An Overview of 5 Popular Types of Business Loans
In the past, most small business owners who wanted business funding typically had three options:
- They could apply for a bank loan — and typically get turned down, since bank loan lending criteria has gone beyond restrictive, and has entered the realm of the ridiculous.
- They could try and find investors who, in return for supplying capital, demanded an equity position.
- They could carry out a “friends and family” round of financing, which is kind of like holding a private telethon for a cause that nobody truly wants to be part of.
Thankfully however, these days the alternative lending market offers many types of business loans that help businesses of all sizes, and across all sectors, get the funding they need to keep their organization strong and successful. Below, we highlight 5 popular business loan options:
- A Working Capital Loan is an unsecured lump sum loan that is paid back in regular fixed installments (often through ACH so repayment is automatic). They are often used to fund day-to-day operations such as rent, payroll and debt payments, but can also be used for long-term investments such as launching a new product line, acquiring a new business, etc.
- Invoice Financing is a cash advance secured by outstanding invoices (typically 80-90 percent of the value). Your business can get the money it needs by getting paid on your invoices before they’re due or overdue. Because your outstanding invoices are already pending payment, this is one of the easiest loans to be approved for.
- A Business Line of Credit gives businesses access to funds up to a pre-set credit limit, with interest charged only on the amount drawn — not the full amount available. These loans are often applied for before they are needed and then when a short-term funding opportunities arises, they are drawn upon.
Business credit lines typically fund a variety of purposes, similar to a working capital loan, and can be drawn upon several times as long as the credit line doesn’t exceed the pre-set limit.
- Equipment Loans are mapped to the expected lifespan of purchased equipment (and the equipment serves as collateral for the loan). They allow businesses to buy equipment they need and pay for it in installments while using said equipment to make money.
- Merchant Cash Advances are unsecured lump sum loans, in which a portion is paid back at the end of each business day based on a small percentage of daily sales. These are great for businesses that process a large amount of credit and debit card sales because repayment is automatic. Further, when daily sales fluctuate, the payments adjust accordingly.
You can think of a merchant cash advance like a sale of future payment card (credit/debit) sales. However, it functions much like a business loan, and is especially popular among retailers (restaurants, auto repair, hotels, etc.) that cannot get a conventional bank loan because they don’t have flawless credit, enough collateral, aren’t profitable enough, etc.
To learn more about various types of business loans that may be available to you — including but not limited to those highlighted above — contact the National Business Capital team today. We’ll learn about your goals, clearly and fully answer your questions, and educate you to make a business funding decision that’s right for your business — not ours or anyone else’s. Your consultation with us is free.