Whether you are just starting a business from the ground up or are looking to expand and grow your current one, you need to have the proper cash flow and working capital.
A business simply can’t run without capital, especially if you are just starting out. There will always be fluctuations in your sales and profit, and without the necessary cash on hand, you can very well be dealing with serious problems such as non-payment of bills and suppliers and non-payment of salary to employees, not to mention unexpected emergencies and other sudden expenditures and so on.
At times like these, most business owners can very well benefit from a business loan. But there are many different kinds of business loans out there, and it’s in your best interest to find out which loans may be a good choice for your needs. So what do you need to know about these business loans, and how do you acquire one? Here are the top five kinds of business loans you should know about.
Business term loans
Business term loans are the most common form of business loan for business owners and entrepreneurs, and with such a loan, you are able to borrow a certain lump amount which can range from £740 to £370,000 ($1000 to $500,000).
The term loan can extend for a few years, and the terms of repayment can be between 1 year to up to 5 years. It’s important to note, however, that there are certain lenders which may be willing to extend the term of repayment or shorten the term depending on your requirements.
The average rate of interest for business term loans is from 7 to 30%. With a business term loan, often no collateral is required. The loan will be based on your credit rating or score as a business as well as your revenue (by year or month) and your overall business growth and success.
Many business owners go for business term loans primarily because you can use the loan for whatever purpose and because the payments are set. If you apply for a business term loan, you can easily get approval (if qualified) within a few days.
Business lines-of-credit
A line-of-credit is similar to the concept of a credit card, although it’s often used by businesses which have a low credit score. The line-of-credit works in such a way that once you get approval, you have access to a maximum credit amount from which you can withdraw whenever you need it and whatever amount you need.
As soon as you have repaid what you have borrowed, then you can draw more money from the account, and you need only pay the interest on what you have borrowed.
The approval process for this type of financing is often shorter compared to standard loans, and the interest rate can range from 7 to 25%. Remember, though, that if you miss a payment, the penalty can be high, and collateral may also be needed.
Invoice factoring
Invoice factoring is often interchangeable with invoice financing since the two are quite similar. Invoice factoring is when your unpaid or unsettled invoice statements are sold to a lender in exchange for a cash advance of between 60 to 90%.
The lender will then collect the unpaid amounts on the invoice from your clients and give you back the remaining amount minus the invoice factoring fee. The good news is that there are some lenders which can advance 100% of your invoice and will then charge you a flat fee per week until your loan is repaid.
With this kind of financing, you can get approved in a matter of hours, and almost every business owner is eligible even without a minimum credit history or rating. Bear in mind, however, that if you choose to repay the loan early, there can be a high charge for this.
Merchant cash advances
Another financing option would be the merchant cash advance, which can provide you with a lump amount in exchange for a percentage of your transactions with credit cards. With a merchant cash advance, there is no fixed term for the repayment of the loan – you will simply keep up the loan payments until the total amount has been paid off.
Most business owners have an average term of repayment between 8 to 9 months, although there are some who have repayment terms of only 4 months or as much as 18 months.
If your business has a poor credit score or rating and you have not been approved for other types of business loans, then merchant cash advances might be a good option for you.
Other kinds of special business loans
There are a number of other special business loans you can avail of, depending on your situation. If you need financing for equipment, you can get a special equipment loan where the equipment you purchase will be the loan collateral.
There are also short-term loans which can be repaid in a shorter period of time, and there are personal loans wherein your personal guarantee and collateral may be needed to get loan approval. If you are a female business owner, you may be able to get a loan from a local group or authority, and if you are a veteran, you can get special loans if qualified as well.
Small business owners can also try applying for an SBA (Small Business Association) loan, which can be offered by lenders such as banks in conjunction with the SBA. SBA loans offer some of the lowest market rates, and you can borrow as much as $5 million if approved.
The repayment terms are long for this type of loan as well, although it can be difficult to qualify and the application and approval process can be a long one.
You should explore your options and find out what types of loans you can benefit from; you never know, there might be special groups or organisations which can give you the financing you need.
