10 Different Types of Business Loans That Every Business Owner Should Know Of

When you are ready to start or grow your business, the financing options can seem almost overwhelming. It’s important to take the time to compare and research all of your options before making a decision. Whether you are looking for a large loan for a major expansion project or just need a small business loan to get off the ground, understanding the different types of financing available is key.

In this article, we will look at 10 different types of business loans and compare their features and costs so you can make an informed decision when it comes time to finance your business.

There are a few different types of business loans that every business owner should know about before they go to apply for one.

• Invoice financing
• A business line of credit
• SBA loans
• Term loans
• Equipment Financing
• Commercial real estate loans
• Merchant cash advance
• Personal business loans
• Invoice factoring
• Microloans

Invoice Financing

Invoice financing, also known as accounts receivable financing, is a type of short-term business loan that allows you to use your outstanding invoices as collateral. This can be a great option if you have customers who take a long time to pay their invoices.

With invoice financing, you can get up to 80% of the value of your invoices upfront, which can give you the working capital you need to pay for expenses, grow your business, or take advantage of other opportunities. The lender will then collect payment from your customers and give you the remaining balance, minus fees.

Pros

• Offers non-recourse cash at a competitive cost
• Non-debt so it won’t show up on your books
• Offers more predictable cash flow and supports greater control and visibility over payments
• Enables businesses to receive early payment of invoices

Cons

• It can cost more than traditional financing
• Invoice financing only solves your cash flow problem

There are invoice financing companies that contact your customers directly, which means you have to tell them that you have financed your invoices.

When to Use

Invoice financing is often preferred to a bank loan. Bank financing solutions have strict requirements and regulations to adhere to, with large amounts of paperwork to complete, making the loan process complex and time-consuming.

With invoice factoring, however, the decision-making process is fast and straightforward and applications are approved or declined within days or weeks rather than months.

Furthermore, with invoice finance, there are no long-term repayment schedules and no risk of damage.

Business Lines of Credit

A business line of credit is a flexible financing option for small businesses. Business lines of credit provide working capital that can be used for a variety of purposes, including inventory, payroll, and unexpected expenses.

There are two types of business lines of credit: secured and unsecured. A secured business line of credit is backed by collateral, such as a business’s equipment or inventory. An unsecured business line of credit is not backed by collateral and is typically more difficult to qualify for.

Business lines of credit typically have lower interest rates than other types of loans, such as term loans or merchant cash advances. They also offer the flexibility to only borrow what you need, when you need it.

Pros

• Even cash flow
• Allow you to pay for what you need
• Help you build a relationship with a lender

Cons

• Can be expensive
  
• Applying can be tiring
  
• Limits can be very low
  

When to Use

The number one reason to open a business line of credit is to gain access to short-term funding. Most businesses use these funds to support financing for operational expenses like supplies and payroll or for increasing inventory.

Maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. Many small business experts suggest that first-time applicants should start a modest line of credit and pay off the debt quickly as a way of building a credit profile.

SBA Loans

There are a few different types of loans available through the Small Business Administration (SBA), each with its own qualification requirements and terms. The most common SBA loan is the 7(a) loan, which can be used for a variety of purposes including working capital, inventory, or equipment purchases. The maximum loan amount for a 7(a) loan is $5 million.

The SBA also offers microloans of up to $50,000 to small businesses and entrepreneurs. These loans can be used for a variety of purposes including working capital, inventory, or equipment purchases.

To qualify for an SBA loan, you must have a good credit history and be able to show that you have the ability to repay the loan.

Pros

• Small and large amounts to borrow
  
• Capped interest rates
  
• Resource centers available to provide assistance

Cons

• Slow approval process
  
• Low-credit applicants generally not approved
  
• Collateral can be required

When to Use

SBA’s loan program includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase, but it can also be used for both short- and long-term working capital. It can also be sued to refinance current business debt.

Overall, SBA loans can be a very good option to use in many situations. Just make sure to have a good credit score.

Term Loans

A term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. There are two types of term loans: short-term and long-term.

Short-term term loans are typically used for working capital, such as inventory or equipment. The repayment period is usually between 6 and 18 months.

Long-term term loans are used for major investments, such as expansion or real estate. The repayment period is usually between 5 and 25 years.

Pros

• Fast to get
• Possibility to retain ownership
• Many different lengths of terms

Cons

• High-interest rates
• You will have to make regular payments which can be monthly or weekly
  

When to Use

Term loans are commonly granted to small businesses that need cash to purchase equipment, a new building for their production processes, or any other fixed assets to keep their businesses going. Some businesses borrow the cash they need to operate on a month-to-month basis. Many banks have established term loan programs specifically to help companies in this way.

This type of loan can be a great way to get the needed funding for whatever your business might need.

Equipment Financing

Equipment finance describes a loan or lease that is used to obtain business equipment. These loans can be good for a start-up or early-stage company. Because equipment financing is typically used to obtain costly equipment, the debt obligation incurred represents a significant financial commitment.

Therefore, business owners or company executives must carefully consider any equipment finance plan and try to secure the best possible financing terms.

Pros

• Tax breaks
• Full ownership
• No collateral needed
• Flexible payments

Cons

• More expensive than other loans
• Restricted only to equipment
• You must own equipment

When to Use

For a small business, cash flow is everything. So, if you can obtain crucial business equipment without having to drain your bank account, it is definitely worth exploring. In addition, freeing up working capital allows your company to spend money on other parts of the business, such as hiring employees or expanding your marketing efforts.

