The Four Main Types of Business Loans You Can Take
As a business owner, there probably is little that you wouldn't do to keep the business hamming onwards smoothly and stay afloat. We all want our businesses to succeed and thrive.
For most entrepreneurs and owners, keeping the business running comes first above all else. And that’s why there is no shame in the owner of a large or small business or startup acquiring the right financing to execute business processes or purchase what their company needs to succeed.
Other times expenses may be too high or the business owner may be just below the budget line to reach a major milestone. This is precisely when getting the right loan can rescue the situation.
As you can see, there are different situations that call for getting external financial support in the form of a loan. Choosing the right type of loan for your situation is smart. It can make the difference between achieving your business objectives and falling short of your business goals.
So, which is the right type of loan for your particular situation?
Types of Loans Available to Businesses & Entrepreneurs
As it stands, there are a handful of different types of loans that business owners can consider taking. The type of loan a business owner would take out depends on a number of factors.
Mainly, the right loan depends on what the business can qualify for at that point in time and is able to repay without much trouble.
Some of the most common types of business loans designed for different situations include:
- Secured Loans
- Unsecured Loans
- Small Business Loans (or SBA)
- Merchant Cash Advance
Let’s explore these four types of loans that are available to businesses and entrepreneurs.
1. Secured Loans
There are two basic types of loans that differentiate between one another in a very significant way: Secured loan vs. Unsecured loan.
While the principal of receiving a business loan is the same between these two basic types of loans, the manner in which the loan will be obtained does indeed differ.
Secured loans work by utilizing company assets or the assets of the business owner as collateral. Putting a car on offer for a secured business loan would be an example of this type of loan.
You can use the loan when you need money right away, can get a lower interest rates than other loans, have poor credit or no credit history, or need to stretch the loan out for a longer period.
2. Unsecured Loans
As for unsecured loans, the working capital would be sought based on the applicant's line of credit, rather than putting up any physical property or asset on hold for the loan's consideration.
So, you are approved without the need for collateral. That means instead of pledging assets, the borrower qualifies for a loan based on their credit history and income.
On the other hand, lenders do not have the right to take physical assets (such as a vehicle or office funiture) if the borrower stops making payments on an unsecured loan. Lenders may, however, require a higher credit scores, interest rates and a loan cosigner depending on your creditworthiness and the risk involved.
You can use unsecured loans (sometimes referred to as personal loans) to pay for unexpected expenses, make business improvements, consolidate debt, and more.
3. SBA Loans (and How They Work)
Small Business Administration (SBA) Loans are taken out for businesses that qualify depending on a number of factors. The most important SBA loan requirements are that you demonstrate strong business financials, excellent personal credit, and provide “adequate collateral.”
As such, this loan is placed into the "secured" category of loans, since it utilizes assets of the business itself or the owner to receive a qualifying loan amount.
SBA loans are generally provided to the small business through government-backed private sector lenders. The funding with this type of loan generally applies over the course of months, while the payback period may extend over the course of years.
Some people argue this is the hardest loan to get (along with traditional bank loans) based on underwriting standards and nature of the loan application process. It, however, all depends on the agreement set forth between the business owner and their individually prepared contract.
You can use an SBA loan for purchase of inventory, equipment and supplies, and for working capital. It’s a good option if you are looking for a loan with a longer term and lower payments.
4. Merchant Cash Advance Loans (MCA)
Merchant cash advances work through a system that does not take into account your line of credit loans online. That is to say that this is a unique type of “loan,” since it works without the need of collateral on the loan borrower's part. In other words, when taking out a merchant cash advance, you can expect a different type of loan experience.
With MCA, you can receive a cash advance in exchange for a percentage of your daily debit and credit card sales. An extra fee may also be added on, depending on the financing company.
Technically, MCA is not a loan. New York State judges actually continue to rule that as long as a merchant cash advance is not a loan, then merchant cash advance firms aren't subject to usury laws (the regulations governing the amount of interest that can be charged on a loan.)
MCAs are generally the easiest form of business financing you can get—often approved and funded in just a day or two—with almost no paperwork involved. Repayment period is 8-9 months.
You can use MCA for short-term working capital and for quick “unsecured” cash advances.
More Business Loan Options
Other types of loans you can look into include:
- Credit Loans
- Start Up Loans
Sufficed to say that what type of loan one borrower requires over another will differ. If you are the owner of a newer business, then a startup loan may be up your alley.
If you are already in the swing of things and are simply in need of a little boost to keep on top of things, then a cash advance may be just the thing to get the job done.