10 Types of Business Loans That Every Business Owner Should Know

Your company may wish to borrow money for a variety of reasons, and there are numerous financing solutions available to meet your needs. While having many loan alternatives might be beneficial, it is also important to do your research before applying because there are so many financing options available.

Below, we’ll go into the details explaining the ten various forms of business loans

1. SBA Loans

Business loans that are backed by the US include SBA loans. Administration for Small Businesses (SBA). The level of risk for the lender is decreased since the federal government promises to pay back up to 85% of the amount borrowed in the event of a default.

Pros

• Borrowers might get good rates and terms
• The maximum loan amount is $5 million
• Long terms for repayment

Cons

• Difficult to qualify
• Complicated application process
• Typically, the application and approval procedure takes a month or longer.

When to Use

• Businesses wishing to grow or restructure their debt
• Borrowers with good credit who are willing to wait a long time for funding
• Great-credit business owners looking for long-term loans

2. Term Loans

When looking for small business loan options, many people first consider term loans. Small business term loans give entrepreneurs a one-time lump sum of money that they can repay over time in installments. 

Pros

• Obtain upfront funding to invest into your company
• Tend to let you borrow more money than other kinds of loans.
• If you utilize an internet lender instead of a traditional bank, funding happens quickly; often within a few days or a week as opposed to up to many months.
• Available repayment terms range from long to short.

Cons

• May need a personal guarantee or collateral, which is an asset which the lender can resell if you default, such property or business equipment.
• There can be differences in price; term loans from internet lenders often have higher costs than that from conventional banks.

When to Use

• Organizations seeking to expand
• Those who don’t mind waiting a little time for funding and have excellent credit and a robust business
• Business owners that need continuous working capital or who want to participate in certain business sectors.

3. Invoice Financing

Known alternatively as invoice financing, accounts receivable financing enables business owners to release capital that is constrained by outstanding bills. Unpaid invoices can be used by business owners to obtain capital in the form of a one-time credit or a continuing line of credit.

Pros

• Quick cash
• Your clients will be unaware that the invoice is being paid
• Obtaining credit using funds that are already owed to the company

Cons

• To qualify, you might need to have excellent personal credit and quality invoicing.
• Expensive when compared to alternatives
• You are still in charge of obtaining payment for the invoice.

When to Use

• Companies trying to convert outstanding debts into quick cash
• Organizations that want to keep control of their bills

4. Business Lines of Credit

A business line of credit is an unrestricted funding source that can be used to cover a range of ordinary business expenses, such as inventory, maintenance on equipment, or a shortfall in cash flow.

Pros

• Flexible borrowing options
• Typically unprotected, requiring no security
• Only the loan amount from the line of credit is subject to interest.

Cons

• Low borrowing limitations, barring the provision of collateral
• May come with extra charges like maintenance charges as well as draw fees.
• Requires excellent revenue and credit

When to Use

• Short-term financial requirements, controlling cash flow, or dealing with unforeseen costs
• Seasonal enterprises

5. Equipment Financing

You can purchase assets like office furniture, manufacturing equipment, or commercial ovens through equipment financing instead of paying cash.

Pros

• It helps to distribute the price of costly equipment over time.
• You are the equipment’s owner and have invested in it.
• If your firm finances and credit are strong, you can obtain rates that are competitive.

Cons

• The loan duration could be longer than the equipment’s usable life.
• You might need to make a down payment.
• Equipment can age faster than the time period of your financing

When to Use

• A specific equipment must be bought in full.

6. Invoice Factoring

Your company can be qualified for invoice factoring if it offers goods or services to other companies and utilizes invoices to obtain payments. This form of financing involves your company selling unpaid business – to – business bills to a third party.

Pros

• Quick money for your company.
• Can assist your company in obtaining funds for unpaid invoices before they become due.
• It is frequently simpler to qualify for this sort of funding than for other kinds of business loans.
• Credit histories of customers were given greater weight than those of business owners.

Cons

• You lose power over how your invoices are collected.
• This quick cash flow solution may also be costly, particularly if your clients frequently make late payments.

When to Use

• Your B2B company has a short credit history.
• Companies in need of quick cash due to unpaid invoices.
• Businesses with consistent clients who pay on time

7. Personal Business Loans

Since acceptance is based solely on a person’s personal credit but not a business creditworthiness, which they most likely haven’t yet created, small business owners who may be looking to launch a new venture may want to take this alternative into consideration.

Pros

• Startups and more recent companies may be qualified
• Some business owners find it simple to finance their operations by taking out a personal loan.

Cons

• A high cost of borrowing
• Small borrowing sums up to $50,000
• You’ll be personally responsible for the debt if your company is unable to make the payments, and personal credit scores could suffer.
• Some lenders won’t let you use personal loan money for commercial endeavors.

When to Use

• Startups and newer businesses with strong personal credit.
• Borrowers willing to risk damaging their credit score

8. Microloans

Your tiny firm can occasionally only require a small sum of money to accomplish the following objective. Small company loans that have loan rates of $50,000 less than are known as microloans.

Pros

• Low price.
• There may be other services offered, like consultation and training.
• Microloans can give underprivileged small business owners a boost of capital to launch a new venture or support the expansion of an existing one.
• Frequently reserved for entrepreneurs in underprivileged communities or sectors.

Cons

• Limited loan amounts.
• There may be strict eligibility conditions that you must meet.
• A personal guarantee as well as collateral may be required by microlenders in order to obtain finance.

When to Use

• Startups and enterprises in underprivileged areas.
• Businesses looking for a small amount of funding.

9. Merchant Cash Advances

Although not strictly a loan, a merchant cash advance can be a good choice for business owners that require immediate access to cash. These advances typically range from $250,000 to $500,000.

Pros

• High credit card usage businesses can obtain cash quickly with the use of merchant cash advances.
• Compared to other finance choices, this form of financing may be simpler to qualify for. Even with poor credit, you can be eligible.

Cons

• The interest rates on factor rates are typically higher than those on business term loans and other forms of financing. 
• Allowing a merchant services business to withdraw money daily from your account could lead to future cash flow issues.

When to Use

• Businesses that can handle frequent payments and have significant and stable credit card sales.
• Businesses that are unable to wait for funding and cannot obtain it elsewhere.

10. Commercial Real Estate Loans

You should probably choose a commercial real estate loan if your company wishes to purchase commercial real estate, such as a retail store, office, or manufacturing plant.

Pros

• Available funding is in large numbers.
• You might be able to obtain a low APR if you have strong credit and are buying a property with a favorable loan-to-value (LTV) ratio. Commercial real estate loans are sometimes available with interest rates as low as 3%.

Cons

• Loans are normally only used for remodeling or buying new buildings or land.
• The market of commercial real estate financing can be very different and very expensive if you choose to use a hard money lender and have poor credit.

When to Use

• You want to purchase commercial property or create commercial property.