Business loans can be a lifesaver for entrepreneurs and small business owners, providing the necessary funding to get their ventures off the ground or take them to the next level.
There are several types of business loans to choose from, each with its own set of benefits and drawbacks. The most common types include term loans, lines of credit, invoice financing, and equipment financing.
Term loans are a popular choice for businesses that need a lump sum of money to cover a specific expense or project. They typically have a fixed interest rate and repayment term, ranging from 6 months to 5 years.
A line of credit provides access to a pool of funds that can be drawn upon as needed, allowing businesses to manage cash flow and cover unexpected expenses.
Types of Business Loans
Business loans come in various forms, each with its own set of characteristics and benefits. Revenue-based small-dollar loans, for instance, allow borrowers to repay a fixed amount over several months or years, without relinquishing control or selling equity.
These loans typically impose a repayment amount of 1.5 to 2.5 times the principal loan. Transitional loan financing, on the other hand, is ideal for businesses with a significant amount of equipment and machinery, and are seeking refinancing, working capital, and more.
Businesses can also opt for term loans, which involve borrowing money from a traditional bank, credit union, or online lender, and repaying the funds over a fixed period of time, often at a fixed interest rate. Term loans can be used for various purposes, such as working capital, inventory, or equipment.
Here are some key features of different types of business loans:
Term Loans
Term loans are a popular option for small businesses looking to borrow money. They involve borrowing a specific amount of money from a lender and repaying it over a predetermined period, typically with fixed monthly payments.
You can borrow up to $500,000 or more with a term loan. This can be a significant amount of money, especially for small businesses that need to invest in equipment or expand their operations.
Term loans can be secured or unsecured, with repayment terms ranging from a few months to several years. This flexibility makes them ideal for funding long-term investments such as business expansions, equipment purchases, or real estate acquisitions.
The terms and conditions of term loans vary, but you can expect to secure an APR starting around 9%. This is a relatively low interest rate, especially compared to other types of business loans.
Here are some key benefits of term loans:
- Borrow up to $500,000 or more
- Secure an APR starting around 9%
- Receive repayment terms of up to 10 years
- Use the funds for a variety of purposes, such as working capital, inventory or equipment
Short-Term Loans
Short-term loans can be a lifesaver for businesses that need cash in a hurry. They offer flexible repayment terms, often under three years, which can be a big relief for companies with fluctuating cash flows.
With some online lenders, qualifying businesses can access funding in as little as one day. This speed is especially helpful for businesses that need to cover unexpected expenses or capitalize on sudden opportunities.
Short-term loans typically have lower APRs, starting as low as 8%, which is significantly lower than some other types of business loans. For example, revenue-based small-dollar loans can impose a repayment amount of 1.5 to 2.5 times the principal loan.
Borrowing limits for short-term loans can vary, but some lenders offer up to $500,000. However, the actual amount you can borrow often depends on your business's creditworthiness and other factors.
Repayment terms for short-term loans can range from six to 18 months, which is a relatively short period compared to other types of business loans. This can be beneficial for businesses that want to avoid long-term debt obligations.
Here are some key features of short-term loans:
Types of Business Loans
You can get a loan that suits your business needs, ranging from $500 to $5.5 million.
SBA loans can be used for most business purposes, including long-term fixed assets and operating capital. Some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender when requesting a loan.
There are various types of loans available, including seasonal financing, export loans, revolving credit, and refinanced business debt.
Here are some specific types of business loans:
- Small Business Loans: These loans are guaranteed by the SBA and can be used for most business purposes.
- Commercial Real Estate Loans: These loans can be used to purchase or refinance commercial real estate, such as furniture, real estate, machinery, equipment, construction, and remodeling.
- Commercial Bridge Loans: These loans provide short-term financing for businesses that need to cover a temporary cash flow gap.
Lines of Credit
Lines of Credit offer a flexible way to borrow money, similar to a credit card, with a predetermined credit limit that can be used and repaid multiple times as needed.
You can borrow and repay funds with a line of credit as many times as you need, only paying interest on the amount utilized. This type of financing is suitable for managing short-term cash flow needs, covering unexpected expenses, or seizing immediate opportunities.
Lines of credit can be secured or unsecured, and they are often revolving, meaning the credit limit replenishes as the borrowed amount is repaid. This allows you to access funds when required and avoid borrowing more than necessary.
A business line of credit typically has a draw period, which can last up to 24 months, after which the repayment period begins, lasting up to five years. This means you'll no longer be able to access the credit line during the repayment period.
Getting a business line of credit with the best borrowing terms usually requires good credit and sometimes collateral, and you might also have to sign a personal guarantee, typically with unsecured credit lines.
Frequently Asked Questions
What is the easiest small business loan to get?
For quick approval, consider Bluevine's line of credit, which offers fast and easy access to funds. Its streamlined application process makes it a top choice for businesses seeking rapid financial assistance.
What is the difference between an SBA 504 and 7A loan?
SBA 504 loans focus on equipment and real estate financing, while 7A loans provide working capital. Choose the right loan for your business needs
What is the most common type of business loan?
The most common type of business loan is a term loan, which provides a lump sum that's repaid over several years. Typically, term loans are repaid in 5+ years, making them a popular choice for businesses of all sizes.
What disqualifies you from getting an SBA loan?
To qualify for an SBA loan, you must have a good credit history, sufficient collateral or equity investment, and a solid business plan in place. If you lack these key factors, you may be disqualified from receiving an SBA loan.
How hard is it to get an SBA 7A loan?
Getting an SBA 7(a) loan can be challenging without strong annual revenue, a good credit score (690+), and at least two years in business. Meeting lender-specific requirements is crucial to qualify for this loan.
Sources
- https://www.forbes.com/advisor/business-loans/types-of-business-loans/
- https://www.businessloans.com/blog/loans/exploring-the-key-types-of-business-loans
- https://www.icadvisors.com/different-types-of-business-loans-the-ultimate-guide/
- https://www.askmoney.com/loans-mortgages/common-types-business-loans
- https://www.sba.gov/funding-programs/loans
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