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There are many types of loans?



1. Term loans


Best for:

Businesses looking to expand.

Business owners who have been operating for at least six months.


A business term loan is one of the most common types of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period of time. Payments are fixed, usually on a monthly basis. A variety of lenders offer small-business term loans, including banks, online lenders and other types of alternative lenders, like nonprofits.


Term loans can be one of the most inexpensive types of small-business loans; however, qualifying for the best rates and terms can be difficult. Banks, which usually offer the lowest rates, usually require at least two years in business, for example, and a good credit score (between 690-719). Online lenders are typically more lenient with their qualifications, but often offer higher rates than banks.


A personal guarantee, a Uniform Commercial Code lien or another form of collateral may be required by your lender, or requested to improve your rate and terms.


Pros:

Get cash upfront to invest in your business.

Fixed monthly payments offer stability to help you improve cash flow and grow your business over time.

May allow you to borrow a higher amount than other types of small-business loans.


Cons:

If you want the lowest rates and longest terms, term loans may be difficult to qualify for.

May require a personal guarantee or other collateral.

Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks.


» MORE: How to apply for a small-business loan



2. SBA loans


Best for:


Businesses looking to expand or refinance existing debts.

Strong-credit borrowers who can wait a long time for funding.

An SBA loan is a type of small-business loan that is partly guaranteed by the Small Business Administration and offered by banks and other lenders.

There are several types of SBA loans but the most popular offering is the SBA 7(a) loan. SBA loans can be used for working capital, business expansion, equipment or commercial real estate purchases and more, and can range from below $15,000 for SBA microloans up to $5.5 million for 504 loans.

SBA loan rates are among the lowest available, and repayment terms can go up to 10 or 25 years, depending on loan usage. However, the SBA loan application process can be long and rigorous, and a personal guarantee is required for everyone who owns 20% or more of the business.


Pros:

Low rates.

Loan amounts up to $5.5 million.

Long repayment terms.


Cons:

Hard to qualify.

Long and rigorous application process.


3. Business lines of credit


Best for:

Short-term financing needs, managing cash flow or handling unexpected expenses.

Seasonal businesses.

A business line of credit is a revolving source of funding that provides your business access to funds up to a predetermined amount.  Similar to a credit card, you pay interest only on the money you’ve drawn. Once you’ve repaid your funds, you can draw on your line again.


Lines of credit are offered by banks, online lenders and other alternative lenders. Qualification requirements are similar to those for business term loans – banks have more stringent qualifications and lower rates, while online lenders may be more lenient, but offer higher rates.


Business lines of credit can provide more flexibility than term loans. They are typically unsecured, but can require strong credit and business financials to qualify.


Pros:

Flexible way to borrow.

Revolving access to funds.

Typically unsecured, so no collateral required.


Cons:


May carry additional costs, such as maintenance fees and draw fees.

Strong revenue and credit required.

» MORE: Business loan vs. line of credit: What’s the difference?


4. Equipment loans

Best for:

Businesses that want to own their equipment outright.

Major equipment purchases.


Equipment loans are a type of small-business loan that is designed to finance equipment,  which can include things like semi trucks, other commercial vehicles, commercial fridges or office furniture.  Generally, equipment financing can be easier to qualify for than term loans because the equipment itself will serve as collateral to secure the loan; however, your exact rates and terms will still be dependent on your business financials and personal credit history.


Pros:

Equipment being purchased also serves as collateral for the loan.

Equipment lenders may understand nuances of financing large equipment as opposed to traditional small-business lenders.  


Cons:

Some equipment lenders require a down payment.

Equipment may depreciate faster than the length of your financing.


5. Invoice factoring


Best for:

Businesses with unpaid invoices that need fast cash.

Businesses with reliable customers on long payment terms (30, 60 or 90 days).

Invoice factoring, also known as accounts receivable factoring, is not technically a small-business loan. It allows you to sell unpaid customer invoices in exchange for cash. If approved, a factoring company will give you a certain percentage of the value of an unpaid invoice, and then take over collecting payment from your customer. Once that payment is received, the company will give you the remainder of the value, minus fees.


