What Are The Different Types of Business Loans?
Whether you’ve been in business for years or are just starting out, the concept of getting a business loan can be daunting. Even if you’ve applied for a loan in the past, the entire process still requires a lot of research and effort.
Why is getting a loan so complicated? Part of the reason is because the giant banks make the process difficult. They usually have very strict requirements for loan approval. Plus, they often make applicants wait for a long time. You can make the process easier by going straight to the best sources: community banks and credit unions.
The other complication comes from the fact that there are just so many loan options these days. On one hand, that’s a great thing. You want to make sure that you get the right loan for your needs, and when there are lots of options, you’re more likely to find your perfect fit. On the other hand, though, it can lead to some confusion, at least at first. It helps to know your different loan options before you start applying for business loans. Sure, a financial institution can help you find the best fit, but when you come with some knowledge to get started, you can make the whole process a lot simpler. Take a look at your loan options below.
Six Main Types
First of all, there are six main types of loans that a business owner can pursue. These categories offer a range of amounts, limits, interest rates, and more.
The most common type of loan is called a term loan, and it’s usually what people think of when they think of a business loan. A term loan is a lump sum of money that the business owner receives upfront. The business owner can then use that money for any business-related purpose. Term loans usually have fixed monthly payments that the business owner will pay back on the same date every month. These loans also come with interest that the business owner will have to pay as part of the monthly installments.
SBA loans are term loans that are backed by the Small Business Administration. The Small Business Administration is a service of the US government. It was created to encourage local businesses and economies. SBA loans, as you’ve probably guessed, are for small business owners. These loans come with some pros and cons. They’re appealing because they come with low interest rates and other benefits. In fact, SBA loans are, to some, the Holy Grail of business loans. That said, the application process is long, and these loans can be hard to get. For business owners who need money quickly, an SBA loan may not be the best choice. Otherwise, the option is definitely worth pursuing.
Business Line of Credit
A business line of credit works differently from a term loan. While a term loan is best for starting a business, expanding a business, or doing a business-related project, a business line of credit is best for everyday expenses. It’s like a credit card: a business may have a certain credit limit, and they can borrow against that limit. Say, for example, that a business owner has a limit of $20,000. They borrow $500, bringing their limit down to $15,000. However, if that business owner pays back the $500 before borrowing any more money, then the limit goes back up to the original number. All payments come with interest, of course, but a line of credit is usually ongoing. As long as the business owner doesn’t borrow more than the limit, then a business line of credit is a great way to cover smaller expenses.
An equipment loan is technically a type of term loan, but there’s a difference. As one might imagine, equipment loans can only be used to fund business-related equipment. So, why choose an equipment loan specifically instead of a regular term loan? First, an equipment loan generally provides a higher sum than other term loans. Business equipment can get expensive, and regular term loan limits usually aren’t enough to cover those needs. Next, equipment loans also come with lower interest rates. Say that a business owner does get a term loan big enough to cover equipment, but that loan isn’t specifically an equipment loan. The business owner will likely take a long time paying back the loan because of the interest. However, the low interest rates associated with equipment loans can make repayments much easier.
Invoice factoring loans make a good choice when a business owner needs money and is owed money by somebody else. With invoice factoring, a financial institution essentially buys a business’s unpaid invoices at a discount. The person who owes money will then owe the financial institution instead of the business owner. This type of loan can help business owners who need money quickly. It also simplifies the loan process because it’s technically not a loan at all - it’s a purchase. It’s often grouped with business loans because it works in a similar way. However, instead of applying for a loan, the business owner simply sells their invoices. Once that transaction is over, they don’t have to worry about repayment.
Merchant Cash Advance
Merchant cash advances are sometimes called “credit card factoring.” These loans are a popular choice for retail businesses or any other business that makes most of its sales from credit and debit card users. The business owner receives the funds from the loan. Then, instead of using a fixed schedule for loan repayment, the financial institution takes a percentage of the business’s credit and debit card sales until the loan is paid off.
