10 Types of Business Loans to Help Grow Your Business
by Fundid on Jan 31, 2023 9:15:00 AM
Getting a small business off the ground is tough work. Capital can be tricky to find and raise. That’s why many small business owners take advantage of business loans to get their companies up and running.
What are the types of business loans – or other financing options – available to you, and what is the best type of loan for your business? To help narrow down your options and make informed decisions, read on as we explore 11 different kinds of business loans that could help grow your business.
What Types of Loans are Available for Small Businesses?
Getting a business loan to help grow your small business can provide long-term benefits that you may not be able to achieve without taking on added capital. With the right loan and financial support, you can pay for important investments like new equipment and technology upgrades that will improve productivity and help your business stay competitive.
There are many different ways to access capital for your business. Let’s look at the top 11 business loans:
1. Term Loan
The term loan is perhaps the most basic, common, and flexible small business loan. It's simply an amount of cash issued in a lump sum that the borrower repays over a fixed amount of time, usually in monthly installments. Term loans can be used for virtually any aspect of your small business, including equipment, marketing, or everyday expenses.
Term loans are beneficial because they can usually be issued quickly – sometimes as soon as one day. Interest payments on term loans are also tax-deductible, and the term can be extended if needed. One downside is that you’ll probably be expected to put up an asset for collateral, which can be seized if the loan defaults.
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Funding Circle Requirements:
- 660+ FICO credit score
- 2+ years time in business
- Strong business revenue
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2. Business Line of Credit
This setup is essentially a business credit card, minus the card. Usually linked to a checking account, a business line of credit comes with a limit set by the issuing bank. A business can borrow money up to that limit. After the borrower repays the debt, they can again take out cash against that limit.
A business line of credit is great when the owner isn’t exactly how much money they need. That’s because interest is charged only on the amount they withdraw, unlike a term loan where interest applies to the total amount.
A business line of credit is usually unsecured, so collateral isn't needed. However, it can be hard to qualify for one, and the low-interest rates can be offset by extra fees. A line of credit can be useful to get through cashflow crunches if you resist the urge to overuse credit.
Related Reading: A Business Owner's Guide to Business Loans
3. Small Business Administration (SBA) Loan
SBA loans are backed by the government. They’re attractive to many business owners because of their relatively low cost and interest rates compared to other small business loans. SBA loans can be utilized for most business purposes, including start-up, capital, equipment, inventory, real estate, and more.
The biggest downside to an SBA loan is the drawn-out application and approval process, which can extend up to three months before you receive funds. It’s therefore not appropriate for emergency needs, but if you can wait for approval, you’ll enjoy an SBA loan's security and cost savings.
4. Equipment Financing
Equipment financing helps a business owner buy or replace equipment without having to pay for large items all at once upfront. The owner can pay in monthly installments for major equipment, which is used as collateral.
Equipment financing is helpful because it keeps a business operational without a big cash dump burden. It's also a tax benefit because you can write off the full cost of the equipment in the first tax year.
On the downside, the lender can repossess the equipment in case of default – but the owner’s other personal or business assets aren’t threatened.
5. Merchant Cash Advance
In a merchant cash advance, the owner borrows money against expected sales in the future, essentially offering credit card sales as collateral. The owner repays the debt through daily credit card transactions or via weekly transfers of cash from their bank account.
This kind of financing comes with a high risk simply because future success is never 100% predictable. The interest rates can be extremely high. However, in some cases, the lender may agree to adjust the borrower's payments downward during times when business is slow.
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6. Accounts Receivable Financing
There are two kinds of financing (technically not “loans”) that use unpaid customer invoices as instruments to get quick cash.
With invoice factoring, the business owner collects a certain number of long-standing, unpaid invoices and sells them to a factoring company for 80% to 90% of the total amount due. The factoring company then takes over collection activities on the outstanding invoices, if needed.
Instead of selling the invoices, invoice financing allows companies to borrow against accounts receivable invoices issued to their customers. The business is still responsible for collecting the invoices.
Both of these financing agreements can be more expensive than loans or other instruments, but they can help business owners get through a tight time that’s the result of unpaid invoices.
One issue with invoice factoring is that the owner cedes control of debt collection to a third party. That might cause some unhappiness from loyal customers. With invoicing financing, customers never know their invoices are being used as collateral, but the business owner still must collect on the invoices.
7. Working Capital Loan
A working capital loan is a helpful financial solution for business owners to access short-term cash flow to help manage their day-to-day operations and seize unexpected opportunities. Business owners can use working capital loans to fund their near-term needs, such as inconsistent revenue cycles, managing expenses seasonality, and unexpected inventory needs.
