Borrowing money can provide a business with the resources it needs to recover from a loss, take advantage of a new opportunity, or stay afloat during a turbulent stretch. However, in order to borrow successfully it is essential to know something about the different types of small business loans that are available to you. Not all borrowing options are the same, and the differences from one type of loan to the next can have a major impact on the way you use the money—not to mention your ability to pay it back effectively. That’s why we’ve provided the following guide to different types of business loans below.
Your Guide to Various Small Business Loans
Use the following information to understand your borrowing options so that you can make the best choice for your needs. Here are the most common loan types that small businesses pursue, along with recommendations on when (or if) you should use them:
- Working Capital Loans: these are some of the most flexible loans available to many small businesses. While some loans must be used for assets or other specific purposes, a working capital loan can be used to cover any number of everyday expenses—which makes them extremely versatile. Working capital loans are also available for short terms, which can make it easier for borrowers to pay them off. Additionally, some working capital loans are made explicitly available for women.
- Term Loans: these loans provide a large amount of cash up front, which the borrower must then pay off according to a predetermined schedule. Term loans often last for many years, which means that borrowers should think carefully before committing to them.
- SBA Loans: these loans are approved and disbursed through the Small Business Administration, and use the capital of participating lenders. There are many lenders who offer SBA loans, but the amount of money they provide is normally quite meager due to the number of applicants who pursue them each year. In addition, approval for SBA loans may take up to several months, so these loans are best pursued by businesses who have time to wait.
- Business Lines of Credit: lines of credit are valuable because they function much the same way as a credit card—allowing the borrowers to access only as much capital as they need for each purchase within a predetermined limit, and only charging interest on the total amount borrowed. If you require an emergency fund or are planning several future purchases at different times, these may work well for your company.
- Merchant Cash Advances: this form of borrowing provides the borrower with a lump sum in exchange for a percentage of all debit or credit card sales conducted until the loan has been repaid. Small businesses who do not have much room to maneuver in terms of their cash flow should approach these loans with caution.
- Equipment Loans: an equipment loan is generally provided by a specialty lender for the explicit purpose of purchasing new equipment for their operations.
- Invoice Factoring: if your small business has unpaid invoices, you may wish to sell them to a collections agency. You will receive a lump sum payment in return, and in most cases will also be given a portion of the invoice once it has been collected.
- Personal Loans: a personal loan is a loan you take out against your own personal credit and spend on your company. Generally, it is not advisable to do this since most experts agree that personal and business finances should always be kept seperate.
Match Your Loan to Your Needs
You will always be more successful borrowing money for your company when you research your options ahead of time and make an informed decision. Use the information provided above to choose borrowing options that suit the needs of your company. With any luck, you will find it easy to acquire the funding you need and repay it within the time allotted.