When deciding for debt financing your business, you can turn to many sources that will help you rout. Some of these sources include commercial lenders, banks, and personal credit card. It even spares of pinpointing the best loan for your business. When you approach a lender, they help you in deciding the types of loan that will best fit the needs of your business. However, having a general idea of the types of business loans will help you in better understanding your lender’s offerings. Click here to learn more about the types of loans to help out your business
Here is a lowdown of how lenders structure loans and their common variations.
It is the most beneficial type of business loans, especially for small businesses. In fact, most business prefers having this loans arrangement with their bankers; it is valuable in protecting businesses from stalled cash flow and other business emergencies. These loans are for payment of operating costs and purchases of inventory. It is not for purchasing real estate and equipment.
The lender offers you access to a set amount of cash, which you can draw at the time of need. Line of credit loan is either revolving or fixed. When it is revolving, the credit line is reset after you have paid the balance in full.
You can avail a line of credit from different lenders. However, banks offer the best line of credit with the longest renewal rate and best interest rate. Online lenders help out young businesses and businesses with low credit scores by providing a shorter-term line of credit.
Businesses can leverage from the line of credit for:
- Covering recurrent cash flow droughts
- Paying for business emergencies and unexpected situations
- Paying frequent operation expenses
Line of credit provides you cash cushion in case of emergencies. They are useful when you are in need of money. Banks offer an unsecured and secured line of credit. For the latter, you need to declare some of your assets as collateral.
With term loans, borrow a specific amount of money, and pay it back with a set interest rate on your repayment schedule. Several lenders provide term loans such as online retailers and banks. If you own a strong credit card, you should opt for bank loans as these are the most affordable ones. However, if your credits are not that strong, go for a short-term lender.
Below, we have listed down some of the reasons why you should opt for term loans:
- Planning for the long-term expansion of your business
- Acquiring another business
- Purchasing real estate
- Renovating commercial space
- Investing in remodelling
Term loans are best for businesses that are looking to invest in specific business areas. However, you might want to skip them if you only need some capital for emergencies or one-off situations.
Equipment financing is the most popular asset-based loan. This type of loan is ideal if you want money to acquire a used or fresh piece of equipment. You do not need to pay the full price of the equipment; instead, opt for an equipment loan and fund your purchase.
Whether you are an established business or a growing company, equipment financing is readily available to all. In equipment financing, you do not have to put down any asset as collateral. The equipment itself acts as collateral.
Equipment financing has the best interest rates to offer. Depending on the finances, age, and credit of your business, the interest rates range from 8% to 30%. The types of equipment that qualify for equipment financing include appliances, computers, and vehicles. However, if you do not require business equipment and machinery on an immediate basis, then skip this loan.
Invoice financing is one of the most popular loans for B2B businesses. With invoice financing, you utilize your outstanding invoices to obtain a cash advance. Your unpaid invoices serve as the collateral for the cash advance.
In this type of loan, the lender offers you 70%-85% of your total invoice and keeps the remaining per cent. While you and your lender wait for the customer to pay, this advance comes handy in covering your business expenses. Once the customer pays in full, your lender will give you the remaining per cent.
Invoice financing helps in easing cash flow problems and is useful in covering rent, payrolls and operating expenses. These loans may not be of use to B2C businesses or businesses that do not invoice their customers.
Microloans are helpful for businesses that require a small amount of money to accomplish their next goal. These loans are useful in expansion, working capitals and meeting startup costs. The best part, though, the qualification requirements are flexible.
Some of the notable microloan lenders offer loans to novice businesses, budding entrepreneurs, and aid local economies. While any business can avail of these loans, these are ideal for minority and female business owners. However, if you need a considerable amount of finance, microloans may not be helpful.
BUSINESS CREDIT CARDS
Most people overlook the significance of credit cards in financing. Business credit cards are the most convenient way of borrowing money to pay for your expenses. Most credit cards offer the following perks:
- Introductory 0% interest rate
- Cashback on some purchases
- Reward points
- Insurance on car rentals and travel purchases
Business credit cards are useful for businesses that want to make fast payments while earning rewards. Also, the startups who are struggling to qualify for business financing. However, business credit cards are not much of use to businesses that are looking for tons of capital of long-term financing.
With a variety of business loans, the right loans for your business ultimately depend on numerous factors. Each business loan meets business needs uniquely. Before you opt for a business, consider your finances, business’s age, credit and reason for the loan. Once you have identified these factors, you will be eligible for a few or several loan options.