When it comes to financing a business, there are many options available. From term loans to SBA loans and business lines of credit, there is a loan type that can meet the needs of any business. It is important to research the different types of business loans before applying, as each loan type has its own qualification requirements, purpose, and desired loan terms. Here are the 13 most common types of business loans and their advantages and disadvantages.
SBA loans are business loans guaranteed by the U. S. government. Since the federal government guarantees to repay up to 85% of the loan amount if the borrower fails to make payments, it reduces the level of risk involved for the lender.
SBA loans can be one of the most affordable ways for a company to obtain funding, but they usually require a personal credit score of 680 to qualify and the loan process can take several weeks or even months to complete. Term loans are what many people think of when looking for small business loan options. With a term loan, your company borrows money from a traditional bank, credit union, or online lender and then returns the funds over a fixed period of time (and often at a fixed interest rate). If your business needs cash quickly and values repayment terms in less than three years, it might be worth considering a short-term business loan.
With some online lenders, qualifying businesses could access funding in as little as one day. Fast funding and easier qualification conditions are the main benefits of short-term loans, but they can also have some disadvantages such as high APRs and expensive fees like origination and prepayment penalties. Startup funding includes a variety of options, from SBA microloans to online loans and business credit cards. Starter loans are often available to businesses with little or no established credit or time in business, but they can sometimes be an expensive way to borrow money. On a positive note, start-up loans tend to be easier to apply for, even when it's a new company.
And a well-managed start-up loan can help you create better business credit for the future. A business line of credit is a type of financing that allows you to borrow money when you need it and pay interest only on what you borrow. It works like a credit card in that the issuing bank approves a credit limit and, as you use and return the money you owe, you will be able to access that same line of credit again during the drawing period. However, over time, the drawing period may expire (often after 12 to 24 months) and you'll no longer be able to access the credit line when that happens. At that point, the repayment period begins, which can last up to five years. Business lines of credit can be a flexible way to borrow money if you need an open source of funding.
They can also work well for projects with indeterminate costs. However, obtaining a business line of credit with the best loan terms usually requires good credit and sometimes collateral. You may also need to sign a personal guarantee, usually with unsecured lines of credit. Microloans are a financing option that includes small loan amounts and short repayment terms. Interest rates tend to be low (or non-existent in some cases) and qualification criteria are generally less stringent compared to other commercial loans.
Microloans can provide underserved small business owners with an injection of money to start a new business or help an existing business grow. However, microlenders can apply for a personal guarantee and a guarantee to secure funding. If your company offers products or services to other companies and uses invoices to collect payments, it may meet the requirements for invoice factoring. With this type of funding, your company sells its outstanding B2B invoices to a third party. The factoring company that buys your invoices could advance between 70% and 95% of their total value up front.
From there, the company collects outstanding payments from its customers, deducts a factor fee (usually 0.5% to 5% per month per outstanding invoice) and refunds the difference. Invoice factoring can help your company access cash from outstanding invoices before they are due. Qualifying for this type of financing is often easier than qualifying for other types of business loans. However, the factoring company can review its customers' credit during the application process to ensure that those companies are likely to pay as agreed.
This fast cash flow solution can also be expensive if your customers frequently pay late. Invoice financing works much like invoice factoring but without selling outstanding invoices to third parties. Instead, your bills serve as collateral for financing from lenders who advance funds against them.
