Grow Your Business: 6 Different Types of Business Loans You Need to Know

Applying for a Loan Approved, Loan application form with a pen on a desk with an approved stamp

Are you looking for funds to start or grow your business?

Well, you have a couple of options. You could run a crowdfunding campaign, find equity and angel investors or take out a business loan. In this article, our focus is on business loans.

Although banks, especially the big ones, have a reputation of turning away small business owners, things are changing. A stronger economy has seen loan approval rates shoot up to 26.5 percent in big banks and 49 percent in regional and community banks.

What’s more, there are now several types of business loans on offer.

Ready to learn more about these loans? Read on!

1. Term Loans

Terms loans are by far the most popular credit product for businesses. The borrowers get a lump sum of money and repay it with interest within a certain period of time, usually one to five years.

This type of loan is ideal for established businesses that are generating revenue, and for good reason. Terms loans are usually large loans (up to $1 million or more depending on the lender), so a borrower needs prove that they have the ability to repay it.

Also, it’s important to note most borrowers use the loan to make a one-off investment or purchase. If you need funds to purchase a new office for your business, for example, this is the loan you should go for.

Plus, because of the longer repayment periods, term loans typically charge lower interest rates.

2. Working Capital

Every day, your business spends money to keep its operations going. Such expenses include:

  • Purchasing stock/inventory
  • Paying service providers/utility bills
  • Paying employee salaries and benefits
  • Paying rent
  • Settling monthly debt repayments.

When you need money to fund such expenses, apply for a working capital loan. It’s a short-term loan and the amounts are considerably small.

Working capital loans are popular among businesses with cyclical sales or a seasonal component. If you run a snow removal company, for example, you’ll naturally experience low sales in the hotter months. During this period, you can take out a working capital loan to keep the business operational.

The downside? Interest rates are typically higher than those charged on term loans.

3. Bridge Loans

Bridge loans are a type of working capital loans, but specific to businesses in the real estate industry.

Let’s say you run a house flipping business. There are times when a property enters the market, but because you don’t have adequate funds at hand– maybe you’re waiting for one of your fix uppers to sell – you’re unable to snap it up immediately.

What do you do? Let the opportunity pass?

As a savvy entrepreneur, the best move is to go in for a bridge loan. Since bridge loan lenders understand how the flipping business works, they will provide you the funds to buy and fix the property. And once you sell your other property, you’ll have the money you need to pay back the loan.

Bridge loans can either be open or closed.

Open bridge loans don’t have a specific date by which the loan must be repaid. Close bridge loans do.

In general, bridge loans have short turnaround terms and high interest rates. Explore this page to learn more about other uses for these loans.

4. SBA Loans

Since most small businesses have historically been unable to secure loans from banks and other formal lending institutions, the Small Business Administration stepped in to help fix the issue. The agency partners with select lenders to offer business loans of up to $5 million.

SBA loans are attractive to business borrowers because they offer lower interest rates, lengthy terms (up to 10 years) and other favorable repayment terms. However, the application process is rigorous and they are notoriously hard to secure.

But if your business has a strong credit history, generates steady revenues and you’re in no hurry to lay your hands on the cash, an SBA loan is for you. Bear in mind not every bank offers SBA loans, so you have to do some research and identify a bank that has partnered with the agency.

5. Equipment Loans

From office furniture, computers, motor vehicles, and machinery, every business has its own equipment needs.

Yet, purchasing equipment is one of the biggest expenses a business will ever incur. Without sufficient startup capital, it’s unlikely that the average entrepreneur will be able to acquire all the pieces of equipment their business needs to start making money.

Here is where equipment financing comes in.

Lenders offer equipment loans to help businesses purchase various pieces of equipment. These loans are typically secured against the purchased equipment, meaning that if your default on your payment, the lender can repossess it.

One big disadvantage of equipment loans is you can’t divert the money to other users. Heck, you can’t even purchase equipment other than the one listed on your loan contract.

6. Business Lines of Credit

If you have a credit card, then you certainly are familiar with how a line of credit works.

A bank or other credit card provider evaluates your credit history and then awards you a credit limit. You don’t have to use the funds, but if you do, you’re under obligation to repay the full balance before the end of the billing cycle; otherwise, the unpaid amount will attract interest and other charges.

Business lines of credit work similarly.

If your business has a good credit history (not to be confused with your personal credit history) and has a good relationship with a local bank, there’s a strong chance of getting a healthy business line of credit.

Like a personal line of credit, you can use the money however you wish. However, to avoid misusing the money it’s advisable to spend it on necessary expenses.

Types of Business Loans: Get Credit Financing and Grow Your Business

Whether you want startup or expansion capital, credit financing is an ideal option.

To make the deal even sweeter, there are various types of business loans, each designed to meet a specific business need. From term loans to equipment loans, working capital loans, bridge loans and business lines of credit, all you need to do is make your pick and apply.

Keep tabs on our blog for more credit and debt insights.

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