Categories
Business Loans

Types of Business Loans: Options for Small & Large Companies

Common Types of Business Loans

Financing is the lifeblood of any business, and loans provide that much-needed infusion of funds. You might have used business loans to fund your operations at one point. 

But did you know there are lots of small business loan examples available to you, each with its pros and cons? Knowing your options will arm you with the knowledge to help you decide which is the best one for your business.

Here are nine of the most common types of loans for small businesses.

Term Loans

This is the most common of the types of business loan most people know about because it’s the easiest to understand. You simply get a lump sum of money, which you then repay monthly plus interest.

Most term loans from banks have the highest borrowing limits, so if you’ve ever wondered how to get a $4 million business loan or $3 million business loan this is it. It’s excellent for companies with good credit history who want to expand.

Merchant Cash Advances

A merchant cash advance (also known as a business cash advance) is similar to a term loan in that you get a lump sum of money upfront. Instead of paying a fixed monthly payment, however, a portion of your daily sales is deducted as payment. This is either automatically deducted from your daily credit card sales or withdrawn from your bank.

Merchant cash advance has fast approval but typically suffers from one of the highest costs compared to other loan types.

SBA Loans

An SBA loan is one that is offered by a third party lender and guaranteed by the Small Business Administration (SBA). Out of all the types of small business loans, this usually has the lowest rates in the market. It also has a high borrowing limit.

The drawback of SBA loans is that it’s hard to qualify for them. They also have an intensive application process.

Microloans

Microloans are one of the best business loan options if you just need a small boost in cash. It lets you borrow up to $50,000. The most significant benefit of microloans is that they have fast approval times and are generally easy to qualify for. 

Small business microloans stand out among the various types of business loans because they are ideal for firms with light overhead, such as a work from home consultancy. It’s also the last resort for entrepreneurs who don’t qualify for every other business loan financing option.

Personal Loans

A personal loan is a business loan where the owner himself borrows the money and not the business. Assuming you have an excellent credit score, you’ll most likely get approved quickly and easily with a personal loan. It’s a good alternative if a business doesn’t qualify for financing.

The main negative of personal loans is that the cost of borrowing is higher than any other small business loan options available.

Business Line of Credit

A secured business line of credit allows you to withdraw money on demand, up to a maximum credit limit set by the lender. It’s an excellent alternative to large business loans because you only pay for the interest of funds that you use.

A line of credit is a great loan to have in case of emergencies, where you don’t know yet how much you’ll need.

Equipment Financing

Equipment financing is a loan that’s specific to buying or renting equipment for the business. The average amount of this small business loan is 1 million. The equipment itself serves as the collateral for the loan, and also sets the loan’s term.

This type of financing is an excellent way to get equipment without spending upfront, but your business needs to have a strong performance and track record to qualify.

Invoice Financing

Invoice financing is used by B2B businesses that have delayed accounts receivables. It’s like a regular term loan, but here you use the unpaid invoices as collateral. The lump-sum is typically 85% – 90% of the total amount of the invoices.

Invoice financing is an excellent solution for cash flow problems due to late payments from your customers. The drawback is that it has a high cost of borrowing.

Commercial Real Estate Loan

A commercial real estate loan is a financing option explicitly used for buying or renting property. Much like in equipment financing, the property is used as collateral for the loan.

The term and amount you’ll receive from this loan type vary with the lender. Banks will typically offer more favorable conditions, but require exceptional credit history and a good business track record.

L3 Funding Loan Options

Once you’ve figured out the type of loan you want to get, it’s time to hunt down for the lender with the most favorable terms. Here at L3 Funding, we provide various merchant funding options with fast approval and competitive rates. Apply now to learn more!