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A Guide to the Different Types of Business Loans

As the adage goes, you must be willing to spend money to make money. The same case applies to businesses, whereby you must be ready to invest in your company to grow it and help it reach its maximum financial potential.

Nonetheless, as much as you want to, sometimes managing all the business costs plus the recurring expenses of running it can be challenging. You may find yourself in a financial constraint, but that does not mark the end of the road for you.

You can access different types of business loans for various reasons such as business expansion, relocation, increasing your business working capital, recruiting new talent, or increasing inventory. But before that, you ought to understand how each type works, and its pros and cons.

Keep reading to understand the various business loan types so you can select one that suits your business needs best.

Business Line of Credit

Also abbreviated as LOC, a business line of credit is a type of loan that includes a maximum card limit. This limit means that the lender offers a pool of money that you can borrow from at any time but should not exceed the indicated borrowing limit.

Business lines of credit can be revolving or fixed. In the case of a revolving LOC, the available funds can be refilled and drawn on every time you pay the loan.

The most significant advantage of LOC is flexibility. You can hold on to it and use it only when you badly need the funds, such as in times of emergency. The loan is appropriate when paying for seasonal expenses.

The drawbacks of LOCs include high-interest rates, and it is not the best type of loan if you need financial help for large projects.

Short Term Loans

As the name suggests, short term business loans are loans with a short repayment term of between three and 18 months. The best thing about these loans is that you do not necessarily have to step into a lending facility for financial help.

The loans are mostly offered by online lenders who aim to help business owners with financial emergencies. However, your credit score must be average to qualify as a borrower. If you follow the right steps, you can access the loan in a few hours.

If you have been applying for loans without any success, the chances are that your credit score does not meet the traditional lenders’ standards. Short term loans like the merchant cash advance come in handy to offer quick cash without usage restrictions.

Short term loans are the best for increasing business stock or repairing work equipment after an expected breakdown. Besides, your credit score does not have to be perfect for you to qualify for the loan.

However, the main downsides of short-term loans include a high-interest rate, and you are expected to repay the principal plus interest within a few months.

SBA Loans

Small Business Administration, or SBA loan, is partially guaranteed by banks and partly by the government. The partial strategy aims to reduce the risk for loan lenders while ensuring affordability by all businesses, regardless of their sizes.

The affordable interest rates make SBA loans the most preferred loan by small firms. The loans come in different types depending on how much you need or how you intend to use them. You can apply for microloans, best suited for small businesses and amount to a maximum of $50,000.

If you need a larger amount, perhaps for your real estate business, you should opt for CDC loans. SBA 7 loans, on the other hand, are suitable for almost any business needs.

In addition to the loan, the government offers extra resources such as mentorship programs and guidance on writing business plans.

The loan comes with some cons, as you are required to improve your credit score to qualify for SBA loans. Moreover, it may take months before you access the funding, making this loan type unsuitable for emergencies.

Business Term Loan

Term loans are the first thing that comes to most business owners’ minds when they think of a business loan. The funding program is super flexible, making it suitable for all business types. In the case of a business term loan, you are offered a large sum of money to be repaid at scheduled intervals.

The repayment periods may vary, depending on the amount or the lender’s policy. You can acquire these loans from online lenders or traditional lending institutions. A term loan is suitable if you want to expand your business or buy equipment.

However, the drawback is that repayment starts immediately, regardless of whether you are going to use the loan or not. Therefore, it is recommendable that you only borrow a term loan if you intend to maximize it before the repayment time.

Business Credit Card

When you think of a credit card, you are probably thinking of the actual card that you use for transactions and not as a loan type. You are right. Business card loans work in the same way as consumer credit cards, where you make a business purchase without actually paying for it.

Besides the loan, business credit cards include incentives and reward programs that you cannot find in other business financing options. Even better, the credit card issuers do not consider your financial capacity, making this loan the best for startups and small businesses.

However, you must be keen on how you handle the privilege, keeping in mind that if your business fails to meet the loan terms, you will be affecting your personal credit. Also, avoid using the card for your daily expenses or things you can afford to pay for without the card.

The card can be tempting, and you may find yourself making extravagant purchases. In the long run, this will harm your business finances.

Also, read these savvy saving tips that can help you stay away from bad debt.

Which Are the Best Types of Business Loans?

The most suitable types of business loans for your firm depend on your precise needs. What works for other businesses might not work well for you. Therefore, you should evaluate your needs to establish why you need the loan and if you’re comfortable with the repayment term and interest rate.

Check out more of our blogs for business tips and guides to help you make sound financial decisions.

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