Understanding the Different Types of Business Loans
You have your business idea, but now it’s time to think of loan products. Financing options for a business vary greatly in terms of length, repayment terms, and interest rates. Here’s a quick breakdown of the most popular business loans and what they’re best for.
Accounts Receivable Loan
An accounts receivable loan allows you to borrow against the money you’re owed. If you have $10,000 in unpaid invoices floating out there, you can borrow a percentage of that money before your customer pays you. You repay it once your customer pays up. You do pay a fee for this type of loan, and those fees are often much higher than the fees you pay with a traditional business loan.
Business Line of Credit
A line of credit for a business offers flexibility in when you use the cash you’ve borrowed. It works a little like a credit card. You withdraw money from the loan when needed. You have a specific amount of time where you can draw on the line of credit, typically paying interest only during that time, after that, you’ll start repaying the principal and interest. Some lenders may require paperwork to prove you’re using the money responsibly before allowing you to draw out the money.
Cash Advance Financing
Cash advance financing benefits the business owner who lacks a solid credit score and needs cash in a hurry. You borrow against your expected earnings. The repayment on cash advance financing is often done daily through your revenues, so you do face reduced revenues until the loan is repaid.
Commercial Real Estate
Commercial real estate loans cover the cost of the land and/or building you need for your business. You can use a commercial real estate loan to purchase the building, remodel it to meet your needs, or have a building built on the piece of land you purchase.
Business equipment loans provide you with the financing needed to purchase the equipment needed to run your business. For example, if you’re opening a catering company, it’s likely you’ll need financing to purchase commercial ovens and refrigeration units, you may also need a company van. An equipment loan covers these necessities.
Rather than borrow money from a bank or credit union, peer-to-peer lending allows you to submit your request to your peers. Someone with the access to cash loans you the money with all repayment terms set by them.
The Small Business Administration (SBA) offers several loan products for businesses. The SBA Microloan program offers short-term loans to certain small businesses and non-profit daycares. You can also get a 504 Loan for equipment and real estate. The 7(a) Loan is the agency’s most popular loan, however.
The 7(a) Loan is the most common, but it requires you to meet specific criteria, such as you must meet the definition of a small, be operating for profit, have invested your own equity first, and have no delinquencies with the government. You must also be able to prove your need for the business loan.
Short-Term Business Loan
Short-term business loans allow business owners to borrow the cash they need for a short amount of time. Expect short-term loans to last anywhere from a few months to just shy of two years. You owe money for less time, but your interest rate may be higher than with a traditional loan. Short-term loans often make it easier to qualify for financing if you have bad credit, but some lenders may require daily payments, which can be difficult to keep up with.
If your business isn’t off the ground yet, a start-up loan is the best product. To qualify, you need a solid credit score, usually at least 640. Loan terms vary, but some lenders offer start-up loans of up to four years. Interest rates also vary, but the flexibility of these loans make them ideal for newly starting businesses who do not have any history to rely on.
Traditional Business Loan
Traditional term business loans usually allow you to borrow as much as $500,000 for a fixed period. You pay the principal with interest back over a span of months, often as much as 72 months. Your monthly payment will be lower than that of a short-term business loan, but you’ll be paying that amount for a longer time span. To qualify, your business must be established, typically for at least two years, and you must have a personal credit score of at least 650, though a higher score is better.