Borrowing money for your business can be a wise way to finance operations and reach growth objectives. But there are numerous factors to take into account when selecting the right type of loan.
Before you begin the process, take time to determine how much money is necessary and what it will be used for. Knowing this information ahead of time can make the decision-making process simpler and faster.
Term Loans
Term loans are an affordable financing solution for businesses that need to finance medium or long-term investments. Typically, these loans can be obtained through banks and credit unions as well as online lenders.
Loans come with repayment terms varying between one and five years, depending on the type. Furthermore, they may be secured or unsecured.
These loans can be used for a variety of business needs, such as buying equipment or paying out payroll. Before selecting a term loan, it’s essential to assess your company’s financing requirements.
Business owners who have been in operation for two or more years and generate substantial revenue typically qualify for a term loan. During the underwriting process, lenders will examine both your personal and business credit scores to assess your financial stability.
Line of Credit
A business line of credit is a flexible loan that works like a credit card but with lower interest rates. Businesses can draw from their lines as needed and pay interest only on what’s owed.
Businesses can save themselves the hassle of constantly borrowing money to meet short-term cash flow needs, which is especially beneficial for seasonal companies.
A business line of credit is recorded as a liability on the company’s balance sheet and typically repaid over time. While interest rates and fees may differ between lenders, they’re typically comparable to those charged by credit cards.
Equipment Loans
If your business requires purchasing new equipment, upgrading existing machinery or expanding with an expansion, an equipment loan could be a viable solution. For instance, imagine replacing the oven in your restaurant or fixing up a truck that has broken down.
An equipment loan can provide the funds you need for these essential purchases without depleting your working capital. Instead, the funds received from your equipment loan can be put towards other costs such as marketing, payroll and utilities.
Applicants who have been in business for six months or longer and possess a good personal credit history and business records typically qualify for equipment financing. Startups and businesses with poor or limited credit may still qualify if they have an established revenue stream and sufficient cash flow.
Invoice Financing
Invoice financing, also referred to as accounts receivable financing, is a type of loan that can help you access cash quickly. It’s ideal for businesses that are growing or need an immediate boost in working capital.
Small business owners who may face difficulties qualifying for other loans due to their industry, length of business, credit scores or other factors should consider this alternative option.
It can be especially advantageous for businesses in B2B industries, such as retail or manufacturing, that have established clients who pay on time. Unfortunately, it’s not suitable for B2C firms that primarily sell to consumers or those with subscription-based billing models.
Merchant Cash Advance
Businesses seeking fast and flexible financing without fixed monthly payments may want to consider a merchant cash advance. This type of loan offers variable repayments based on future credit card sales or other receivables, giving you the power to manage your business more effectively while covering unexpected expenses.
A merchant cash advance is a viable alternative to traditional loans, which often have lengthy approval processes and strict credit criteria. It’s a short-term loan that can be used for various business needs such as day-to-day expenses, unexpected equipment repairs, and inventory purchases.
Applying for a merchant cash advance is easy, with many providers offering online applications. In just hours or days after signing an agreement, funds may be deposited directly into your account.