Types of Business Loans: So you’re looking to get your business off the ground or take it to the next level, but you need some capital to make those big plans a reality. We get it – every business needs a financial boost now and then. Instead of trying to figure out the confusing world of business loans on your own, let us guide you through it. In this article, we break down the top 10 business loan options so you can compare interest rates, terms, eligibility requirements and more. We’ll cover everything from good old bank loans to newer online lending platforms. Our goal is to give you the CliffsNotes so you can quickly understand the pros and cons of each financing avenue. That way, you can zero in on the business lending solution that aligns with your needs and budget. So if you’re ready to secure funding for inventory, equipment, employees or a new location, keep reading to learn about your best borrowing options.
What are Business Loans?
Business loans are an important financing option for companies to fuel growth and cover operating expenses. Here’s an overview:
- Business loans provide funding to companies in exchange for scheduled repayment with interest. The funds can be used for a wide range of business needs like purchasing equipment, expanding facilities, hiring employees, managing cash flow, and more.
- Loans typically come from banks, credit unions, online lenders, the Small Business Administration (SBA), or other financing institutions. The lender will charge interest and fees on the loan.
- There are many types of business loans available, from short-term working capital loans to longer-term loans for major investments. The loan type, rates, terms, collateral requirements, and qualifications depend on factors like the business’ revenues, time in business, credit score, and intended use of funds.
- Compared to equity financing where companies sell ownership shares, loans allow businesses to access capital while retaining full ownership and control. Loans do need to be paid back per the repayment schedule, however.
The key defining aspects of any business loan include:
- Borrowed money and principal amount
- Interest charges and fees
- Payment schedule with set installments
- Collateral or guarantees
- Contract stipulating terms and conditions
With many financing options now available, it’s important for business owners to understand the different types of business loans, their pros and cons, and which lending products align best with their needs and qualifications.
10 Types of Business Loans
There are many types of financing options available for business owners. Getting familiar with the key differences between the various types of business loans can help you select the best option for your unique situation.
1. Term Loans
These are the most commonly used business loans, obtained from a bank or online lender. They offer fixed monthly payments and terms ranging from 1 to 25 years. The loan amount, interest rate, fees, and terms depend on your credit, collateral, and other qualifications.
2. SBA Loans
Backed by the U.S. Small Business Administration, these loans help borrowers who may not qualify for traditional financing. Lenders assume less risk because the SBA guarantees a portion of the loan. Qualifications and terms vary by program.
3. Lines of Credit (LOCs)
LOCs provide revolving access to funds, up to a set limit, instead of a lump sum. You pay interest only on what you use. This flexible option works well for businesses with fluctuating cash flow needs.
4. Equipment Financing
Specifically for purchasing equipment like machinery, vehicles, computers etc. Payments are structured around the projected lifespan of the equipment. Options include leases as well as secured and unsecured loans.
5. Invoice Financing
Use unpaid invoices as collateral to obtain a cash advance, enabling you to fulfill orders without waiting for customers to pay. The lender collects the invoice payment directly from your client when due.
6. 401(k) Business Financing
Allows you to invest a portion of your 401(k) retirement savings into your own business, with no tax penalties. Requirements include being a business owner over age 55.
7. Peer-to-Peer Lending
Borrow from individual investors rather than banks via online peer lending platforms. Investors bid on loan requests and set rates based on risk. May appeal to startups or those with short credit history.
Raise small amounts of capital from a large number of people, typically via the Internet. Useful for startup costs like product development. Donors may receive rewards but have no equity.
9. Angel Investors
Wealthy individuals provide capital to startups or small businesses, often in exchange for convertible debt or ownership equity. Extensive business plans are usually required.
10. Venture Capital Firms
Like angel investors on a bigger scale, VC firms provide substantial funding in return for equity stakes in high-growth-potential companies. Very selective, targets businesses aiming to scale rapidly.
What type of business loan should I get?
The best type of business loan depends on your specific needs and situation. Some key things to consider are the loan amount required, how quickly you need funding, your company’s financial health, if you have collateral to secure the loan, and your intended use of funds. Common options are SBA loans, equipment financing loans, short-term working capital loans, startup business loans, and commercial real estate loans. Review each to determine the best fit.
What credit score do I need to get a business loan?
Exact credit score requirements vary by lender, but generally you’ll need good to excellent credit—a score of 680 or higher—to qualify for a small business loan. Building your credit score to over 700 can help ensure favorable loan terms like lower interest rates. If your score is under 650, improve it before applying or explore alternative funding options.
How long does it take to get approved for financing?
The business loan application and approval timeline ranges from just 1-3 days for short-term working capital loans up to 90+ days for large SBA loans. On average, small business owners can expect to wait 1-4 weeks for a credit decision once completing the full application. Preparing all required documentation beforehand can help accelerate underwriting.
What documents do I need to apply for a business loan?
When applying for a small business loan, be prepared with documents like your business plan, bank statements, tax returns, profit and loss statements, accounts receivable/payable aging reports, personal and business credit reports, collateral assets lists, and other financial records. Specific documentation may vary but lenders generally review your company’s finances and ability to repay the loan.
Should I use business financing for equipment, real estate, or working capital?
The intended purpose should guide your loan choice. Equipment loans allow upgrading assets to grow operations. Commercial real estate loans facilitate purchasing property. Short-term working capital financing assists with managing cash flow. Identify how you’ll use the capital first, then select the appropriate loan type that aligns to that need.
So there you have it – the 10 most common types of business loans and how they stack up against each other. From short-term loans to get you quick cash to long-term loans for major investments, there are financing options for companies at every stage. As you evaluate your business needs and expansion plans, review the pros, cons and eligibility criteria for each to choose the best loan for you. The key is matching your loan with your ability to repay on schedule and leverage it to successfully grow. With the right financing, you can turn your big ideas into business success. Now go crush it!