When starting or expanding a business, access to adequate funding is essential. Many entrepreneurs turn to business loans to secure the necessary capital. Here’s a quick look at the different types of business loans available to determine which loan is right for your business.
Term Loans
They involve borrowing a specific amount of money, which is repaid over a predetermined period, typically with fixed monthly payments. These loans are often used for major investments, such as purchasing equipment, expanding operations, or renovating a facility. They may vary in length, ranging from a few months to several years, and can be obtained from traditional banks or alternative lenders.
Line of Credit
It provides access to a predetermined amount of funds applicants can borrow as needed. Similar to a credit card, businesses can withdraw money from the line of credit whenever necessary, only paying interest on the amount borrowed. Lines of credit are often used for short-term working capital needs, such as covering payroll, purchasing inventory, or managing cash flow fluctuations.
Equipment Financing
Equipment financing allows businesses to acquire necessary equipment or machinery without paying the full purchase price upfront. The equipment itself serves as collateral for the loan. Equipment financing usually offers flexible repayment terms and can be a good option for businesses that rely heavily on equipment, such as construction companies, medical practices, or manufacturing firms.
SBA Loans
Small Business Administration (SBA) loans are backed by the U.S. government and are often sought after by business owners who may not qualify for bank loans. SBA loans offer attractive terms and lower down payments, making them an appealing option for small businesses. The SBA offers various loan programs, including the 7(a) loan program for working capital, the CDC/504 loan program for real estate and equipment purchases, and the microloan program for small-dollar loans.
Merchant Cash Advance
It provides a lump sum amount to a business in exchange for a percentage of future sales or credit card receipts. The funds are repaid daily or weekly from a portion of the business’ sales until the advance, plus fees, are paid in full. Merchant cash advances are typically used by businesses with irregular sales volumes or those needing quick access to capital.
Invoice Financing
This loan enables businesses to get immediate cash flow by using unpaid invoices as collateral. A lender provides an advance on the value of outstanding invoices, typically up to 85% of the invoice’s value. Once the customer pays the invoice, the lender then deducts their fees and releases the remaining amount to the business.