This type of loan is advantageous due to its flexibility and utilization of current assets so that a business owner can quickly address time-sensitive issues that would be difficult or impossible with other forms of financing. Working capital loans allow small business owners the fiscal stability needed to pursue new opportunities and achieve desired growth goals.
Fundid Recommendation: We're partnering with Accion Opportunity Fund (AOF), a non-profit financial support system that provides business owners – predominantly entrepreneurs of color, immigrants, and women - with access to capital, networks, and coaching.
AOF working capital loans are ideal for small businesses and sole proprietors that meet the following criteria:
- Annual revenue of at least $50,000
- Located in all U.S. states except Montana, Vermont, Tennessee, North Dakota, South Dakota, and the District of Columbia
- 570+ FICO credit score
AOF has support staff available to help in Spanish and English 7 days a week, 8 am - 8 pm, to guide you through the full process, from application to funding to post-loan approval.
8. Loan Crowdfunding
Loan crowdfunding is an innovative way to get the financial support you need to grow your business. It works by allowing people like your community, friends, fans to invest small amounts of capital into a loan for your business, with loan payments returning to lenders as the loan is repaid over time. This can be extremely useful for businesses that don't have access to more traditional sources of financing, as it provides an alternate avenue for acquiring funds and managing risk.
To maximize the potential of loan crowdfunding, it's important to create a compelling plan around how you're going to use the funds that investors are entrusting in your business. Explaining how you will use their fund – and presenting your projections demonstrating how they’ll ultimately benefit – can be a great way to gain investor confidence.
Interested in starting your own loan crowdfunding campaign? Let Honeycomb Credit help you get started! Honeycomb allows your community to invest in your business in a new way - loan crowdfunding. Your customers and fans chip in as little as $100, you raise the money you need to grow your business, and you pay them back with interest.
Microloans are typically issued in amounts less than $50,000. They’re good for owners who need a little cash for a one-time business expense or a startup that doesn’t need much money. Some microloans are issued by the government, while others are offered by nonprofits. Collateral is usually required.
10. Personal Loan for Business
Especially when starting a company, an owner can use a personal loan to finance a business. Most banks won’t offer a business loan to businesses with no history of operations, so a personal loan can stand in its place.
This approach can create a significant risk to one’s personal assets, and qualifying for this loan can be tough. Most personal loans are capped at $50,000, as microloans are. A personal loan is an option for business owners with good credit scores.
Related Reading: How to Separate Your Personal and Business Finances
Which Loan Is Right for Your Business?
Make sure any loan you decide on fits the specific financial goals of your business and won't result in unmanageable debt. If you aren't looking to purchase equipment, an equipment loan won't be the right fit. When looking to grow your business, it's important to consider the different business loans available to you and which will help you achieve your goals.
Make an Honest Evaluation of Your Business
How would a potential lender view your business at first look? How strong are its credit score and debt-to-equity ratio? Can it afford the monthly payments with the revenue it generates? Be thorough and candid about the state of your business.
Examine the Interest Rate and Repayment Terms
Weigh the interest rate and terms of repayment in conjunction with each other. A high-interest rate may seem unsightly on paper, but it might not be a deal-breaker if the repayment terms are favorable. Get clear on the term length, payment schedule, and whether you can pay the loan off early without penalty.
Ask About Application and Administrative Fees
Some lenders charge a fee to apply for a loan. They may also charge fees for application-related functions like running a credit check or having collateral appraised. Make sure you know how much of these expenses you’re responsible for.
Even if you consider your business to be in emergency mode, don’t rush any part of your decision-making. Weigh your options as deliberately and slowly as you can – making the wrong choice too quickly can be disastrous. Speak with a Lending Advisor to evaluate your options quickly and determine the best course of action for your business.
How to Get Approved for a Business Loan
There are many factors a lender will take into consideration before approving a small business loan, and explaining how to qualify for one would take a whole other article. But a few areas to focus on in preparation include the following:
- Keep on top of your credit scores – both business and personal
- Be clear on the requirements and minimum qualifications for the loan
- Have a solid, straightforward business plan ready
- Collect all pertinent legal and financial documents
- Prepare details on the collateral you'll provide if needed
With the right preparation, the process can be a lot less stressful.
Related Reading: How to Get Funding For Your Business
Find the Right Loan for Your Business
There are plenty of options for loans and financing available to small businesses of all kinds. Take time to understand each one relevant to your business before deciding. At Fundid, we are here to help you better understand your options. If you need expert advice on what type of funding to consider for your business growth, let us know and we are happy to answer your questions!