There are many types of business loans. But choosing from all these different financing options can be confusing for most entrepreneurs that need borrowed funds in their businesses.
In this post, we’ll help you find answers to these questions and provide you with details of 10 different types of business loans. Finally, we’ll explain how you can choose the financing option that’s best for your business.Get The Business Loan You Need!
10 Types of Business Lending Options
Should you opt for the loan with the lowest rate of interest? Or is it more important to select one with the longest repayment period?
There are dozens of questions that you could have.
This section can help you discover what type of small business loan is better for you and your business.
Business Term Loans (One of the Best Types of Business Loans)
Term loans are an excellent financing option if you’re looking for a lump sum of money repayable in fixed installments.
Many business owners consider this the best type of small business loan as they know how much they need to repay every month or quarter.
Additionally, the entire loan is paid back over a predetermined period giving the loan a strong element of predictability.
Business term loans are among the best financing options to buy property, acquire another business, buy equipment, fund an expansion, or practically anything you can think of.
Most traditional lenders require the business owner to provide collateral to secure the loan. Consequently, there is a need to pledge your house or other property as security. The lender has the right to sell the collateral if you don’t repay the loan.
Camino Financial doesn’t require you to pledge collateral.
There are 3 types of business term loans: small, medium, and long term. Which one you get will depend on the amount you need and how much time you need to repay it.
Most entrepreneurs consider term loans as the best source of financing for all their business needs.
Term loans can range from as little as $10,000 and up to $5000,000 or even more, depending on the lender.Get Approved For A Loan Today
As their name suggests, microloans are usually for small amounts, and repayment terms are very short. These types of business loans need to be paid back along with interest within one to three years.
The loan amount and the interest rate depend upon the nature of your business and how long you have been in operation.
Companies that have been around longer could get lower rates. And if you can offer some form of collateral, you could be eligible for quick approval as well as more funding.
Most microloans are used for business expansion, purchasing inventory, or buying machinery and equipment.
Personal loans (to start a business or for startups)
The tenth and last small business financing option on our list is the personal loan.
It’s hard to get a bank or a traditional financial institution to lend you any money if you want to start a business. They prefer to advance funds to companies set up a year or more ago and have a successful operating history.
However, startups looking for funding do have some other options.
You can approach a lender for a personal loan. It’s not the best course of action to follow, but you can explore it if you have no other choice.
Personal loans are approved based on your personal credit score, and you can use the money in any way you want. That includes starting a business.
But strictly speaking, this funding source is for minor expenses.
Using a personal loan for a business is only advised for startups that can’t get approval from financial institutions with a minimum-time-in-business requirement.
We designed a business loan that is perfect for startups, newer businesses, or even for some personal expenses. We call it the Solopreneur Loan.
Our Solopreneur Loans are among the best examples of business loans created for entrepreneurs who find it difficult to raise money elsewhere.Get Approved For A Loan Today
Among all the types of business lending options, SBA loans carry the lowest interest rates in the industry.
The U.S. Small Business Administration is a government agency set up to help small business owners.
SBA loans fall into several categories. Here’s a quick description of some of the different types of small business loans that the SBA offers:
SBA 7(a) loans
You can use a 7(a) loan when real estate is part of a business purchase or for short and long-term working capital.
An SBA 7(a) loan can be for up to $5 million with terms of up to 10 years. Although interest rates vary, a 7(a) loan can have an annual interest rate in the 5% to 11% range.
CDC/504 Loan Program
These types of business loans are available through Certified Development Companies (CDCs), which are nonprofit organizations regulated by SBA.
Loan maturity extends up to 25 years, and borrowers can use the money to buy buildings, land, and machinery. However, you can’t use a 504 loan for purchasing inventory or funding working capital.
A funding limit of $5 million applies to these loans.
We mentioned that SBA loans are the cheapest option; 504 loans are priced significantly lower at 2% to 3%.
These are limited to $50,000 and are typically provided to entrepreneurs for business expansion, repair, and rebuilding.
SBA Microloans are generally available at rates between 8% and 13%.
You can also use SBA Microloans to fund working capital or purchase inventory, but you can’t use the money to pay existing debt or buy a property.
A word of caution about SBA loans: although the interest rates are low, the requirements for business loans are highly stringent. Also, it could take months to get your loan approved.
Business Line of Credit
This small business loan is very flexible. A business line of credit provides you with a sum that you can draw on when you need funds. Interest is charged only on the amount that you borrow.
Of course, its flexibility can come at a cost.
Business lines of credit are expensive, and interest rates can be high. Be prepared to pay an annual rate as high as 25% or even more. Additionally, lenders usually charge a recurring fee for the line of credit, increasing the overall cost.
You should use a line of credit as a short-term source of finance. Don’t deploy the funds to buy equipment or for your other long-term needs.
The purpose of a business loan is to help you invest in your business, you can’t use them for personal reasons.
Invoice factoring and invoice financing
These two types of small business financing are similar. Both help companies generate cash against their unpaid invoices.
Let’s understand the difference between Invoice Factoring and Invoice Financing:
- Invoice factoring: A business that has unpaid invoices can sell them to a factoring company. The factoring company would pay the business immediately after deducting its fees. Subsequently, the factoring company would collect money from the customers.
- Invoice financing: Here, a sale doesn’t take place. Instead, the invoices act as collateral. The company that’s providing invoice financing would advance a sum secured by unpaid invoices. The responsibility for collecting invoice payments is with the business that has received the finance.
The fees that a factoring company charges are 1% to 6% of the invoice value. Remember that this percentage is for an invoice that’s payable in 60 days. So, the APR would be about 6% to 35% or even more.
Invoicing financing companies are equally expensive.
