There are 6 main types of business loans: SBA loans, business lines of credit, invoice factoring or financing, business term loans, equipment financing, or a merchant cash advance option.
1. SBA Loans
The USA’s Small Business Administration partially backs loans that range from $5,000 up to $5 million to help out small businesses, although the loans are actually provided by online lenders and commercial banks. SBA loans can be used for almost any business purpose and have low APR rates and long repayment terms, but the application process is long and time-consuming.
2. Business Term Loan
With a traditional business loan, you can borrow a lump sum of money between $1,000 and $500,000 and repay it over the next several years. Repayment terms are usually between 1and 5 years, although there are lenders that offer both longer and shorter terms.
3. Business Line of Credit
A business line of credit is comparable to a credit card, but it’s open to businesses with lower credit ratings. You’ll be approved for a maximum amount of credit which you can draw on whenever you need. Once you’ve repaid the money you can withdraw more, only paying interest on the money you borrow.
4. Invoice Factoring
With invoice factoring, or invoice financing, you sell your unpaid invoices in exchange for an advance of between 60-90%. The company collects the invoice amount from your client before paying you the remaining percentage, minus its fees.
5. Merchant Cash Advance
Merchant cash advances give you a lump sum in exchange for a set percentage of your daily credit card transactions. Instead of regular APR rates, multiply your loan amount by a factor rate, typically 1.14 to 1.48, to discover the total amount you owe. The equivalent in APR begins at 15% but can go into triple digits. Similarly, there isn’t a fixed loan repayment term; you keep paying until you’ve paid off the total amount.
6. Equipment Financing
Although regular business loans can be used to purchase equipment, a dedicated equipment financing loan uses the items you buy as collateral against the loan. This lowers the average APR rates to 8% to 30% and makes the loan open to businesses with poor credit ratings. You can use your equipment even while you are paying off the loan.
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