Other Loan Possibilities
You can find the above loans in virtually any financial institution. Each type comes with pros, cons, and other considerations. That said, keep in mind that you do have other possibilities available. The loans that we’ve listed below aren’t loan categories per se. Actually, any of the loans below could fall into at least one of the categories listed above. However, some financial institutions do have specialized loan products for specific people and situations. Consider the examples below.
Small Business Loans
Whether they’re term loans, equipment loans, or any other loan type, these loans are specifically designed for small businesses. SBA loans fall into this category, of course. However, some banks and credit unions have other programs just for small businesses. They want to support small businesses for the same reasons that the SBA does. Small businesses boost local economies and invest their money back into communities.
Some banks and credit unions offer loan programs specifically for female business owners. Why the specific focus on women? Because women’s financial struggles go back to the beginning of time. In more recent history, though, the cards are stacked against female business owners in particular ways. For example, in the United States, women couldn’t have their own credit cards until the 1970s. Generally, financial institutions have been slow to support women in the same way that they’ve supported men, which has caused a huge gender gap in business ownership. Some banks and credit unions are aiming to change that by creating loans specifically for female business owners.
Some loans exist just for business startup costs. A lot of business loans work for people who already own businesses. Startup loans are for those who are trying to get their businesses off the ground. A lot of people put money from their own pockets into their businesses, and a lot of people also borrow money from friends and family. Still, starting a business is expensive, and a loan can help. That’s why some financial institutions have created loan programs for startup costs.
Bad Credit Loans
One of the biggest fears of business owners is not being able to get a loan because of bad credit. If you have bad credit, it isn’t necessarily your fault. It takes a lot to build a credit score, and it doesn’t take much to knock it down. Even something as simple as waiting to get a credit card can harm your credit score. A lot of financial professionals understand that a credit score isn’t always a reflection of a person’s ability to pay back a loan. Some have implemented loan programs and compromises for borrowers who have bad credit.
Other Unique Loan Products
These aren’t the only loan products on the market, of course. If you’re looking for a business loan, there are lots of unique loans that you can choose from. With so many banks and credit unions available these days, there are many creative options out there. Take your time to research your options and find the one that will work best for you.
Where to Find Your Business Loan
Now that you have a better idea of the different loan types, where should you go to get your business loan? We already mentioned that it’s tough to get a loan from a big bank. These places are impersonal, don’t care about your business, and have long wait times when you need funds quickly. The good news is that you have other options, including community banks and credit unions.
In the US, there’s no real measuring stick for what makes a community bank a community bank. Generally, people agree that community banks handle less money than megabanks, but there’s some disagreement on what that amount of money is. The most important thing, though, is that community banks serve communities. They’re smaller than the megabanks, of course, and they have a local focus. As a local business, a community bank helps its local economy and invests money into the community as a whole.
Credit unions work a lot like community banks. They do serve communities, and they do what’s best for those who need them. However, the difference between a community bank and a credit union is ownership. A bank is owned by one or a few people. A credit union is owned by its members. Anybody who uses a credit union is a part owner of that credit union. Furthermore, credit unions are nonprofit organizations.
Either a credit union or a community bank would make a great choice for a business loan. Either way, when you get a business loan from one of these places, you know that you’re helping a community. With a community bank, you’re helping a geographical community. With a credit union, you’re helping a community that’s based on something other than a location.
Furthermore, both community banks and credit unions offer better interest rates than megabanks. They tend to offer better limits, too. Most importantly, it’s easier for a business owner to get a loan from one of these places to begin with. At megabanks, loan seekers usually need excellent credit, plenty of references, and other resources to find any success. As a matter of fact, the people who are most likely to get a loan from these banks are the ones who need those funds the least.
At a community bank or credit union, on the other hand, it’s easier to find someone who will listen to your story. People care about more than the bottom line. They want to know how your business impacts the community, what good it provides, and more. There are options for people who have bad credit. You’re more likely to find someone who will understand why you might have bad credit. Plus, with fewer people waiting to get a loan, community banks and credit unions have shorter wait times for loan applicants.
How Bundlefi Can Help
With all these options available, it’s easy to get a bit confused and overwhelmed. That’s why Bundlefi is here to help. We have search tools to connect business owners with the loans that they need to succeed. Take a look at Bundlefi today to find a loan on your own terms.