The companies providing the funds don’t usually pay the entire invoice value as an advance. Instead, they typically hold back a margin of about 10% to 30%.
Merchant Cash Advances
It’s relatively easy to get approval for a merchant cash advance (or MCA); that’s why companies that find it challenging to qualify for other business loans tend to gravitate towards this type of financing.
However, only businesses that have large volumes of credit card sales are eligible for merchant cash advances.
Here’s how a merchant cash advance works:
An MCA lender provides funds that are repayable against future credit card sales. The lender calculates repayments as a percentage of daily card sales. Between 20% and 40% of the amounts paid by customers go directly to the lender.
We mentioned that it’s an expensive way to raise money. A recent report on Forbes.com points out that merchant cash advances can carry an annual interest rate of up to 250% (sometimes even more!).
Yes, you read that right. Interest rates can be as high as 250 percent!
Fortunately, there are other types of business loans that are cheaper.
If you’re considering a merchant cash advance to raise money for your business, we’d like to offer you a far better option. Small business loans from Camino Financial are far cheaper.
Anybody who meets the minimum requirements is eligible to apply for a business loan.
All you have to do to determine if you prequalify is to complete a short online application.Apply For A Cheaper Alternative!
Equipment Financing loan
As its name implies, an equipment loan provides funds for buying vehicles, machinery, computers, and other types of equipment.
These loans work in the following manner:
- The equipment that you buy serves as the collateral for the loan. If you can’t repay, the lender has the right to seize the equipment and sell it.
- The loan’s term usually matches the life of the equipment. So, if the machinery you acquire has a life of, say, 5 years, the loan term would also be 5 years.
- Interest rates usually aren’t very high. Expect to pay between 8% and 30% annually.
Equipment financing is one of the types of business loans that are relatively easy to qualify for. That’s because the equipment acts as security for the loan.
Inventory Financing loan
Retailers and wholesalers use inventory financing to pay for products that will be stocked and sold later.
The lender often collateralizes the funds. If the borrower doesn’t pay, the lender has the right to seize the inventory and sell it to recover its money.
Inventory financing is often a good option for companies that want to purchase stock for the busy season. In addition, it allows them to update their product lines so that they can meet customer demand.
One of the negatives of inventory financing loans is that they aren’t cheap. Lenders increase interest rates as the risk of default can be high.
These types of business loans have another downside, as well. For example, borrowers might have to pay a processing fee when signing the loan agreement.
Business Credit Card
A business credit card provides certain advantages that other forms of finance don’t offer.
For example, business credit cards offer cashback and points. If you understand how the reward system works and use it wisely, you can save a significant sum.
The best part is that these benefits are available for making the purchases you would have made anyway.
There aren’t usually any restrictions on card usage. You can buy office supplies, pay for travel-related expenses, or purchase practically anything else with your business credit card.
However, there are some disadvantages, as well. Interest rates on your outstanding card balance can be well over 22%. Then there are late fees and charges for delayed payments.
If you don’t pay your credit card bills on time, it can be an expensive form of financing.
Another disadvantage is that your credit limit might be low (at least when compared when other financing alternatives), and you don’t receive a lump sum of money (like you would with a loan, for example).
In conclusion, you should use business credit cards only for your regular day-to-day expenses or for emergencies. There are many other types of business loans that are better suited for more significant expenses.
How to Choose the Best Type of Business Loan?
Now that we’ve discussed all 10 types of business loans, you’re probably wondering which one is the best.
The answer depends on what you need the money for.
If you need to buy a specific piece of machinery, that could be the most appropriate choice. Equipment financing loans usually have low rates of interest. Additionally, getting approved for an equipment loan is relatively easy.
SBA loans provide another excellent option. They are low-cost, and the upper limit is a generous $5 million. However, the approval process is both lengthy and cumbersome.
Term loans offer the best of all worlds.
They are available at reasonable interest rates. Plus, repayments are fixed and predictable.
Plus, you can use the money for any business purpose like buying equipment, purchasing inventory, or paying the expenses for expanding into new territory.
The Best Type of Small Business Loan
Business loans can provide entrepreneurs with the cash they need to buy equipment, expand into new territory, or pay for their day-to-day expenses.
If you require a business loan, Camino Financial is an excellent option!
Our loans are definitely one of the best types of business loans in the market.
We advance funds at the best available rates and terms. Our loan specialists will do their utmost to help you raise the cash you need.
Apply for a business loan to Camino Financial today! It won’t affect your credit score, and you can find out if you prequalify in just a few seconds!
FAQs About Business Loans
What is a small business loan?
A small business loan is a lump sum advance made by a financial institution to a business borrower.
The purpose of a business loan is to help you finance business expenses you won’t be able to make otherwise.
Some examples of business loans are term loans, SBA loans, invoice factoring, equipment financing, and lines of credit.
How do small business loans work?
Small business loans offer entrepreneurs an excellent option for raising money for their companies. They can provide you with the money to take your business to the next level.
The lender transfers you the cash you applied for, and you have to repay over a period of time (plus interest rates and maybe other fees).
What are the general requirements for business loans?
If you need a business loan, the lender would require details about your business and yourself.
Most lenders also stipulate that your monthly sales should be above a specified threshold and that you should have a FICO credit score that meets their minimum requirements.
Where to loan money for my business?
There are many places where you can get a loan for your business. Some examples are:
Depending on the financial institution you choose, you will be able to choose from a range of different types of business loans.
How much do banks loan to small businesses?
You can get a loan for up to $750,000 (or even $1M) with big banks if you have a good credit score and fulfill the requirements.
Should I get a small business loan?
If you need funds for your business, you should definitely get a business loan!
Camino Financial is a lender with minimum requirements and very competitive terms.