6 Types of Loans for Businesses

1. Business Term Loan

Pros:

• Funds can cover any business expense
• Larger amounts to borrow
• Get the loan approved within days

Predictable repayment terms

Cons:

• Prepayment penalties
• Collateral or blanket lien for businesses with poor credit scores

A traditional business loan gives you access to funds as low as $1,000 or as high as $500,000 with the ability to repay the debt over several years. Repayment terms are typically one to five years, but you can find lenders with both shorter and longer terms. The average interest rate for a business-term loan is between 7 to 30 percent. You can use the funds from a business loan for any type of expense. The interest rates and repayment terms you get are based on the business credit score, average monthly or yearly revenue, and general financial status.

2. Line of Credit

Pros:

• Quick approval
• High max borrowing amount
• Lower APR
• Flexible source of funding
• Best for businesses with not-so-excellent credit

Cons:

• Missed payments charge high fees
• Collateral may be required

The line of credit for businesses is similar to your personal credit card. These are often used by businesses with no credit history or less-than-fair credit ratings. Your line of credit has a maximum amount and you can draw from this anytime you need to. You only pay interest on the amount you borrowed and you can replenish your credit by paying the balance. It’s easy and quick to access with some lenders approving applications within 24 hours. The average repayment term is from 6 to 12 months and APR rates are between 7 to 25 percent. The exact terms and rates you receive will depend on the business credit score and revenue.

Lender Pick

OnDeck helps small business owners access funds required to deal with challenges and growth opportunities. You can access cash whenever you need it with OnDeck’s business line of credit. The revolving loan can provide $6,000 to $100,000. The 12-month repayment term is reset after each withdrawal you make. Businesses are required to be at least 1 year old with $100,000 annual revenue or more. The minimum personal FICO score requirement is 625 points. OnDeck’s rates start at 13.39% for a revolving line of credit. Their term loans have lower APR rates starting at 9.99%.

3. SBA Loan

Pros:

• Low interest rates range from 5 to 13 percent
• No long business history required
• Longer repayment terms – up to 25 years for 7(a) loans

Cons

• Long application process can take several months to complete
• Requires strong credit history

The Small Business Administration supports, in part, loans ranging from $5,000 to $5 million to provide aid to small businesses in the United States. These loans, however, are still provided by commercial banks and online lenders. Since the loans are backed by the government, loan providers can offer lower APR rates with the confidence that they will get the money back. An SBA loan has lower APR rates and long repayment terms and can be used for most types of business expenses. However, you do have to deal with a time-consuming application process.
You will find several kinds of SBA loans. The 7(a) loans are the most common program that covers businesses that have special requirements. This is your best option if you are purchasing real estate for the business. It can also be used to refinance your current business debts, as working capital, and to buy supplies, furniture, and fixtures.
The 503 loans offer businesses long-term and fixed-rate financing for major assets that drive growth and job creation. SBA also has microloans that offer up to $50,000 for businesses that need help expanding.

Lender Pick

Torro is a financial service provider that offers funding options to businesses. The company has a fast application and approval process. You can get the funds in less than two business days. You are not required to put up any collateral. Loan amounts range from $10,000 to $2 million for new and established businesses.

4. Merchant Cash Advance

Pros:

• Quick loan approval
• Access lump sum amount
• Best for businesses with shorter histories or poor credit

Cons:

• High interest rates

A merchant cash advance is an unsecured business loan that can help with cash flow issues. You get a lump sum amount in exchange for a certain percentage of credit or debit card sales. You don’t get the typical APR rates with a merchant cash advance. Instead, the loan amount is multiplied by a factor rate and the result is the amount that you need to pay back. If we convert the factor rate to APR, it starts at 15% and can even go up to three-digit rates. There is no set repayment term so you continue paying the loan until the total amount is paid.
The length of repayment will depend on how many credit card sales you make in a day and what percentage of the sales go toward repaying the cash advance. On average, repaying a merchant cash advance takes 8 to 9 months. It’s possible to pay off the loan in as fast as 4 months but it can also take longer than a year. Businesses with short histories or poor credit ratings can benefit from a merchant cash advance if a traditional loan is difficult to access. Lenders can give up to $250,000 and approve the application in one or two days.

Lender Pick

Torro is a provider that specializes in merchant cash advances. All their offers have weekly payments and provide same-day funding. Your loan can even get approved in as fast as 3 hours. With weekly payments, you are offered more budget flexibility for payments. Torro does not charge early repayments.

5. Equipment Financing

Pros:

• Accessible to businesses with poor credit scores
• Receive funding in days
• The equipment acts as loan collateral

Cons:

• Depreciating equipment value could make you more than its actual worth
• Equipment may be out of use once you’ve completed payments

Equipment financing is a loan that is specifically used to purchase business equipment such as a vehicle, copy machine, or oven for a restaurant. The equipment also acts as your collateral against your loan. Since this is a secured loan, you get lower APR rates averaging 8 to 30 percent. Even businesses with poor credit scores can access this type of loan. The loan amount varies depending on how valuable the equipment is. Lenders may offer up to 100% of the value of the item. Loan terms are usually 5 years or for as long as the equipment is valuable.

Lender Pick

BlueVine offers equipment loans for businesses with annual revenues of at least $100,000, a 550-600 credit score, and at least one year of business operations. Loan applications can be approved in 24 hours with rates starting at 15%.

6. Invoice Financing

Pros:

• Quick loan approval
• Minimal eligibility requirements
• Help business deal with tardy clients affecting cash flow

Cons:

• High prepayment penalties

Invoice financing is a type of alternative financing where you sell outstanding business invoices to a factoring company. In exchange for the invoices, you get a cash advance of up to 90% of the total uncollected invoice. The factoring company will collect the invoice value from your clients and then pay you the remaining percentage minus any factoring fee.
You may find companies that can provide the total amount and charge a flat rate weekly while you are repaying the loan. Other companies may take a percentage of invoices every week until your clients pay up. Businesses can easily apply for invoice financing since you have the invoice acting as collateral. Your credit and business history should not affect your eligibility.

Lender Pick

Fundbox is a platform that offers working capital for small businesses. You can advance up to 100% of unpaid invoices and communicate directly with clients for full payment. APR rates as low as 4.66% are available and repayment terms are 12 or 24 weeks. Fundbox does not penalize early repayment. You can loan up to $150,000.

Bottomline

Businesses in need of funding for growth and expansion or to cover an off-season have different loan options. It’s important to get the right loan if you want the business to succeed. These six loans each have their own advantages and disadvantages depending on what costs you need to cover. There are loan types best suited for buying new equipment, dealing with cash flow problems, or launching a new venture.