There are so many reasons why a business might need to borrow money. From hiring new, top talent and purchasing new equipment to covering unexpected costs, the reasons can vary greatly. However, one thing is certain, you need a loan option that is right for your situation and business type.
With so many options available today, knowing where to start and understanding what each means can be a daunting task. Qualification requirements, loan purpose, and desired terms must be taken into consideration. All of these factors can influence the type of business loan that is right for you.
Here are 6 of the most common types of business loans, along with details to help you make an informed decision:
1. SBA Loan. SBA loans are business loans that are guaranteed by the U.S. Small Business Administration (SBA). These are a popular option among lenders because the federal government guarantees to repay up to 85% of the loan amount if a borrower defaults, reducing the level of risk involved. This option is often used by businesses ready to expand, in need of extra working capital, or in the process of acquiring an existing company.
2. Startup Loan. As it sounds, a startup loan is for new businesses. Most loans require your company to be established for at least one year before it can qualify for funding. A startup loan, on the other hand, provides access to capital much sooner. This type of loan comes in a variety of options, from SBA microloans and online loans to business credit cards.
3. Short-term Loan. This type of loan provides cash for the business in a tight spot, and it values repayment terms under three years. Depending on the lender, you might even be able to access a short-term loan in as little as 24 hours. Each business’ situation and loan terms will be different, but you might be able to borrow up to $500,000, secure APRs as low as 8% and receive repayment terms from six to 18 months.
4. Line of Credit. Most people are familiar with a line of credit. A business line of credit is a type of financing that allows you to borrow money on an as-needed basis. You only pay interest on what you borrow. Essentially, it works very similarly to a credit card. One thing to keep in mind is that the draw period may expire, in some cases after just 12-24 months.
5. Invoice Factoring. An increasingly popular option is invoice factoring. If your business provides a product or service that uses invoices to collect payments, you should consider this option. In short, it allows you to sell outstanding invoices in exchange for a lump sum of cash. Depending on the lender, you can receive up to 95% of an invoice’s value upfront.
6. Merchant Cash Advance. Another popular option among business owners is a merchant cash advance (MCA). This solution provides access to financing based on the promise of future revenue. The amount you repay is typically a percentage of your daily debit and credit card sales. The fees and rates will vary from lender to lender but typically fall from 1.2 to 1.5%.
All in all, make sure you research and compare all of your options. Your business goals, situation, and vision are unique. You need a lender that offers fast funding to meet your immediate needs and terms and conditions that support your future.