One of the biggest issues small business owners face is access to sufficient capital. Business owners who don’t research their options might end up depending on funds from sources that are impractical or illegal such as student loans, bad credit business loans, payday loans or other short-term loans that end up being very expensive to service.
Types of Business Loans
It’s a good idea to explore business financing options before your business will have the need. To get ahead of your operating capital needs, here are a few types of business loans you should know about:
Credit cards are one of the most common methods of financing for small business owners. Provided you have relatively good personal credit, obtaining a business credit card to finance your business needs should not be a problem.
Credit card financing is ideal for shorter-term financing needs, like filling cashflow gaps between client payments. Credit cards would not be good for larger, long-term financing needs because the interest payments on large sums of borrowed money could be costly for a small business owner.
Line of Credit
A line of credit is a bank loan similar to a credit card in that it provides access to financing on a continual basis. However, there are key differences in more competitive interest rates, easier access to cash advances and the ability to get a line of credit that is secured or unsecured.
You might want to use this business loan for lags in cash flow that are large and might last a few months. This loan is also ideal because, when there’s no balance you won’t need to make payments or pay out any interest. It’s convenient and can be used when needed, but doesn’t require a brand-new application each time you need to borrow money.
A business term loan is a specific, lump sum of money disbursed with a set interest rate. It’s amortized over a specific time period so you know exactly how much each loan payment is along with a breakdown of the principal and interest paid down each period (usually monthly.)
A term loan is ideal if you’ve got a larger purchase you need to make for your business, like real estate, equipment or inventory. The key here is that you’d want to finance assets you’re pretty sure will earn a return on investment. Otherwise, you could be on the hook for a loan that you are unable to pay back.
SBA loans are guaranteed by the U.S. Small Business Administration, which allows banks to lend money to business owners at lower rates while providing more flexible repayment terms. There are several types of SBA loans, so you’ll need to consult with local banks that offer this product for information on qualifying criteria.
SBA loans are good for business owners who have invested their own time and money into their business, yet have no other options for business financing. Additionally, you’ll have to meet lender eligibility requirements (which vary by lender) and be willing to offer up collateral for the loan, such as business and personal assets in some cases.
This type of loan probably would not work as a small business startup loan due to requirements set forth by the SBA.
The personal loan space is heating up, with many lenders providing quick, convenient options online. In a matter of hours, a person can apply for a personal loan and receive funds as quickly as the next business day.
Though there are restrictions on how loan proceeds can be used with some personal loan lenders, it’s usually acceptable to fund business activities. In fact, some personal loan providers are now offering business options, too.
Personal loans work if you’ve got good credit and are amenable to the loan terms that could include higher interest rates, late fees, origination fees and prepayment penalties. You’ll also have to be comfortable with the fixed monthly payment amount, as this is a term loan product.
This term loan is collateralized by the equipment you’ll buy with loan funds. This makes the loan less risky for the bank, as it could conceivably sell the asset to recoup any losses on the loan. Less risk usually translates into better terms, like a lower interest rate, for the borrower.
These business loans are ideal for business owners who need to purchase equipment that is vital to the profitability of the business. Think about a bakery that might need commercial ovens or a construction outfit that needs specialized excavating equipment.
These loans are not good for business owners who don’t have a good credit profile. Banks typically choose not to extend financing to business owners with bad credit in this scenario. If they do, the terms might not be favorable.
Before you take out a loan, do some research. Seek out expert opinion when you need it and be open-minded throughout your decision.