Being a business owner can be both a thrilling and anxious-filled experience. This is especially true for those who are about to start a new business, as they usually have numerous financial worries. In these scenarios, business loans can represent a helpful tool to address these problems.
The process of getting a business loan is fairly straightforward: a lender provides a necessary amount of money under the agreement of repayment plus fees over a set amount of time. The decision-making process for choosing a lender is complex since certain terms must be established, such as loan rates, the qualifications of the lender, and other issues, which are elements that severely affect any decision taken in this context.
Considering that a specific type of loan can be better for a determined goal, the enterprise’s needs are the key elements to consider to make the ultimate decision. For example, when the goal is to do small business digital marketing on a budget, a business line of credit makes a significant difference in sales strategy by infusing extra funds.
Today, traditional lenders have big opponents in the online scenario, as these lenders tend to have different requirements and often offer better deals. People have been using traditional loans for everything, from financing business to fulfilling the dream to go to Paris, with standardized arrangements and set rules. However, online alternatives are very different, as their different financing programs can be custom-tailored to a business’s needs. Features such as loan amount, repayment terms and schedule, interest rates and fees, funding schedule, and collateral requirements form a perfect option for a business in need of some cash influx.
Here are some of the different types of loans a business owner should evaluate and determine which one is best for their business.
1. Term Loans
Through this option, the business receives large upfront cash to repay with interest over a determined period. Online lenders finance up to $1 million and provide approval faster than traditional lenders, which offer lower interest rates, but take months to approve this funding. However, some lenders need a personal warranty or collateral such as real estate or business equipment. Credibility Capital, Currency, and Funding Circle are popular term loan lenders, suitable for expanding businesses searching for fast funding.
2. Small Business Administration (SBA)
SBA loans are an excellent alternative for expanding a business or refinancing debts. These loans have longer repayment periods and lower rates based on the loan’s purpose. For example, repayment in ten years after new equipment purchases and over twenty years for real estate. However, their application process can be long and it can be hard to qualify. Common lenders such as SmartBiz and Live Oak Bank offer large borrowing amounts that reach up to $5 million.
3. Business lines of credit
For short-term financing needs, this option provides the best alternative. This loan presents a flexible way to borrow through limited access to funds related to the business credit limit. Although interest rates apply only on the money withdrawn, the lenders often charge maintenance and other additional fees that increase the paid rate. BlueVine, Fundbox, and Kabbage are common lenders that offer a solution for handling unexpected expenses.
4. Equipment loan
Equipment loans are the best alternative for providing the business with necessary supplies. The borrower owns the purchased equipment, but it serves as a collateral or warranty for the lenders. The loan amount is based on the equipment’s life span, business credit, and the loan amount. However, it is a possibility that the equipment becomes outdated before the financing reaches an end.
5. Invoice factoring and financing
Invoice factoring is the best way for businesses to find quick cash flow. The business sells its unpaid invoices to a third party at a discount, for them to collect after the due date. In this scenario, the company loses control over invoices, but it is an exceptional alternative for businesses needing fast cash.
On the contrary, invoice financing provides an outstanding option for companies that want to maintain control over their invoices. With this financing, unpaid invoices work as collateral to get a cash advance. Companies like BlueVine and Fundbox provide these extraordinary alternatives.
6. Merchant cash advances
Similar to a term loan, with this financing the business receives upfront capital to finance their needs. However, there is not a monthly payment fixed, but a daily or weekly withholding percentage of credit and debit card sales. This is a remarkable solution for businesses with high and consistent sales.
7. Personal loans
Although these loans are usually for a particular goal, it is possible to make use of these for business financing. Personal loans for fair credit are an exceptional solution for startups and newer businesses since banks rarely approve financing for enterprises without records.
Microloans are a significant tool for new businesses since they run with low fees and often include consulting and training. Usually, these are offered by nonprofit organizations for businesses in disadvantaged communities.
About the Author: Lidia Staron is a part of the Content and Marketing team at OpenLoans.com. She contributes articles about the role of finance in the strategic-planning process.