There are many different types of small business loans, and each has its own pros and cons. The right one for your particular situation will depend on when you need the money and what you need it for. Here are four of the most popular types of business loans.
Term Loan
A term loan is a type of business loan that gives you a lump sum of cash upfront. You, the borrower, will have to repay the loan with interest over a predetermined period. “Term” refers to the time frame for repayment, such as three to five years. In contrast to a traditional bank loan or an asset-based loan, which funds a specific business activity or purchase, a term loan is often used to cover day-to-day expenses like payroll, office rent, and utilities until your business generates enough cash flow to cover these expenses on its own. Like any other kind of business financing, term loans can be structured in different ways depending on your needs and the lender’s requirements.
SBA Loan
SBA loans are essentially backed by the Small Business Administration. Repayment terms for these loans depend on how you intend to use the funds. For instance, if the loan is for working capital needs, you can choose a term of up to seven years. If the purpose of the loan is to purchase real estate, the term can be as long as 25 years. The only downside to this type of loan is that it is pretty hard to qualify for.
Equipment loan
Equipment loans, as you may have guessed, help you buy equipment for your business. Equipment loans typically have terms that match the expected life span of the equipment, and the equipment, in this case, serves as the collateral for the loan. Rates will depend on how much your business is worth and your credit score.
Business Line of Credit
A business line of credit allows you to draw on funds up to a predetermined limit and pay interest only on the money you’ve drawn. It can provide more flexibility than other types of business loans, as you’re not committed to paying back the entire amount over a certain period of time.