Types of business loans

You may need business financing to either set up a business or to expand the existing business. Lenders will provide financing for your business based on your creditworthiness. There are many types of loans available in the market and knowing the right one for your business is important.

We will explore the different options available in the market.

  1. Term loans

Term loans are the most common types of business loans. You get a lump sum and pay interest on the principal amount. These types of loans have the advantage that you get your money upfront and can borrow high amounts. You also get the money faster if you use online lenders.

You may require collateral or a personal guarantee. Interest rates may vary with online lenders being slightly costlier than normal banks.

  • Equipment loans

If you need to equip your business then this is the right type of loan for you. The equipment serves as collateral and the lender can repossess it if you are unable to meet the terms of the loan.  The value of the equipment determines the rates you will pay.  Depending on the strength of your business you can get competitive rates. You may, however, need down-payment and the equipment can become obsolete before the term of your loan expires. You may, therefore, be paying for a machine you are no longer using.

  • Invoice  financing

This type of loan is good for people who want fast cash. You use your invoice as collateral to get cash advance. Invoice financing is, however, costlier than normal loans and you will still need to follow up on the invoices for payment. 

  • Personal loans

You can take a personal loan to finance your business. This works for start-ups who may not qualify for a business loan as most require that you should have been in business for a period of time.  You need a good credit score to qualify for a loan but can access fast funding.  The borrowing costs are higher and the amounts you can borrow are not high. If you fail to pay, it will reflect in your credit ratings and may hurt your chances of getting a loan in future.

  • Microloans

Non-governmental organizations offer microloans to support small businesses. The amounts given are not large but they come at a low cost and are a good option for start-ups. The lending organizations normally have stringent qualification checks before you qualify for a loan.

  • Business lines of credit

Business lines of credit provide funds up to your credit limit. You only pay Interest on the money drawn.  It is a good option for short financing and emergencies. You will not need collateral thus much flexibility in borrowing. There may be some additional fees like maintenance and withdrawal fees. You will also need to have good revenue and credit.

To build a successful business, you need funding. There are very many options available in the market. Only borrow what you can comfortably pay because defaults will cause a stain on your credit rating.