The type of business loan you decide on will determine interest rates, total loan cost, the loan term and how the money will be repaid to the lender.
Small business owners who are looking for financing have many options. The right business loan product depends on your specific needs.
Here is a breakdown of the different types of business loans available to you.
Types of Business Loans
The Small Business Administration doesn’t fund these loans, but they do guarantee them. Repayment periods vary depending on how the money is used. The loan terms range from seven years for working capital to ten years for buying equipment and twenty-five years for real estate purchases.
- Offers some of the lowest rates on the market
- Offers high loan amounts (up to $10 million) with long repayment terms
- Have a long/rigorous application/approval process.
- Best for businesses wishing to expand or refinance existing debt
- Best for strong-credit borrowers
Business Line of Credit
A business line of credit provides funds up to a determined credit limit. You pay interest only on the money drawn.
- Provides more flexibility than a term loan
- Typically unsecured
- Can carry additional costs, such as maintenance and draw fees
- Requires strong revenue and credit
- Best for financing needs like managing cash flow or unexpected expenses
- Best for seasonal businesses
Bad Credit Business Loans
Special business loan programs have been created for those businesses that have a poor or limited credit history.
- Lenders look only at your last three months bank and merchant statements
- Your business must be earning consistent revenue and be making profits
Merchant Cash Advance
You get a lump sum of cash upfront. Instead of making one fixed monthly payment, as you would with a term loan, you pay a merchant cash advance, either in the form of a percentage of your daily credit and debit card sales, or by a fixed daily or weekly withdrawal from your bank account.
- Gives you fast cash with unsecured financing
- Has the highest borrowing costs
- Frequent payments could create cash-flow difficulties
- Best for businesses with high and consistent credit card sales
- Best for businesses that can’t get financing elsewhere and need capital quickly
Small Business Loan for Women
Statistics show that women find it significantly harder to obtain business financing than men do. There are three primary reasons for this:
- Women tend to start a business with less personal funding than men do, which means women usually have a lower net worth. Lower net worth gives the impression that the borrower won’t be able to make payments should the business not go as planned.
- Female-dominated industries, like retail or hospitality, are seen as risky and low-growth in nature. Traditional business lenders are less likely to approve these loans.
- Women tend to have lower credit scores than men, reportedly around 20 points lower. Credit scores have traditionally been pivotal in the approval of small business loans.
To combat this unequal access to business loans, special programs are now available to women, religating preconceived notions about women-owned businesses to the past.
These loans provide money to buy equipment for your business. The purchased equipment itself is used for collateral. The loan term typically coincides with the life span of the equipment.
- Rates depend on the value of the equipment and the strength of the borrower’s credit.
- You own the equipment and build equity in it.
- You may have to come up with a down payment.
- Best for a business that wants to own its equipment outright.
Working Capital Loans
These loans are meant to finance a business’s day-to-day, short-term operations, such as payroll, rent, debt payments, or to help with times of reduced business activity.
- Provides fast cash, and easy approval.
- Borrowers with strong credit can obtain unsecured business loans.
- Borrowers with poor or limited credit history may need to provide collateral.
- These loans are often tied to the business owner’s personal credit.
Factoring Finance (Credit Card Factoring)
If this sounds a lot like a merchant cash advance — it’s because it is. Credit card factoring is a type of business loan where the loan provider approves funding based on the average volume of credit card sales.
This type of funding is best for businesses that have consistent debit and credit card transactions each month, but little to no collateral and/or bad credit. This type of financing has several different names: business cash advance, merchant funding, merchant account cash advance, or merchant cash advance.
The funding of this program involves a lump-sum payment to your company in return for future credit/debit card sales. Your available funding amount will be based on your company’s monthly volume of credit/debit card transactions.
This type of financing is popular for several reasons:
- Easy to qualify for
- Funds quickly
- Bad credit is okay
- Flexible payment plans
- No collateral required
- Cheaper than using a company credit card
If a bank denies your loan application or you don’t feel you’d get approved for a traditional loan, a business loan against future credit card sales is a viable option.
Business Term Loan
This is a common form of business financing. You get an upfront lump sum, which is then repaid with interest over a predetermined period of time.
- Gives you cash upfront to invest in your business
- Typically has higher loan amounts
- Fast funding if you use an online business lender (a few days to a week)–using a traditional bank may take several months
- May require a personal guarantee or collateral
- Best for businesses looking to expand
- Borrowers usually need strong credit and an established business
Revenue Based Business Loans
This type of financing is similar to a Merchant Cash Advance, but instead of determining your funding and repayment amounts on only credit/debit card sales, you are taking into account all forms of revenue including those that come from credit/debit sales.
- Gives you fast cash.
- Can qualify for more funding than a merchant cash advance
- Sometimes referred to as a “Business Cash Advance”
Accounts Receivable Factoring
This is a bit different from a normal business loan. For services rendered, a typical business sends out an invoice which is due in 60 days. If you need cash quickly and can’t wait to get the payment on this outstanding debt, you can get cash for your unpaid invoices. The invoices can be sold to a factoring company, which will be responsible for collecting from your customers when the invoice payment becomes due.
- Supplies fast cash for your business
- Usually has easy approval, but can be costly when compared to other types of business loans
- You will lose control over the collection of this debt
- Best for a business with reliable customers with long payment terms (30, 60 or 90 days)
Now that you’ve determined what type of small business loan you need, you’ll probably want to know how to get it.