10 Types of Popular Loans for Your Business

Types of Loans and Funding Options for Business

      Business owners have several loan and financing options available, ranging from traditional installment loans, credit lines to micro loans.

However, every business is unique, and so are their capital needs. Are you new to the industry, have a low personal or business credit score, or are you eyeing certain rates and conditions? There are a number of loan products available.

Study the most common types of business loans available, and find out which type is the best choice for your business.

1. Business Line of Credit

Business lines of credit are similar to credit cards. When this is approved, the business is granted with a maximum credit limit. You can borrow funds at any time as long as they don't spend over the loan limit. You only pay interest on money withdrawn from the credit line.

This type of loan is suitable for: paying unforeseen expenses, solving cash flow problems, and seasonal expenses.

2. Business Term Loans

A term or installment loan is a type of business loan in which the borrower receives a certain amount of money which will be repaid according to a set schedule.

Usually, term loan payments are made every month, but the payment schedule is based on the lender's policy. Each payment will be applied to the principal, or balance of the loan, as well as the interest charged by the lender.

This loan is suitable for growth or business expansion, large one-time purchases such as equipment or real estate, and businesses with a strong loan profile.

3. Short-term Business Loans

Short-term business loans are usually considered low risk, because they have a short time frame. Because of its low risk, this business financing option is a good choice for new businesses and borrowers, with poor credit scores. Most short-term lenders charge a one-time flat fee instead of interest. These loans are suitable for: emergency financing needs, borrowers with bad credit, and borrowers who need cash fast.

4. Personal Loans for Business

Personal business loans are an option for businesses and entrepreneurs who do not have the necessary credit scores or business documentation to qualify for a business loan.

With personal loans, the small business owner uses his own credit score and income documentation to qualify for financing. These business loans are perfect for: entrepreneurs, startups, new businesses, and business owners with strong personal credit.

5. Small Business Administration Loans

The Small Business Administration Loan (SBA) is a federal organization that functions as a resource for small business owners. One of the benefits offered by a small business administration loan is a low-cost, government-backed loan program. (forbes.com)

Business owners don't go directly to the SBA for loans. SBA works with lenders such as banks and non-profit organizations. A portion of the loans offered by lenders are SBA backed, meaning lower rates and better terms for borrowers. This financing option is suitable for business expansion, working capital, debt refinancing, businesses with a strong lending profile.

6. Merchant Advances

With a merchant cash advance, the lender gives the company a cash advance in exchange for a percentage of future credit card sales.

After receiving the merchant deposit, daily payments are withdrawn by the lender from the business bank account. Payments are often based on a percentage of sales, so when sales are lower, the daily payments are lower as well. These business financing options are suitable for: emergency financing needs and businesses with strong daily income.

7. Crowdfunding

With crowdfunding, a startup or small business uses an online platform to raise money from a group of investors. Small businesses offer their ideas to potential investors, and the investors contribute money if the idea is attractive to them. It is important for businesses seeking financing to map out their strategies and promote their campaigns to attract investors.

8. Invoice Financing

Invoice financing is used to deal with cash flow problems caused by unpaid invoices. Borrowers can sell outstanding invoices, or use them as collateral in exchange for cash up front.

Invoice financing relies on paying your customers — not your business — this type of financing is a good choice for Businesses experiencing cash flow problems due to unpaid invoices, first-time businesses and bad credit borrowers.

9. Micro Loans

A micro loan is usually defined as a loan under $50,000. Since these are small loans, they are best suited for small businesses, businesses that only need a small amount of money, sole proprietors, and startups that have lower capital requirements than other businesses.

10. Working Capital Loans

Businesses that need help covering day-to-day operating expenses need working capital loans. This short term business loan can be used for seasonal businesses and other businesses that need access to capital until their income increases again in the future.

You can get a working capital loan from a number of online lenders and traditional financial institutions. These financing options may be available as an SBA loan, a term loan, a line of credit or factoring. Because of the many choices, the terms of your loan also vary.