Considering a loan for your business? Then you might also be wondering which types of business loans exist.
Knowing the different types of small business loans is important. It helps you make an informed choice for your company and weigh the pros and cons.
Ultimately, the best lending option for you comes down to which type of loan fits best. Consider both your circumstances and the type of loan before making a choice.
Here’s a basic guide that covers your business loan options.
Business Line of Credit
A business line of credit is a flexible lending option for small businesses.
Instead of receiving all the money in a lump sum, business owners are given a line of credit to spend as needed. The amount tops out at $500,000, so there is really a lot of flexibility in this option.
Similarly, a business credit card could work the same way.
Want to compare small business loan options? (See here: Small Business Loans 2021: Compare Financing Options | Nav)
SBA Loan
When security is a priority, SBA loans are the way to go. SBA stands for Small Business Administration and means your loans are backed by the government. Instead of borrowing from the bank, private-sector businesses loan you the cash.
Collateral is required, meaning you have to put business or personal assets up to acquire such funding.
Contained within this group are subgroups like the 7(a) loan, the Microloan Program, and the CDC/504. Each type of SBA loan offers different benefits, so do your research before.
Business Term Loan
If income is consistent, a term loan can be one of the best types of business loans for you.
Term loans are generally paid back in a set number of years (5 or less) with the same monthly payment and a fixed interest rate.
Generally speaking, this type of loan is good for buying equipment or expanding pieces of your business. It might not be suitable for a pivot or any type of expansion that’s risky.
Merchant Cash Advance
Feel confident about your income? People wondering how to fund a business often turn to merchant cash advances.
In this type of loan, you borrow against future income. Instead of paying a monthly bill to the bank, they gain access to your earnings and take a percentage out each month.
Again, this is probably best for a company that’s consistent and doing business. Probably not a great option for startups or risky expansions.
Equipment Financing
For those who run companies with large overhead, there is equipment financing. When you need to overhaul your gear or upgrade your gadgets, this option is great. With this option, interest rates are much lower than some of the other options on this list.
Contrary to the name, it doesn’t have to be used for heavy machinery, either. Some business uses equipment financing to furnish their office, for example.
Types of Business Loans
Understanding the different types of business loans before submitting applications is key. This helps you narrow in on what you need for your company and which financing option is best suited.
Each offers its advantages. So whether you need flexibility, security, or know your business will be profitable, there are options for loans.
Do your research and find what’s right for you.
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