Overall, they are great for expanding your business.

Commercial Real Estate Loans

A commercial real estate loan is a mortgage loan on property used for business purposes. The proceeds from a commercial real estate loan can be used to purchase, renovate, or refinance an existing property. Commercial real estate loans are typically made through banks or other financial institutions.

There are several different types of commercial real estate loans, each with its own set of terms and conditions. The most common type of commercial real estate loan is the traditional mortgage. A traditional mortgage is a long-term loan, typically with a term of 15 years or more. Traditional mortgages typically have fixed interest rates and monthly payments.

Pros

• Boosts your cash flow
• Long-term repayment periods
• Low-interest rates
• No collateral needed

Cons

• High-risk loans
• Lack of equity growth

When to Use

Commercial real estate (CRE) is property used exclusively for business-related purposes or to provide a workspace rather than a living space, which would instead constitute the residential real estate. Most often, commercial real estate is leased to tenants to conduct income-generating activities.

It can be anything from an office building to a residential duplex, or even a restaurant or warehouse. Individuals, companies, and corporate interests can make money from commercial real estate by leasing it out, or holding it and reselling it.

Merchant Cash Advances

Merchant cash advances are a type of business loan in which the lender provides funding to the borrower in exchange for a percentage of future sales. Merchant cash advances are typically used by businesses that have a high volume of credit card sales, such as restaurants and retail stores.

A lender who offers a merchant cash advance will look at your credit card receipts and assess how much you need and how much you could pay them back. The contract you sign with the MCA lender will outline the amount you are getting and how much interest you will have to pay back. Interest rates can vary widely between companies.

Pros

• Fast cash
• Flexible repayments
• No need for an excellent credit score
• No collateral needed

Cons

• High APR
• Can damage your cash flow
• You are not building your credit score

When to Use

Merchant cash advances are best for small businesses that need capital immediately to cover cash-flow shortages or short-term expenses. But remember that this type of financing can carry annual percentage rates in the triple digits and create a difficult cycle of debt.

With that said, make sure that you fully understand what this type of financing brings before you take it out. It’s smart to consult with an expert.

Invoice factoring

Invoice factoring is a form of alternative financing that involves selling your outstanding invoices to a third party in exchange for cash upfront.

With these advantages, invoice factoring is especially prevalent in industries that don’t lend themselves well to conventional financing solutions.

Only companies that invoice clients are eligible for factoring, so the factoring process starts with your business performing work for a client. Once the work is complete, you invoice your client. If you decide you need cash faster than the client typically pays you, you can apply with a factoring company.

Pros

• Quick access to cash
• Easier to get approved
• Offers more flexibility
• Highly accessible

Cons

• Reduced profits
• Your credit score can take a damage
• The collection isn’t required
• Hidden costs

When to Use

Invoice factoring is most typically used where the funder manages the customer collections and ledgers of the business. This allows them to have more control and most invoices are discounted when they are sent out. It is typically used with smaller businesses that have little or no credit control.

Overall, this type of financing can be a good asset but you do need to be careful about the downsides.

Personal Business Loans

Personal business loans can be a great option for business owners who are looking for financing. There are many different types of personal business loans available, so it is important to compare the different options before choosing a loan.

Some personal business loans have low-interest rates and flexible repayment terms. Others have higher interest rates but offer more money. Also, some personal business loans require collateral, while others do not.

When choosing a personal business loan, it is important to consider the interest rate, repayment terms, and collateral requirements.

Pros

• Flexible usage of funds
• Larger loan amounts are available
• Lowe interest rate

Cons

• Slow process to get approved
• Strict eligibility requirements

When to Use

A small business loan is similar to a personal loan, but it is meant to help entrepreneurs get funding for a variety of costs that arise from running their business. A small business line of credit gives you a certain amount of credit that you can pull from and receive as cash, and you will pay interest on what you borrowed.

And working capital loans are meant to help you cover the everyday costs of running your business, like payroll and rent for your office or workspace.

Microloans

Microloans are a type of business loan that is typically smaller in amount and have shorter repayment terms than other types of loans. They can be used for a variety of purposes, such as startup funding, equipment purchases, or working capital.

These loans often have lower interest rates and fees than other types of loans, making them a good option for small businesses. It’s a short-term loan (from six months to five years) up to $50,000. There are many types of microloans, but many people use those funded by the Small Business Administration (SBA) as they tend to offer more favorable terms and more protections for borrowers.

Pros

• Low-interest rate
• No collateral needed
• Fast Financing

Cons

• Only small amounts available to borrow
• Short repayment terms
• Possible restrictions

When to Use

The borrower usually uses microloans if they do not have access to local financial institutions, if they have poor credit, or if they want a loan smaller than what their bank will allow. Many new and small businesses use this type of funding to boost their sales and as well expand.

Overall, this form of bank financing can be very helpful for all forms of businesses since it gives you the needed money fast.

Conclusion

We hope this article has helped you compare the various financing options for 10 different types of business loans. With the right loan, you can get your business the funds it needs to grow and succeed.

Just remember to research all your options carefully and find the one that best suits your current financial situation. With a little bit of shopping around, you may be able to save money on interest or fees. Good luck in finding a financing solution that works well for your business.