A business loan is a financial assistance to a business, startup, or company to finance its project. It could be for a business startup or purchase of equipment or a machinery of the business. Business owners need to understand what the lender requires from them and the terms and conditions of the loans. Besides, there are two types of loans. There are secured loans and unsecured loans.
Types of business loans available
- A secured business is a loan that is advanced to a business and the company pledges its assets to protect the lender from possible loss. The assets pledged are known as security or collateral. When business defaults in repayment of the loan, then the lender can seize the assets to settle the amount owed.
- An unsecured loan is a loan is a loan that does not have a collateral or one that is not protected by a guarantor. This type of loan is supported by the credit worthiness of the borrower.
When many businesses want to expand, they use their assets as collateral. Some of the instances when businesses use their assets as collateral include acquiring another company, setting up another outlet, purchase of assets such as an equipment and purchase of business premises.
Types of Secured business loans available
There are several types of secured business loans in the US. They include the followings:
1. Merchant Cash Advance
This is a short term business loan, usually one month where a business borrows a credit against its future cash revenue. This kind of loan is easily accessible and it does not work like traditional business loans and is not regulated the same way as the other business loans. It is possible to get multiple cash advances and then pay high fees at the end. Before taking this kind of a loan, make sure you are aware of what you are about to get into. Make sure that you are aware of the advantages and disadvantages.
The amount a business can borrow differs from one lender to the other. However, some lenders can advance up to 250% of your firm’s sales. The lender then sets the percentage of the payment, which could range between 18% and 30%, and it is usually deducted directly from your business’s business account daily, weekly, or monthly. You give the lender details of your bank account.
2. Small Business Loans (SBA Loans)
These loans are government-sponsored and aim at promoting small businesses from private-sector lenders. The funding duration usually ranges from 1 to 6 months, with a payback period of 5 to 20 years. The SBA partners with other lenders, micro-lending companies and community development organizations that offer loans to small businesses. By so doing, there is a reduced risk of loss to lenders and also allows them to access capital.
The advantage of SBA loans is that their loans have charges that can compare to those of guaranteed loans. Besides, they provide support on how to run your business by offering counseling and education to business owners. They have low down payments while they are flexible.
3. Startup Loans
These are secured loans advanced to businesses from lenders in the private sector. The funding is available for 1 to 5 months while it has a payback period of up to five years. This is a good lain since it is hectic for startups to find starting capital. Most financial institutions do not lend money to businesses without credit history and a proven track record of at least two years.
New businesses have difficulties in obtaining loans since there are considered riskier, unlike established companies that have evidence of their ability to repay a loan. Some of the reasons why a business may consider borrowing a startup loan is for growth or business expansion.
4. Franchise Startup Loans
This is a secured loan that is set aside for franchises that are known nationally. To qualify for a loan, the business owner needs to contribute between 10% and 30% of the total startup capital. It is advisable to go for the lender that is experienced with the franchise market. Besides, you can also look for grants and initiatives that support a franchise. For instance, the government sometimes offers unsecured personal loans to help small franchise businesses.
The amount that the lender can offer a business is dependent on several factors. Some of the requirements are the franchisee to contribute at least thirty percent of the costs involved and also the working capital. In case the franchise is new and the brand is not known, the lender may require the owners of the business to provide more substantial money.
5. Business Line of Credit
This is a business loan that can be compared to a credit card. It is usually advanced to business with low credit ratings. You get approved for the highest amount o credit and after repaying the loan, you can withdraw more cash. You only pay interest for the money that you have borrowed. These loans are approved within a day and they have APR rates of between &5 and 25% while the repayment period is usually between 6 months and one year. The terms of the loan are dependent on the credit score of the business and also business revenue.
The advantage of the loan is that it is flexible, especially during emergencies, fast approval, and low APR rates while they are suitable for businesses that do not have good credit ratings. However, they have high penalties, and they require collateral.
6. Invoice Factoring
This is a secured loan where a business sells its unpaid invoices to get a credit that is between 60-90%. The lender receives the amount due from your clients and the fees and then remits the remaining percentage to you. However, some lenders can provide you with the entire amount and then charge you a fee while you are repaying the loan. Some of the lenders take a certain amount remitted by your clients until the amount is paid in full. The invoice form from your customers acts as the collateral for the loan. The terms of the loan are usually 16 months, while the fees are 12%. For this loan, credit rating and business history are not considered a lot.
Some of the advantages of the loan are that it has fast approval of just a few hours while its eligibility requirements are easy since credit rating and business history are not necessary. However, the loan can have high charges for early repayments.
7. Equipment Financing
These are secured loans meant for purchasing equipment for a business. The equipment that you purchase is used as the collateral for the loan. This makes the APR rates to fall to 8% to 30%, which makes the loan available to businesses with poor credit ratings. Once you have bought the equipment, you can be using it while repaying the loan. You can get funding for up to 100% cost of the equipment while the loan takes a few days to come through. The repayment period is usually up to when the equipment is still in use, but it is often up to 5 years.
The advantage of the loan is that businesses with poor credit rating can qualify for the loan while the equipment purchased acts as the collateral. Funding comes through in just a few days. However, the disadvantages of the loan are that you could end up paying more as the equipment is depreciating while it could also be obsolete by the time you are finding to repay the loan.
Vincent is a Kenyan writer with an interest in finance, business, technology and health niche. He holds a Bachelors degree in Applied Statistics with computing from the University of Eldoret.