Business owners, both existing as well as those going through the startup phase, have several types of funding choices, all of which have their own set of pros and cons.
With a variety of business loans to consider, owners are in position to compare multiple options with an eye towards the one that is best for their organization at the present time.
Common Types of Business Loans
Listed below are many of the most common types of business loans, including some basic information on what each one has to offer:
- SBA Business loans. These loans are made to businesses from banks, however, each one is guaranteed by the SBA. Although the loan does not come directly from the SBA, the organization works with the lenders to back each loan as a means of mitigating risk.
- Secured loan. This loan requires the borrow to use an asset (collateral) to receive the working capital requested. From the lender’s point of view, a secured loan is less risky than an unsecured loan.
- Unsecured loan. This loan is based on nothing more than the credit worthiness of the applicant, as no collateral is required. Typically, an unsecured loan will have a higher interest rate than a secured loan.
- Commercial real estate loan. As the name implies, this loan is used by a business that is interested in purchasing a commercial property. Just the same as buying a home, there are a variety of options such as fixed and variable rate.
- Accounts receivable financing. This loan allows you to use accounts receivables - money that has yet to be paid by the customer - as collateral in a financing agreement. You will receive less than the total amount due, however, you are not required to wait for the customer to pay the money. This is also known as factoring.
- Franchise startup loan. Are you starting a franchise as opposed to a more traditional business? In this case, a franchise startup loan is an option to consider as it is intended for this type of business arrangement.
- Line of credit. Similar to a loan, but with the ability to access only the funds you need while leaving the rest of the “line” unused for the time being. In other words, you will not receive one lump sum loan but can instead access the line of credit as you see fit.
- Business acquisition loan. Are you purchasing a business to run as your own? Are you purchasing another business to add to your current organization? In this case, you will want to turn to a business acquisition loan. These loans are designed for acquiring a business.
- • Equipment financing. If you need to purchase equipment for your business, such as heavy machinery, an equipment financing loan is a viable solution. This makes it simple to purchase equipment, using the equipment as the collateral on the loan.
- Equipment leasing. While this may not be a traditional loan, it is a method of business financing worth discussing. With leasing, you only pay for the portion of the equipment you use based on the term of your agreement. When the agreement expires, you have the option to either turn the equipment back in or purchase it outright or with a loan. This is becoming increasingly popular thanks to the tax benefits.
- Business only loan. This is best for an established organization, as it is based on the credit worthiness of the company as opposed to the personal credit of the owner.
To most business owners, the word “grant” sounds much better than “loan.” With a business grant, you will receive the funding you need without any requirement to repay the money.
While “free money” is always better, the primary downfall is the difficulty of finding, applying for, and receiving a grant.
Those who are interested in business grants can rely on the SBA grants search tool, located here.
There are grants for almost every industry, with many based on the phase of your company as well as the location among other factors.
According to the SBA, here are several questions to ask as you search for grants:
- Am I looking for a grant for a startup or existing business?
- Does your business belong to one of these industries (some offer more grants than others)?
- Will your business be associated with the government in any way, shape, or form?
- Are you a minority business owner?
- Are you a woman business owner?
- Are you seeking a grant for people with disabilities?
- Is your business located in a rural area?
- Do you need a grant to help your business recover from a disaster
How to Make a Decision
Now that you know more about the most common types of business loans, there comes a time when making a decision is a must. While you should never feel pressured to apply for any type of financing, if this is something your organization needs you must choose the right option.
Here are several steps to follow:
- Consider the pros and cons of each type of business loan, including how these will impact you now and in the future.
- Request more information from the appropriate lender, ensuring that you understand what you are getting into.
- Don’t focus solely on the money you are receiving now, but also on how your company will be impacted down the road.
- Ask questions. The lender expects you to have questions, so don’t be shy about discussing your situation and requesting more information.
- Get the advice of others. From executives within your company to your banker to your accountant, there are people you can turn to for assistance with this decision.
You should no longer think about “business loans” as a broad category. You should now realize there are several distinct loan types, one of which is likely to be perfect for your company.
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