Invoice factoring can be helpful to cover gaps in cash flow for the purchase of inventory or paying for labor; however, it does require you to relinquish control of your invoices, and factoring companies may be required to probe your customers about their personal credit and business financials. Funding is usually fast, but it can be expensive.


Pros:


Fast cash for your business.

Easier approval than traditional funding options.

Cons:

Costly compared with other options.

You lose control over the collection of your invoices.

»MORE: Ways to manage your business’s cash flow


6. Invoice financing

Best for:

Businesses looking to turn unpaid invoices into fast cash.

Businesses that want to maintain control over their invoices.


Invoice financing, or accounts receivable financing, is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance. You maintain control over your invoices and the responsibility for collecting payment from your customers. Like invoice factoring, it is fast to fund and can help cover short term gaps in cash flow.


Pros:

Fast cash.

Can be revolving.


You retain control over your invoices and customers (unlike invoice factoring).


Cons:

Can be expensive.

Can trap you in a cycle of borrowing.

»MORE: Is invoice financing or invoice factoring better for your business?


7. Merchant cash advances

Best for:


Businesses that have high and consistent credit card sales and can handle frequent repayments.

Businesses that can’t get financing anywhere else and can’t wait for capital.

A merchant cash advance (MCA) is an alternative type of financing, and is technically not a type of small-business loan. An MCA company will advance you a lump sum of money in exchange for a portion of your future sales revenue.


Repayment can be daily, weekly or monthly as either a fixed debit from your business bank account or as a percentage of your sales revenue. With the latter, your payment will fluctuate depending on how much money your business is bringing in.


Approval for an MCA is based on your business’s revenue rather than your personal credit or available collateral; however, it is one of the most expensive forms of business financing, with APRs that can reach triple digits. It is usually recommended to look for other types of small-business loans before turning to an MCA.


Pros:

Fast cash.

Flexible requirements.


Cons:

Very expensive type of small-business loan.

Frequent repayments can create cash flow problems.

»MORE: Before taking out an MCA, assess the true cost of borrowing

8. Personal loans for business


Best for:

Startups and newer businesses with strong personal credit.

Borrowers willing to risk damaging their credit score.

It is possible to use a personal loan for business purposes, and can be a good option for startups, as banks typically don’t lend to businesses with no operating history.


Depending on your credit history, personal finances and personal assets, personal loans can carry some of the most affordable rates and terms. It may be difficult to qualify for the amount you need, however, as a standard business term loan typically goes higher than a personal one.


Pros:

Startups and newer businesses can qualify.

Fast funding.


Cons:

High borrowing costs.

Small borrowing amounts of up to $50,000.

Failure to repay can hurt your credit.

» MORE: Business loans vs. personal loans


9. Business credit cards


Best for:

Ongoing business expenses.

Business credit cards are revolving lines of credit. You can draw from and repay the card balance as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.


Business credit cards are typically unsecured, meaning they do not require collateral, but they can be expensive if you’re not paying the balance off every month. Rewards will vary based on the credit card you get, so make sure you factor that into your decision, especially if you plan on using the card a lot.


Pros:

Earn rewards on your purchases.

No collateral required.

Revolving access to funds.


Cons:

High cost, with a variable rate that may rise.

Extra fees may apply.

10. Microloans


Best for:


Startups.

Businesses in need of only a small amount of financing.

Microloans are a type of business loan available in a small amount, typically between $500 and $50,000. Microloans are sometimes offered by banks, but because they are not very profitable for large banks, you will more commonly find them at alternative lenders, like online and nonprofit lenders. For example, Accion Opportunity Fund is a community development financial institution that offers loans as small as $5,000 for disadvantaged businesses. The SBA also has a microloan program.  


Microloans are typically used for working capital to start small businesses or help them grow. They can also be beneficial for borrowers who are having trouble qualifying for bank loans, though rates are usually higher than bank loans.


Pros:

Typically offered by small lenders who provide other services, such as consulting and training.

Accessible to borrowers facing credit challenges, or other barriers to bank loans.


Cons:

Rates are typically higher than traditional bank loans.

Microlenders can be tricky to find.