Are you exploring the best small business loans to fund your business? Here are the different loan options you need to know.
You’ve probably heard the old adage that money makes money and yes, it’s true. If you invest money today, then that investment will bring more cash inflows toward your pocket in the future.
In the early days of startups, money is the most important thing that can help the businesses grows. Whether you’re going to expand your business, purchasing an inventory or business equipment, you need money. But it is difficult to set aside funds when you’re already spending too much on your business operations.
Now here comes, the idea of small business loans. In first glance, getting business loans can be scary. But if you get the right startup loans, it can be very helpful for your business when you see your startup in trouble.
In this article, I’m going to highlight and compare twenty different types of small business loans you can borrow in different situations.
Comparing 20 Types of Small Business Loans
Generally, there are two main types of loans such as short term loans and long term loans. In short-term loans, the maturity period is less than or equal to one year. While in long term loans, the maturity period reaches between one year to seven years or even more.
However, these loans are further classified into two types.
- Secured Loans: Such loans which are secured by assets as collateral are known as secured loans.
- Unsecured Loans: In these loans, credit worthiness of applicants is taken under consideration rather than taking assets as collateral.
Okay, so let’s discuss the business loans step by step.
1. Account Receivable Factoring (A/R Finance)
Account Receivable Factoring is basically a financing option for startups.
Well, if you are running a business, you can get this short term working capital loan against your account receivables as collateral.
2. Installment Loans
If you need money to meet your business needs, you can get installment loans from banks. These business loans are paid back on equal monthly installments. Each installment includes both interest as well as principal payment.
Remember, when you receive the full amount after signing the loan contract, the interest (which you will have to pay) is calculated from the first day to the maturity date of the loan.
3. Payday Loans
A payday loan is a short term loan that can be borrowed at a very high interest rate on the agreement that money will be repaid when the borrowers receive their upcoming salaries/payments.
In addition to that, payday loans are also known as cash advance loan, small dollar loan, payroll loan, salary loan or payday advance.
4. Government Backed Loans (SBA Loans)
Governments usually offer small business loans to entrepreneurs to foster entrepreneurship culture because entrepreneurs launch startups and create jobs in the market.
These loans are secured and both available for short term and long term period. Usually, the payback period for these types of small business loans is 5 to 20 years.
5. Business Term Loans
Small business terms loans are the commercial loans which are used to pay major investments in the startups or also used for business acquisition purpose. Term loans are similar to installment loans because borrower has to pay fixed interest rate plus principal amount on equal monthly installments.
Business Term loans are further categorized into types such as intermediate term loans and long term loans.
The tenure of intermediate term loans is less than 3 years. In this plan, borrower has to repay loan in monthly installments.
While the maturity period of long term loans are 10 to 20 years. In such cases, financial institutions take fixed assets as collateral.
6. Merchant Cash Advance
Merchant Cash Advance Loan is a good funding alternative for those businesses that didn’t approval of conventional loans.
Basically, merchant cash advance is an advance payment to businesses in exchange of sharing specific percentage of future credit/debit card sales with financial organizations.
For example, you get $10,000 an advance payment from financial company but you make an agreement that you will share your part of the future credit/debit card sales with them i.e. up to $15,000.
7. Credit Card Loans
Banks usually issue credit cards to small business owners to meet their day to day business expenses. This is a quick and hassle free small business loan you can get easily. All you need is to have a good credit line history and repute with your bank.
Keep in mind that credit card loans are quite expensive. If you don’t make repayment on time, you will have to high interest charges on the borrowed amount.
8. Equipment financing
Banks offer loans for equipment financing. In order to secure the lending money, banks will take your business equipment as collateral.
9. Commercial Mortgage
If you are looking for long term loans through which you can build your commercial property or refinance your upcoming projects, then go for commercial mortgage loans.
Commercial Mortgage is a long term mortgage loan (usually 20 years) given by the financial institution (usually banks) which is secured by the commercial property. Mortgage property may be in the form apartment complex, shopping mall, office building, or warehouse. Banks usually accept those commercial properties as a mortgage that generates regular income and revenue.
10. Startup Loans
For wantrepreneurs, money is the most important thing to start a business. That’s why; dreams remain dreams and never become reality for many wantrepreneurs.
If you want to start a small scale business and have no money, go for startup loans. You can get these small business loans from different places and platforms such as
- SBA Loans (Non-profit loans)
- Personal Loans from banks
- Get loan from Friend and family
- Try to secure Government Grants
- Go for Crowdfunding
- Use your bank’s Credit Card
If you want to save your interest charges, try to get money from those sources which are non profit loans. Otherwise, borrowing startup loans from the financial institutions may hold you liable to pay interest charges on loans.
11. Business Acquisition Loan
Business acquisition means purchasing of one business entity by another entity. The acquisition may be done by purchasing of company’s shares (usually more than 50%) or by purchasing the assets.
If you are going to buy another business but have low bank balance, try this option. You can get business acquisition loan for new business acquisition or to purchase a franchise.
While applying for this loan, make sure the business (you’re going to acquire) has a good performance and value in the market. Banks do due diligence and check these things before they lend money. They also check the borrower’s previous experience in order to secure their loan payment.
12. Peer 2 Peer Loans (Social Lending)
Peer to Peer loan (P2P) is a fantastic way to get online small business loans. According to Forbes, it is a new debt financing method that helps and enables the individuals to borrow and lend money online without the middle process such as a financial institution.
Remember, if you go for social lending then you will have to pay heavy interest charges on loans. So, be careful when you are going to try debt financing option.
13. Professional Loans
These business loans are available for professionals such as doctors, lawyers, dentists etc. These loans maybe in secured or unsecured form, it all depends on the banks’ policy & discretion. The payback period of the professional loan agreement is 2 to 6 months.
14. Construction Loans
If you need more money for your commercial construction, then luckily financial institutions also offer construction loans to corporate clients.
15. Hard Money Equity Loan
Hard money equity loans are asset based loans which are secured by real property. Usually, these small business loans are issued by private investors as well as by the companies.
16. Working Capital Loans
If you want to finance your day to day business operations, working capital loans will be the perfect option for you.
17. Balloon Loans
Balloon loans are quite similar to installment loans. But in balloon loans, principal amount as well as interest charges are paid in single installment at the end of the maturity date.
18. Letter of Credit
Letter of credit or simply known as LC is another banking facility which can be availed in local as well as in foreign trade.
If you are dealing in import and export business, you can get letter of credit facility from your bank.
19. Guarantee Loans
Sometimes, banks/financial institutions refuse the customers for the issuance of small business loans. If you are facing such situation then why not you try for Guarantee loans?
Guarantee loans are basically promise made by the third party that if the borrower defaults then the guarantor party will be liable to pay the specific portion or the entire debt amount to the lender.
20. Commercial Loans
If you are running SMEs and you are unable to afford the major operational costs and capital expenditures of the company then commercial loans are another great option to fund your business.
It is a debt based finance agreement between the borrower and the financial organization in which you can get commercial loans to meet your major business expenses.
Try your best to explore the specific reason that why you need money for your business? Either you need it for new startup or you need money to expand your business. Explore the main reason.
Once identified, search different types of small business loans and pick the right one that matches with your actual need. Carefully, read the terms and conditions of that loan either it is suitable for you or not. If so, contact your financial institution to help you in this matter.
Good Luck 🙂