the highest among SBA loans but they are still relatively low; you can expect interest rates around 9% to 16%. A popular option for startup funding is to use a personal loan for business purposes.

Both banks and online lenders offer personal loans; these are based solely on your personal finances and your credit so your personal credit score is extremely important. Ideally your credit score must be above 650 to qualify; interest rates on personal loans range from 7% to 36%, depending on the lender and their ratings; and repayment period is usually less than five years. In addition to personal loans there are other ways to leverage personal finance for business purposes; if you're a homeowner you may be able to use home equity loan for business purposes; this way when business is slow you pay less and when it's booming you pay more; however cash advance for merchants is one of most expensive types of business finance on market; APRs can approach 100% or even higher. A business loan is a loan that is specifically intended for business purposes; as with all loans it involves creation of debt which will be repaid with additional interest; there are several different types of commercial loans including bank loans intermediate funding asset-based financing invoice financing microloans corporate cash advances and cash flow loans.