Home Business Insights & Advice Different types of small business loans

Different types of small business loans

by John Saunders
7th Apr 20 5:21 pm

There comes a phase in every business’s life when it requires a cash injection to either stave off a financial crunch or to finance business expansion. There can be a myriad of different situations that requires a business to arrange for the extra financial cushion. Your business might come across an emergency like the one the whole world is dealing with today, i.e. the novel coronavirus. There are times when your business needs to purchase new equipment or buy a new property to expand your business premises. So, many situations eventually leave a business owner with no option but to seek a business loan.

However, it is not an easy job by any stretch of the imagination. Seeking funds is one thing, but arranging them is one heck of a job. First of all, you need to understand that there are many loan products out there that can fit your financing needs. You should spend some time to study all of them so that you eventually make the right decision and select the right loan product.

Let us take a look at different loan products that can save the day for a small business.

1. Small business administration loans

 The Small Business Administration (SBA) loans are one of the hot picks for small businesses in the United States. If you own a small business with a decent credit score and are seeking a competitive yet non-traditional financing option, an SBA loan is what will serve your purpose. The reason why SBA loans are the most sought-after ones is the fact that they are available at a lower cost than the traditional loans, and it is a government-backed loan facility.

2. Business line of credit

 If your priorities are on-demand access to funds and a flexible credit regime, you should consider the option of a business line of credit. It works very much like a credit card as the borrower is generally provided with a maximum credit limit. You can utilize that limit as per your needs and only pay for the amount you have used. This option allows you to use this money multiple times for different tasks and challenges. The Business Line Of Credit Rates is not that heft which makes it easy for you to repay it through scheduled payments.

3. Short-term loan

 Businesses with low credit scores dealing with sudden emergent circumstances generally opt for a short-term loan. These loans can be repaid over a brief period that can range from a few weeks up to 12 months. Businesses with low credit scores generally find it tough to obtain a long-term loan, which is why short-term loans help them a great deal. What is more, if you pay these short-term loans in time, it can improve your credit score. You must keep in mind that these short-term loans can be quite an expensive option as they come with a hefty interest rate.

4. Equipment loan

 There come times in the life of every business when it requires to purchase new equipment or repair the existing one. Sometimes, they do not have the required financial cushion to make the purchase. In such scenarios, equipment loans emerge as the best option. The best part is that your business can immediately start using the equipment while you repay the loan in easy monthly installments.

Also, it is quite easier to obtain an equipment loan, especially when compared with other lending options like SBA loans or installment loans. You do not need to present collateral to obtain this loan because the purchased equipment itself becomes collateral. So if you default on your loan payments, the lender seizes your equipment.

5. Invoice financing option

 Businesses like to forge long-term associations with their clients to ensure constant growth. However, there are times when their clients fail to honor their financial obligations with your business. Such situations might leave your business in limbo. However, there is no reason to worry because many lenders offer you the option of invoice financing. It comes with two options, i.e. invoice factoring and invoice discounting.

In the invoice factoring option, a lender will only pay the borrower a percentage of the outstanding invoices and collect its amount from the invoiced customer. The lender pays the borrower the remaining outstanding balance after receiving the whole amount from the invoiced customer. Still, it will charge interest and fee for its service from the borrower.

In the invoice discounting option, the lender pays a percentage of the unpaid invoice to the borrower. In this case, the borrower will collect payment from its customer, and once it is done, it can pay the lender the borrowed amount along with interest and charges.

Conclusion

It is not a walk in the park out there for small businesses. They have to brave challenging situations to make their way to the riches. As a business owner, it is always important to keep a cool and strong mind, which allows you to take brave decisions, even the unpopular ones, but they can pay you high dividends in the long run. There is no shame in seeking financing options when the chips are down. It is all about making an informed decision about which kind of loan product will serve the purpose.

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