Are You Aware of these Different types of Business Loans?

20 Jan 2021

Whether you want to start a business, or expand it or need some cash flows… loan is the answer to all your queries. Are you confused over its types? Here, we will let you go through the varied types of business loans. After all, we want you to make the right decision.

Bank Term Loans

Banks issue bank terms loans for a specific amount, and have long-term repayment plans. These loans have both fixed and floating interest rate. A term loan is appropriate for small business owners with sound financial statement, and the ability to repay over a specified repayment schedule. Terms loans are usually used to purchase equipment and fulfill working capital needs.  

Types of term loans

Reflecting the lifespan of a loan, term loans have several varieties

Short-term loan: As the name suggests, it is offered for a short period - less than a year, and is paid in weekly or monthly installments, through a loan that runs up to 18 months can be referred as a short-term loan.

  • Intermediate-term loan: The loan runs typically between one to three years and paid in monthly installments.
  • Long-term loans: Long-term loans last for three to 25 years, but may last for 30 years in some cases. The long term loan requires monthly or quarterly payments from the company’s profits.

Bank Line of Credit

A line of credit is an unsecured loan that a customer can borrow from a financial institution – usually a bank - and use for any purpose, as needed. Because of its unsecured nature, the customer will need a good credit score, typically credit score of 680 or higher, and have a decent history of repaying debts promptly. Line of Credit (LOC) may be cheaper than a credit card advance and more flexible than a personal loan.

LOC can be the best help when you need money incrementally. It can be used for home renovation projects, for a great vacation, medical bills, big-ticket purchase, child’s fees.  

How does it work?

You can access funds from the line of credit, whenever you need. In the line of credit, unlike a loan, you don’t have to get a lump sum amount upfront. You have variable access to a line of credit as long as you don’t exceed credit limit or maximum amount as you need it. It is accessible through electronic transfer and checks.

Equipment loans

Equipment loans are issued to purchase business equipment. An equipment loan is the best financing option to help small businesses get the capital to acquire, replace, repair, and upgrade various types of machinery to produce, manufacture process their products. Equipment financing loans can be used to buy medical and dental machinery for hospitals; cookware, oven, table and chair, and other catering supplies for restaurants; monitor, printer, scanner for offices; specialized machinery, furniture, a vehicle for transportation, etc. for efficient and productive operations.

With equipment finance, you can pay 100% of the cost of the equipment used for your business. Equipment loan you are eligible for depends on the total value of the equipment you are purchasing.

Invoice financing

Invoice financing allows you to borrow money against unpaid invoices i.e., against the amount due from customers. Lenders provide companies with cash collateralized by accounts receivable. With invoice financing, you can get up to 85% of the value of your invoice. It is a great way to invest capital into your business when customers are taking a long time to pay the bills. This kind of financing helps improve cash flow, paying employees and suppliers, and covering other expenses.

There is less risk involved in invoice financing from a lender’s perspective. Unlike a line of credit which may be unsecured, invoices act as collateral for invoice financing. Although invoice financing doesn’t eliminate all risk, customer may not pay the bill. 

Purchase order financing

Purchase order funding is financial assistance for businesses that lack the cash flow to complete customer orders. Many small businesses have cash flow problem to complete a purchase order, and that’s why they need purchase order financing. Purchase order financing company pays the supplier of your company to deliver goods to the customers. When the customers pay purchase order financing company then makes money by charging your company various fees. Purchase financing company deducts its fees from collected invoice and returns the remaining amount to you.

For example, if you have a new business and get large orders at once, you might not have money to deliver these orders to your customers. Purchase order financing makes sure you have enough fund to fulfill the orders.     

Rollover for Business Startups

A rollover for business startups allows you to use funds from your retirement account to invest in your business. With rollover for a business startup (ROBS), you don’t pay early withdrawal penalty or taxes. A ROBS is neither a business loan nor a 401(k) loan, so there is no debt or interest to repay.

How rollover for business works?

ROBS gives you access to your retirement funds to use it to fund a new business, to buy an existing business, to recapitalize your business without having to borrow or cash it. A ROBS is not a withdrawal from or a loan against your retirement fund. When you use it, your retirement account buys a share of your business.    

Hard Money Loans

A hard money loan is a specific type of asset-based loan option for real estate investors when they can’t get a loan from a traditional mortgage lender. A hard asset and collateral secure a hard money loan.

Many new businesses are turning to hard money loan because they are easier to achieve than traditional loans. However, hard money loans are expensive and hard to pay.

How hard money loans work?

Generally, hard money loan is issued for a short term – typically 6 to 24 months. The good thing about hard money loan is that you can close it as soon as you can. Hard money loan allows real estate developer and investor to purchase new properties and do more transactions with less money, which will get them a higher return.   

Non-profit business loan

Some non-profit lenders offer funding for small businesses. These lenders cater to small business in their community that can potentially impact the economy by creating jobs. However, it can be difficult to get a loan from non-profit lenders, because there are few of them.  

Non-profit lenders often offer to business owners unable to access capital from traditional lenders for nominal interest rates. Their objective is to support the economic development of the community. Non-profit lenders develop a strong relationship with small business owners they lend to. Thus, they help borrowers navigate particular challenges and provide them fund before it is too late.   

It is, however, essential to note that non-profit lenders don’t have same resources as other financial institutions. Short-term loans

As the name suggests, short term loans are issued for short period - less than a year and is repaid in weekly or monthly payments, though a loan that lasts up to 18 months can be referred as a short-term loan. When a business doesn’t qualify for loan or line of credit from the bank, it can still access to finance in the form of short-term loan to fulfill temporary working capital needs.

While short-term loans are widely available, they are specifically targeted for consumers who are likely to pay the loan back. Short-term loans are a great option not only for business but also individuals who need finance on an immediate basis.

Advantage of short-term loans

  • Shorter time for incurring interest
  • Quick funding time
  • Easier to acquire

Merchant cash advance

A merchant cash advance is a cash advance but operates like a loan. It is a lump sum payment that a finance company provides you in exchange for a percentage of your credit card and/or debit card sales. Merchant cash advances (MCA) are approved quickly and easily with no collateral, even if you don’t have a good credit score. MCA is suitable for several business purposes.

However, it is essential to note that merchant cash advances have higher fees than traditional loans. Merchant advance companies are not bound by usury law and operate in mostly unregulated market. MCA can help with inventory purchase, debt payments, working capital, and other unexpected payment. 

Online Business Lines of Credit

A business line of credit is like a small business credit card. It gives you access to a credit limit when you need capital. Unlike a traditional business loan, you have variable access to a business line of credit as long as you don’t access the limit. You can access the fund as per your need and repay the only amount you get, plus the interest rate. You can draw on a business line of credit to tackle cash flow gap, get more working capital, and other unexpected payment.     

With a business line of credit, you can typically borrow from $10,00 to over $1 million in funding. And repayment term generally ranges between 6 months to 5 years, depending on your creditworthiness, for 7% to 25% interest rate.

Benefits of a business line of credit (BLOC)

  • Poor credit is acceptable
  • Only pay interest on fund accessed
  • Suitable for a wide range of business purposes