Today on the Rules of Thumb blog from MoneyThumb we've compiled a list of the nine most common types of business loans, along with their benefits and drawbacks, as well as the sorts of businesses that each is best suited for.

1. Loans from the Small Business Administration (SBA)

Despite the fact that these loans are given by banks and other lenders, the Small Business Administration guarantees them. SBA loan repayment durations are determined by how you intend to use the funds. They vary from seven to ten years for working capital, ten to twenty-five years for equipment acquisitions, and twenty-five years for real estate investments.

Pros:

• Some of the most competitive prices are available.
• You can take out a loan of up to $5 million.
• Repayment periods are lengthy.

Cons:

• It's difficult to qualify
• The application procedure is long and arduous.

Ideal for:

• Companies that want to expand or refinance their debts.

• Borrowers with good credit are willing to wait for a long time for finance.

2. Loans for a specific period of time

A term loan is a popular method of obtaining capital for a business. You are given a big sum of money upfront, which you must repay over time with interest. Online lenders can make term loans up to $1 million and can provide cash faster than traditional banks.

Pros:

• Get money upfront to put into your company.
• Allow you to borrow a larger sum of money than other types of loans.
• If you utilize an internet lender rather than a traditional bank, you can get money in a few days to a week instead of several months.

Cons:

It's possible that the lender will ask for a personal guarantee or collateral, which is an asset like real estate or company equipment that the lender can seize if you default.

Term loans from internet lenders are often more expensive than those from conventional banks.

Ideal for:

• Businesses that want to grow.

• Borrowers with good credit and a solid business who don't mind waiting a long time for finance.

3. Lines of credit for businesses

A business line of credit allows you to borrow money up to your credit limit, and you only pay interest on the money you borrow. It might provide you with more options than a term loan.

Pros:

• The most adaptable approach to borrow.
• Because they are usually unsecured, no collateral is required.

Cons:

• Additional expenses, such as maintenance and draw fees, may apply.
• It's necessary to have a lot of money and good credit.

Ideal for:

• Needs for short-term finance, cash flow management, or dealing with unanticipated costs.

• Businesses that operate only during certain seasons.

4. Equipment loans 

Equipment loans,  (Cars, vans, and light vehicles are all eligible for business auto loans.) The period of an equipment loan is usually matched to the equipment's estimated lifetime period, and the equipment acts as security for the loan. Rates will be determined by the equipment's worth as well as the strength of your company.

Pros:

• You are the owner of the equipment and have built up equity in it.
• If you have good credit and a good business, you can receive competitive rates.

Cons:

• You may be required to make a down payment.
• Equipment might become obsolete far faster than the term of your loan.

Ideal for:

• Businesses are interested in purchasing the equipment entirely.

5. Factoring invoices

Consider the following scenario: your company has outstanding customer invoices that are due in 60 days. If you need money right away, invoice factoring might help you receive cash for those overdue bills. You would sell the bills to a factoring business, which would be in charge of collecting payment from the consumer when the invoice was due.

Pros:

1. Quick cash for your company.

• Traditional finance methods have a higher acceptance rate.

Cons:

• When compared to alternative solutions, it is expensive.
• You lose control over how your bills are collected.

Ideal for:

• Unpaid invoices need immediate payment.

• Businesses with dependable clients who pay on time (30, 60, or 90 days).

• Cash advances from merchants

• You are given a large sum of money upfront that you may use to fund your company.

6. Merchant Cash Advance 

Rather than making a single set monthly payment from a bank account, as with a term loan, you pay back a merchant cash advance by withholding a percentage of your credit and debit card sales daily or by making fixed daily or weekly withdrawals from a bank account.

Pros:

• Quick money.
• Financing without a guarantee.

Cons:

• Some of the most expensive borrowing fees - up to 350% in some situations.
• Cash flow issues might arise as a result of frequent repayments.

Ideal for:

• Credit card sales are large and stable and can tolerate regular repayments.

• Businesses are unable to obtain funding elsewhere and cannot wait for funds.

7. Loans for individuals

A personal loan might be used to fund a business venture. It's a viable alternative for startups, as banks normally won't lend to companies that have no operating history. These loans are approved completely on the basis of your personal credit score, but you'll need strong credit to qualify.

Pros:

• Startups and smaller enterprises may be eligible.
• Quick financing is available.

Cons:

• Borrowing expenses are high.

• Borrowing sums of up to $50,000 are available.
• Failure to repay might have a negative impact on your credit score.

Ideal for:

• Startups and fledgling firms that have a good personal credit score.

• Borrowers who are willing to take a chance on their credit.

8. Credit cards for businesses

Revolving lines of credit are what business credit cards are. As long as you make the minimum monthly payments and don't go over your credit limit, you can use and repay the card as needed. They are most commonly used to fund recurrent expenditures like travel, office supplies, and utilities.

Pros:

• You may earn points for your purchases.
• There is no requirement for a security deposit.

Cons:

• High cost, with a variable interest rate that might escalate in the future.
• There may be additional charges.

Ideal for:

• Continual business costs.

9. Microloan

Nonprofit organizations and mission-based lenders offer microloans, which are modest loans of $50,000 or less. Startups, newer firms, and businesses in underserved areas are often eligible for these loans.

Pros:

• The price is low.
• Other services, such as advising and training, may be given.

Cons:

• Loan amounts are less.
• It's possible that you'll have to fulfill strict qualifying standards.

Ideal for:

• Startups and small companies in underserved areas.

• Businesses are just looking for a little amount of money.

• Financing invoices

This concludes our list of the nine most common types of small business loans, along with the benefits and drawbacks of each type of loan and who they are ideal for. The MoneyThumb team would appreciate it if you shared this article on your social media channel so your peers can benefit from the important information it contains.

Source: Nerdwallet.com

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