types of business loans

The Common Types of Business Loans Explained

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If you run a small business and are looking for some more money, then you might have several types of business loans at your disposal. Each loan type has specific terms, interest rates, and qualification requirements. Whether you’re interested in purchasing inventory, real estate, equipment, or you just want more working capital, there’s likely a business loan out there that will suit you.

If you’re interested in learning more, then make sure to keep on reading. We’ll go over the various types of business loans and what kinds of situations they’re ideal for. This way, you’ll be able to make the best decision for your business. 

1. Term Loans

Term loans are best for business owners who have an ongoing need for working capital or are looking to make investments in specific business areas. With a standard term loan, you borrow a certain amount of money upfront. You then pay back the loan on a specific repayment schedule, with interest. 

If you have the ability to wait for the financing and you have good credit, then you’ll be able to find a term loan with the optimal amount, terms, and rates.  

2. Business Lines of Credit

This type of loan would be great for a business owner who is looking for a cash cushion for cash flow emergencies or gaps. With a business line of credit, the borrower is given access to a certain amount of money that they can draw from whenever they want. 

There are both revolving and fixed lines of credit. With revolving lines of credit, the credit line resets after the borrower pays off their balance in full. This is similar to paying off a credit card balance. 

If you’re trying to tide over your cash flow while you’re waiting for customer payments or you’re paying for recurring operating expenses, you would probably benefit from this loan type. 

For secured lines of credit, you typically have to give some assets as collateral. 

3. SBA Loans

If you’re looking for a long-term loan and you have great credit, then you should consider getting an SBA loan. The Small Business Association (SBA) doesn’t give out business loans but they do partially guarantee loans that lenders make to small businesses.

When the SBA partially guarantees a loan, this gets rid of some of the risks and encourages lenders to make loans to small business owners. 

The standard SBA 7(a) loan is a useful option for people who want to acquire or expand a business or need working capital. The SBA 504/CDC loan is good for business owners who need to finance the purchase of real estate or equipment and make upgrades to existing properties. 

It should also be pointed out that even though SBA loans are meant to help small business owners who don’t qualify for traditional loans, those business owners still need to meet high qualifications. This includes having solid credit history and strong business financials.

With that said, you can usually expect interest rates to range from five percent to thirteen percent. Of course, the amounts, terms, and rates for SBA loans will greatly depend on the lender and specific program. You can also expect terms to be as long as 25 years, in some cases.  

4. Equipment Financing

Equipment financing is ideal for business owners who want to lease or purchase business vehicles, machinery, or equipment. Equipment financing, also known as equipment loans, is one of the most popular asset-based loans.

If you’re looking to secure a loan in order to acquire a piece of used or new equipment, then this could be a great option for you. Instead of having to pay outright for expensive equipment, you can now get an equipment loan to pay for your purchase. 

New and established businesses can qualify for this kind of loan. In fact, even business owners who have low credit scores can usually qualify for equipment financing.

Unlike most other types of business loans, this loan is secured by the equipment itself. This is why it’s much easier to qualify for this kind of loan. Essentially, you don’t have to put down any other collateral because the equipment is the collateral. 

Equipment financing tends to come with fairly affordable interest rates. These rates usually range from eight percent to thirty percent, depending on the finances, credit, and age of the business. 

You can use equipment loans to lease or buy a variety of equipment types. They can include vehicles, appliances, and computers that you use in order to run your business. 

6. Commercial Real Estate Loans

Commercial real estate loans are a good option for people who are looking to finance the purchase of a commercial property. Like equipment financing, the property itself acts as the collateral.

Depending on the kind of lender you go with, you can see a wide variety of repayment term lengths and interest rates. Ultimately, the size of your loan is going to depend on loan-to-value (LTV). This is a comparison of the size of the loan against the value of the property you want to purchase. 

The Importance of Knowing the Common Types of Business Loans

Hopefully, after reading the above article, you now have a better understanding of the common types of business loans. As we can see, it’s important to know what it is that you want to use the loan for and what your financial situation is, so that you can better determine which loan is best for you.

If you’re looking for the best lender for your next business loan, then contact us today and see what we can do for you!

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