The 8 Most Popular Types of Business Loans
Business financing and equipment leasing are essential aspects of growing your company – here are the eight most popular types of business loans and how they are beneficial.
Seeking the right partner is at the core of any business’s long-term financing strategy. Financing is about more than just access to capital – it’s about building up a history of punctual payments and a reputation for reliability, creating a strong relationship with creditors, and learning to manage several payments to grow your business. But before you can find the right partner, you need to know what to look for.
Financing options are plentiful, and you can get loan terms and contracts tossed your way from any corner of the Internet. However, it’s important to be wary of the fine print, and to know how different loans and financing options work before deciding the best one for you.
Types of Business Loans
Are you better off financing a personal loan and lending it out to your business? Or do you qualify for help from a commercial lender, or a bank? Are investors an option for you? Or should you get your debt financing elsewhere? Let us go over some of the most popular types of business loans.
1. Line-of-Credit Loans
A line of credit loan allows a lender to provide a certain amount of credit for a borrower to withdraw from as needed, rather than providing a lump sum. In a line of credit business loan, the company seeking financing has the option to make minimum monthly payments as per the terms of the loan based on the credit they have withdrawn or pay a higher amount to increase the available funds.
These types of business loans are typically short-term but can be renewed as needed. They function as a sort of emergency cash reserve for businesses tight on working capital, as a means to procure additional inventory and finance operating costs, or just generally have a little more financial insurance in the early days.
Most businesses, especially startups, can make use of a line of credit loan because they are usually fairly low risk to banks. This is also why interest rates for these loans tend to be quite low.
2. Term Loans
A term loan or installment loan is probably one of the most traditional types of business loans you’ll come across. Term loans are very simple: you receive a lump sum, and make monthly payments to pay back what you owe plus interest over the course of the loan’s amortization period.
Term loans exist to provide a large infusion of cash when needed, such as when setting up for a huge operating expense, planning an expansion, or purchasing real estate.
For businesses with a stronger credit history, a term loan may be found with better than average interest rates, making it a viable way to shore up working capital at relatively low cost.
3. Balloon Loans
A balloon loan is any kind of business loan that does not amortize. This means that you pay off your monthly interest but owe the full value of the loan at the end of its term (hence the “balloon”).
Balloon loans are riskier than installment loans but may be a better financial choice when a business needs an upfront cash infusion but must wait several months to receive payment for their product or service.
4. Equipment Loans
Equipment financing or equipment leasing involves taking out a loan to buy large-scale equipment for a business, from simple office fixtures to an entire server room, heavy equipment and machinery, construction equipment, medical equipment leases, or manufacturing equipment.
Where equipment financing involves paying off a loan required to buy the equipment, equipment leasing involves leasing said equipment from the owner, and returning it upon the end of the lease, for more favorable terms.
The latter is ideal in cases where equipment needs to be swapped out so frequently that leasing makes more sense than a full purchase. Equipment loans and leases tend to be more favorable because the equipment itself can serve as collateral.
5. Commercial Real Estate Loans
As the name implies, these types of business loans are written specifically to purchase or upgrade your commercial real estate. The terms and conditions of the loan reflect that, often putting the property itself up as collateral, and featuring much longer loan terms, from 20 to 30 years.
6. SBA Loans
SBA loans are provided solely by the Small Business Administration, a program and part of the federal government built to help finance small businesses. Loans provided by the SBA are typically low cost and are backed by the government.
However, the SBA itself doesn’t provide these types of business loans. It works with other financial organizations and large lenders, such as banks, to provide business loans for smaller businesses at more favorable rates for the borrowers.
7. Invoice Financing
Invoice financing is a short-term business loan taken by a borrower with unpaid incoming invoices on wholesale sales and other slow-paying transactions. In these cases, while a business is waiting for a client to pay their invoice or pay their credit, they can sell the invoice to a lender for an upfront lump sum.
This is an option for businesses that rely on larger customers, but need working capital upfront to pay for inventory costs or finance a repair or upgrade.
An option that has become more popular as of late is crowdfunding. This is a very non-typical loan model, and one that functions much more like fundraising than a loan.
Instead of working with a single borrower, crowdfunding involves seeking financing from a much larger group of investors, at the cost of compensation at a later date (in the form of a stock in the company, products, or services).
There are also “crowdfunded” loans, wherein multiple smaller investors pitch in to create a lump sum loan for a business. The business pays back the loan, and the payments are split between the backers. This is also known as peer-to-peer lending and is usually distinguished from normal crowdfunding.
What to Know About Loan Approval
Despite general characteristics and qualifiers, loans all ultimately boil down to an agreement between multiple parties (usually two, sometimes three), with contract-defined terms and conditions regarding repayment and compensation.
Different types of business loans will have different requirements, and it is up to each lender to define minimum requirements for loan applications, and how they choose to mitigate the risk of a loan default.
To that end, you will find lenders willing to offer you a loan, provided you pay a hefty down payment – while others may be likely to offer the same value at a lower down payment, but only if your credit history matches their required qualifications.
Looking for a partner in business financing and equipment leasing? Give us a call.