REAL DEAL FINANCE

Business Loans

Types of business loans

1. Term loans

A term loan is a common form of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period. Online lenders offer term loans with borrowing amounts up to $1 million and can provide faster funding than banks. Pros: Get cash upfront to invest in your business Typically higher borrowing amounts Fast funding if you use an online lender rather than a traditional bank; typically few days to a week versus up to several months Cons: May require a personal guarantee or collateral — an asset such as real estate or business equipment that the lender can sell if you default Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks Best for: Businesses looking to expand Borrowers who have good credit and a strong business and who don’t want to wait long for funding


2. SBA loans

The Small Business Administration guarantees these loans, which are offered by banks and other lenders. Repayment periods on SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years for buying equipment and 25 years for real estate purchases. Pros: Some of the lowest rates on the market High borrowing amounts up to $5 million Long repayment terms Cons: Hard to qualify Long and rigorous application process Best for: Businesses looking to expand or refinance existing debts Strong-credit borrowers who can wait a long time for funding


3. Business lines of credit

A business line of credit provides access to funds up to your credit limit, and you pay interest only on the money you’ve drawn. It can provide more flexibility than a term loan. Pros: Flexible way to borrow Typically unsecured, so no collateral required Cons: May carry additional costs, such as maintenance fees and draw fees Strong revenue and credit required Best for: Short-term financing needs, managing cash flow or handling unexpected expenses Seasonal businesses


4. Equipment loans

Equipment loans help you buy equipment for your business. The loan term typically is matched up with the expected life span of the equipment, and the equipment serves as collateral for the loan. Rates will depend on the value of the equipment and the strength of your business. Pros: You own the equipment and build equity in it You can get competitive rates if you have strong credit and business finances Cons: You may have to come up with a down payment Equipment can become outdated more quickly than the length of your financing Best for: Businesses that want to own equipment outright 4. Invoice factoring Let’s say your business has unpaid customer invoices, which typically are paid in 60 days. If you can’t wait that long to get paid and need cash now, you can get money for those unpaid invoices through invoice factoring. You’d sell the invoices to a factoring company, which would be responsible for collecting from the customer when the invoice is due. Pros: Fast cash for your business Easier approval than traditional funding options Cons: Costly compared with other options You lose control over the collection of your invoices Best for: Businesses with unpaid invoices that need fast cash Businesses with reliable customers on long payment terms (30, 60 or 90 days)


5. Invoice financing

This is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance. Pros: Fast cash Your customers won’t know their invoice is being financed Cons: Costly compared with other options You’re still responsible for collecting the invoice payment Best for: Businesses looking to turn unpaid invoices into fast cash Businesses that want to maintain control over their invoices


6. Microloans

Microloans are small loans — $50,000 or less — offered by nonprofit organizations and mission-based lenders. These loans typically are available to startups, newer businesses and businesses in disadvantaged communities. Pros: Low cost Other services may be provided, such as consulting and training Cons: Smaller loan amounts You may have to meet stringent eligibility requirements Best for: Startups and businesses in disadvantaged communities Businesses seeking only a small amount of financing


7. Personal loans

It is possible to use a personal loan for business purposes. It’s an option for startups, as banks typically don’t lend to businesses with no operating history. Approval for these loans is based solely on your personal credit score, but you’ll need good credit to qualify. Pros: Startups and newer businesses can qualify Fast funding Cons: High borrowing costs Small borrowing amounts of up to $50,000 Failure to repay can hurt your credit Best for: Startups and newer businesses with strong personal credit Borrowers willing to risk damaging their credit score