Starting with a business can be a very expensive activity, so is expanding one. It does not matter where the business life cycle is, whether startup to a growth phase. The option of taking a business loan is always present to help you get started or to acquire the necessary assets.
Businesses tend to have issues and downtime. During which the only option is to get the best business loans to steer your business out of troubled times. A survey last year pursued by Federal Reserve Bank, stated about 43% of small businesses seek funds from external sources. It also indicated that seven in 10 small firms carry some outstanding debt. Around 56% of respondents applied for loans either for expansion, take on new opportunities or to acquire new assets. In addition, 44% needed funding to meet their operating expenses. The analysis also indicated that many of them approached large lenders or online banks to fund themselves. While some of them applied for Union Pay or smaller banks.
If you are considering financing options, it is important to know about the different types of loans available. Selecting a suitable business loan is dependent on your business needs and requirements. Let us give you some insights about the most common business loans available for you.
Term Loans
Term loans, also called long-term loans, are the best option for owners who request large funding while having a great credit history. Lenders look for a business record of accomplishment so it may not be a good idea for startups.
The process for term loan approval is lengthy and large banks approve only about 25% of small business loans. You will pay a principal plus interest amount monthly once your loan is approved. This will continue until the payment of the full debt. This type of loan is mostly preferred by real estate or acquiring other businesses. Other uses can be supporting a long-term business plan or to renovate your commercial space.
Short-Term Loans
Short-term loans are the best business loans for those looking for a fast cash grab to fill their financial gaps. They can cover certain emergencies, pay-off higher debts or taking on a new opportunity. An advantage of this loan type is that you do not need a prior credit score, which means it is relatively easy to be accepted.
This type of loan also has less paperwork involved as compared to its counterpart; you can have the cash when needed.
A disadvantage is that the repayment timeline is very short usually two years max. In addition, the payment schedule can be daily or weekly based that can be hectic at times. They generally have a higher-level APR as compared to term loans. Most importantly, these loans have capping, which means there is a limited amount approved. If you want more, you might look for other financing options.
Secured Loans
This is a viable option for businesses having a poor credit score and require funding. These are usually low rate loans also used to repair a damaged business credit rating. The essence of this loan type is that some sort of asset secures every small business. These include equipment, inventory, success history, purchase orders or invoices. However, in the case of small businesses, the process is usually securing a personal property through which their loan is accepted. Putting personal property as security is the only way of acquiring the loan amount.
Equipment Loan
This is a good option for startups and established businesses, as every type of business equipment finance is possible. Equipment like vehicles or office furniture comes under this loan type and acquiring it is relatively easy. The advantage new businesses can take is that the equipment secures the loan. This is irrespective of the success or failure of the business.
The rates of this loan type are very low depending on the person’s or business’s credit score, or financial portfolio.
Merchant Cash Advance
Not technically termed as a loan. Through MCA, the lending company provides advance cash to you. This is against the credit or debit card percentage of daily sales (with a fee of course). This can be a quick and easy way to get advance cash with no collateral. The disadvantage of this type of advance is that daily deductions influence the cash flows. In addition, a merchant cash advance is less flexible to change merchant service providers.
The Final Word
By now, you must have developed an idea of different types of loans that businesses acquire in their trying times. It does not matter which loan type you choose, as long as you have the necessary requirements to pay it off on time.
Approval of a loan is the easy part, paying it off on time is the real deal. Even a single missed payment can cause a lasting effect on a business’s financial portfolio. Taking all the points in focus, you now have the necessary knowledge to make the decision according to need.
