Types of Loans You Can Get to Start a Business

Setting up a business comes with many difficulties and obstacles. One of those obstacles is having enough financing to cover all your expenses and needs.

The solution for many businesses is to take a loan, but before you do so, it is wise to understand the different types of loans available for you to start your business.

Term loans

A term loan is a loan that is used for businesses where its owners are able to access a large amount of money faster. They receive the loan immediately, which is beneficial for immediate expenses that need to be addressed. These loans are typically paid off in incremental amounts. These are regular payments that are usually set by the lender, bank, or loaning party to be paid off over a longer period of time, where interest is accumulated and paid off as well over the length of the contract, which is where the loaning party makes their profits. Due to the size of the loan, businesses are often not able to pay the total in a single lump sum, thus the length of the contract. The importance of this is that with businesses growing, there is a lot of financial need and expenses that need to be considered, and many companies do not have that access to liquid assets.

Lines of credit

A line of credit is a popular type of loan for many businesses. Unlike a term loan, you do not get the lump sum you qualify for all upfront. Instead, you are given a line of credit, which is essentially a borrowing limit. This is an amount that you can use to make any business purchases as you see fit. This option is similar to a credit card but on a much larger scale, and it is tailored to fit your business needs. This means that the limits tied with this loan will typically far exceed the spending limits on the average credit card, as you will have large expenses to consider like business equipment or payroll. There are no rewards programs associated with this loan also.

SBA loans

An SBA loan stands for small business administration loan and is a type of loan from the government. Banks are not always willing to loan money to small businesses, depending on their size, income potential, and growth potential. They might see this as too risky. With an SBA loan, the government assists you in getting the money you need to run your company, which helps you compete with larger corporations for access to funding and financial aid. There are more applications you have to fill when needing an SBA loan, and you should research and understand the intricacies to see how it works. There are requirements you need to fulfill in order to qualify before being approved for such a loan.

Peer-to-peer lending

Peer-to-peer lending is another form of borrowing money that comes from investors as opposed to large institutions. Unlike banks, where the money they use to lend comes from those that put money into their system to be kept safe, peer-to-peer lending eliminates this middle man and connects investors with businesses directly. These are good for businesses as they usually translate to lower interest rates compared to larger financial institutions. Additionally, the process can often be much faster and easier for those with strong credit scores as banks incorporate much more paperwork into the application process.

Equipment financing

Depending on the type of business you own and operate, equipment is going to be something that you have to account for and consider when you are balancing your finances. For many industrial companies, getting started is difficult because of the sheer expense of the machinery you need. This is where equipment financing can help. Similar to leasing a vehicle, you will make regular payments for the equipment that you are financing. You own the equipment and have to pay interest over the course of the term of the agreement. What makes this an easy loan to qualify for as a business, is the fact that the equipment you are paying off acts as the collateral itself, so if you are unable to pay, the lender can repossess the equipment. This can be used for all types of equipment, whether that is electronics and computers, to large industrial equipment and vehicles.

Invoice factoring

An option of financing businesses for companies and business owners to consider is invoice loans or invoice factoring. This allows you to get access to funds that you are already entitled to, which reduces the risk of being able to pay off your debts, unlike other loans. As a company, you will be involved in many contracts of varying costs and payment dates. What you need to do as a business is present your invoices of the companies that you have transactions with that have not yet been fulfilled. The lending party will provide you the funding ahead of your payment time. This is beneficial as a business if you have a sudden surge of expenses that you need to immediately pay for, and lack the cash flow to do so, but are secure in your contracts in the future to have the confidence to take this loan.

Merchant cash advances

Merchant cash advances are similar to invoice factoring in that it is dependent on the business and transactions of your company. There is no need for checking credit scores but can come to take a significant chunk of your business earnings. Instead, you will pay back a portion of your profits as payments to the lender in addition to the money they let you borrow. Unlike invoice factoring that uses your current invoices, the money you get is based on projected future earnings, and you pay a percentage of your earnings to the lending party. This type of business loan is used for immediate costs like paying employee salaries.

It is important to take the time to properly research all the types of loans and methods to borrow money for your business. You need to evaluate your industry and projections and determine what is the smartest and safest route to take when taking out any sort of loan, as it will ultimately affect your profit margin and the success of your business.