Businesses run on cash. Cash management and projecting working capital needs are 2 of the most challenging tasks every business owner faces. Thankfully, there are several types of business loans to help owners tide over short-term cash flow holes and overcome challenges.
There are many options out there for businesses seeking a loan. In fact, there are so many options that a business can apply for the wrong kind of loan and end up missing its goal. Before applying for a loan, you need to categorize your needs and apply accordingly.
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Types of Business Loans
Here are the broad categories that business loans fall under, along with the specifics of each type of loan.
Quick Approvals for Fast Capital Access
If you need to raise cash quickly to address cash flow shortfalls, the best loan options include invoice factoring, unsecured overdrafts, and receivables factoring are your best options. In addition, if the amount you need is small, you can use a business credit card to cover expenses.
The central theme in all of these options is fast access to cash. However, the downside is you’ll pay higher interest rates compared to other options. For instance, the interest rates on unsecured overdrafts are a few points higher than planned, secured overdrafts. Invoice and receivables factoring are not the quickest options of this bunch.
However, they are attractive options when you’re looking to minimize the interest impact of your business loans. Typically, there is a lot of room for negotiation with these options. You can shorten your credit cycles significantly, even if you have to collect less than the full invoice amount.
Longer Approval Periods but More Cash
The options presented in the previous category offer fast access to cash, but they typically don’t offer much in dollar amounts. If your business needs a significant amount of capital, then a business loan and line of credit are your best options.
Given the amount of money attached to these loans, it stands to reason that the approval process can be drawn out. In both cases, the bank will evaluate your credit standing and offer you terms accordingly. While the approval experience is the same from your end, the bank views lines of credit (LOC) and business loans differently.
A business loan gives you a fixed amount of cash, and you begin making interest payments immediately. You’ll pay interest whether you use the cash or not. An LOC is a different instrument. You’ll receive a credit limit that you can borrow any amount against.
At the end of the month, you’ll pay interest on the amount you borrowed, creating potentially fluctuating interest expenses every month. The bank’s priority with a business loan is to figure out whether you can afford the monthly interest payment. In an LOC’s case, the bank will try to project how often you’ll draw the line of credit and to what extent.
Both options require you to have good credit. It’s best to fix your credit score and establish a history of consistent debt repayment before applying for either option.
Goal-Oriented Loans
Many business owners default to applying for a traditional business loan or an overdraft facility when seeking cash. However, if you need cash for a specific purpose, there are options out there that will serve you better. For instance, if your business employs less than 5 people, a self-employed business loan is a better option than a traditional loan.
You’ll find the qualification criteria easier to fulfill, and the bank will give you more leeway with their terms. Much depends on your relationship with the bank, but these loans tend to favor smaller business operators. Similarly, if your objective is to establish a good credit history, a bad credit business loan can help you get there.
These loans are usually secured against current asset collateral such as receivables or inventory. The bank will offer you higher interest rates than normal but once you establish a steady record of payments, you can refinance the loan. In the process, you’ll establish a steady history of payments that will give you access to better loan terms in the future.
Equipment Financing
If your goal is to purchase equipment or assets for your business, applying for loans that fit the purpose is a good move. For instance, if you want to purchase a vehicle for your business, applying for a business car or vehicle is the best way forward. These loans will use the asset you purchase as collateral, insulating the rest of your business.
When purchasing equipment, business leases typically offer good deals. In this arrangement, you’ll lease equipment for a fixed period before paying a lump sum and purchasing the asset outright. The catch here is the lump sum payment. In some cases, you can pay interest and principal in your monthly payments, much like a mortgage.
However, much depends on the lender and the terms they offer you. Business leases are just one kind of equipment financing loans, with truck finance, asset finance, fit-out financing, etc the other options.
Many Options Available
As you can see, businesses have multiple types of business loans as options when the need for cash rises. Make sure to conduct thorough research into every option before choosing one. Keep your needs in mind at all times, and you’ll end up picking the right loan for your purpose.
