5 Types of Business Loans and How They Differ
Growing your own business can be a challenge. There’s so much to consider, from staffing to equipment. Perhaps the most overwhelming aspect small business owners face is funding. Obtaining a loan can be an intimidating process, especially when there are so many different kinds of out. Let’s take a look at the five types of business loans and how they differ so that you can make the most relevant decision based on your needs.
1. Term Loan
Term loans are quite common. You receive a lump sum of cash upfront that is to be repaid over a certain amount of time. Interest will be factored into the loan, and repayment periods vary. Typically, borrowers can get up to a million dollars with this type of business loan.
Source: Loan Info | Power Finance
2. Line of Credit
Business lines of credit can be an incredibly flexible financing option for many business owners. It works by allowing access for funds up to your predetermined credit amount. The advantage is that you only pay interest on what you take from your credit line.
Ordinarily, no collateral is required, though there may be additional fees and you usually must have good credit for approval. If you have insufficient collateral or credit, some lenders may request a “comfort letter” as an additional contract between both parties that provides the lender with recourse in case you default on your loan.
Source: Buying a Hotel: Financial Checklist | Verdant
3. SBA Loan
The Small Business Administration guarantees an SBA loan. Banks and other such lending institutions offer them. Depending on your purpose for the loan, you will have varying amounts of time to repay the funds. For example, a loan for working capital usually runs around seven years, while one for real estate purchases can go as long as 25 years. These loans are great because they come with some of the lowest rates around and have high limits.
However, they can be difficult to qualify for, with a lengthy and complicated application process. Though, if you are a veteran, you might be able to qualify for some business loans. Most people are aware that veterans often qualify for low-interest special mortgage loans, but many veterans aren’t aware that they can also qualify for some special business loans, making getting a foot-in-the-door easier when it comes to the competitive markets.
Source: How VA Loan Interest Rates Are Different from Other Loans | Low VA Rates
4. Personal Loans
Some startups may wish to seek out a personal loan over other forms of financing. The reason is that banks tend to be hesitant to loan money to organizations without a proven history of operation. That said, there are circumstances where lenders will look at certain qualitative and environmental factors when reviewing your application under the new CECL model. These factors may include financial condition, credit rating, asset quality, and business prospects—among others. If you meet review standards and don’t need more than $50,000 to get started, a personal loan may be a good option for your business needs.
Source: Qualitative and Environmental “Q&E” Factors in CECL | Visible Equity
Another great option for startups is a microloan. These small loans come from nonprofits, and they also usually allow borrowing of up to only $50,000. The organizations offering these options usually look favorably upon newer businesses, especially those in disadvantaged communities.
Source: Comparing 15 Different Types of Business Loans [Infographic] | Lendio
Hopefully, an understanding of these five types of business loans will get you started on your way to obtaining your own financing. There are options out there for all types of needs.