What’s the best type of business loan for me? There are many different types of loans available for small businesses, but their characteristics vary widely.
As a business owner, it’s essential to secure not just the finances you need but with the most ideal terms for your business specifically.
Naturally, it can be hard to decide which financing option is right. In this guide, we’ll take a deep dive into each type of business loan so you can make the most informed choice!
Best Types of Small Business Loans for Businesses
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 loan is better for you and your business.
Business Term Loans (One of the Best Types of Loans for Businesses)
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 business loan as they know how much they need to repay every month or quarter.
Additionally, you have to pay back the entire loan 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. It is better to get an unsecured business loan.
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 because the business loan requirements are easy to meet.
Both business interest rates and the loan term can depend on the lender. This last one can range from as little as $10,000 to $5000,000 or even more.
As their name suggests, these loans for business owners are usually for small amounts, repayment terms are very short, and the borrowers must pay back the loan and interest within one to three years.
Microloans 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 a quick approval and more funding.
Entrepreneurs can use most microloans for business expansion, purchasing inventory, or buying machinery and equipment.
Personal loans (to start a business or for startups)
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.
The lender approves personal loans based on your 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 loan that is perfect for startups, newer businesses, or even for some personal expenses.
Our Startup Business Loan is among the best examples of business loan options created for entrepreneurs who find it challenging to raise money elsewhere.
Startup loans are becoming an increasingly popular funding option for entrepreneurs and small business owners.
A startup loan is a form of financing that can help you get your business off the ground.
Unlike traditional bank loans, startup loans are specifically for businesses in their early stages of development.
They can provide you with the capital you need to get your business up and running. And they can help you build your credit history and establish your business as a viable entity.
If you default on the loan, you may damage your credit score and jeopardize your ability to secure future financing.
You can cover the costs of launching a new business. This can include anything from the cost of renting office space to the price of buying inventory. Another use is to finance the early stages of a business’s growth. This might include hiring new staff, expanding into new markets, or investing in new technology.
If you have a great business idea but don’t have the capital to get started, a loan can be a great way to get things moving.
SBA loans carry the lowest interest rates in the industry among all the types of business loans offered by banks.
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 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 loans available for small businesses 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, and the 504 loans have a price significantly lower at 2% to 3%.
The loan limit is $50,000 and is 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 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 you can draw on when you need funds.
The lender only will charge interest 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 loan for businesses 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 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
Getting approval for a merchant cash advance (or MCA) it’s relatively easy; companies that find it challenging to qualify for other loans tend to gravitate towards this type of business loan financing.
However, only businesses with 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. You might pay interest rates as high as 250 percent! Fortunately, other types 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 meeting the minimum requirements can apply.
All you have to do to determine if you prequalify is to complete a short online application.
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 loans for businesses 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 they will stock and sell 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 to 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. You can save a significant sum if you understand how the reward system works and use it wisely.
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. Many other types of business loans are better suited for more significant expenses.
Working Capital Loans
Working capital loans are loans that you can use to finance the day-to-day operations of your business.
This can include inventory, payroll, cash flow, and other operating costs and cover gaps in funding, which can help businesses keep their doors open and continue running smoothly.
There are many benefits to using working capital loans, including:
- Provide the funds you need to keep your business running on a day-to-day basis.
- Cover unexpected expenses or gaps in funding.
- Finance growth or expansion plans.
- Take advantage of opportunities as they arise.
Commercial real estate loans
A commercial real estate loan is a type of financing that allows you to purchase or refinance commercial property, such as an office building, retail space, or industrial warehouse.
These loans typically have higher interest rates than residential mortgages, and they may require a larger down payment than a residential mortgage.
What Is a Business Loan?
A business loan is a type of financing specifically designed to meet the needs of businesses.
You can use them for various purposes, including expanding your business, purchasing inventory or equipment, or covering operating costs.
Banks and other financial institutions offer this product, and they usually come with terms and conditions that are specific to businesses.
Examples of business loan
Some examples are term loans, SBA loans, invoice factoring, equipment financing, and lines of credit.
How to Choose the Best Type of Loan for a Business
Now that we’ve discussed all the 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, this loan has prepayments 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 the cash to buy equipment, expand into new territory, or pay for their day-to-day expenses.
If you require a business loan, we are an excellent option. Learn here how Camino Financial loans work!
Our loans are one of the best 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.
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 some 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 business loan for your company. Some examples are:
Depending on your financial institution, you can choose from a range of different types of business loans.
How much do banks loan to small businesses?
You can get a loan amount of up to $750,000 (or even $1M) with big banks if you have a good credit score and fulfill the requirements.
What are the types of business financing?
There are many different types of loans available for small businesses and entrepreneurs. The most common sources of business financing include loans from banks, venture capital, and angel investors. Loans from banks are the most common type of business financing.
Who are the best lenders for business loans in the market for small businesses?
There are many good lenders in the market for small businesses. Some of the best include (but are not limited to) Kabbage, OnDeck, and Funding Circle.
Each of these lenders has different requirements and application processes, so it’s important to do your research before applying. It’s also important to remember that not all lenders are equal – some offer better terms or interest rates than others.