Decades ago if you were considering obtaining a commercial loan your choice was simple; go to the bank. However, in our modern times, there are many other choices other than just a bank when it comes to getting a loan for business purposes.
Today the Rules of Thumb blog from MoneyThumb would like to share with you the different types of lenders you have to choose from for your commercial loan. But first, let’s discuss the types of commercial loans that exist.
What Are the Types of Commercial Loans?
- Bank financing for small business start-up and working capital
- Asset financing for equipment and machinery or business vehicles.
- Credit card financing
- Vendor financing (through trade credit)
- Personal (unsecured) loans
- Amount of loan: The amount of money you want to borrow influences the type of lender. For larger loans, you may need a combination of types of commercial loans.
- Assets pledged: If you have business assets you can pledge as collateral for the loan, you can get better terms than if your loan is unsecured.
- Type of assets: A mortgage is typically for land and building, while an equipment loan is for financing capital expenditures like equipment.
- Startup or expansion: A startup loan is typically much more difficult to get than a loan for expansion of an existing business. For a startup, you may have to look at some of the more untraditional types of lenders described below.
- The term of the loan: How long do you need the money? If you need a short-term loan for a business startup, you will be looking for a different lender than for a long-term loan for land and building.
What are Different Types of Lenders?
The most common lenders are banks, credit unions, and other financial institutions. More recently, the term “lender” has been expended to refer to less traditional sources of funds for small business loans, including:
- Peer-to-peer lenders: borrowing from individuals, through online organizations like Lenders Club.
- Crowdfunding: through organizations like Kickstarter, and others. The good thing about these lenders is that they don’t require interest payments!
- Borrowing from family and friends: There are organizations that help sort out the tricky financial and personal issues involved with these transactions. If you are considering a loan from someone you know, be sure to create a loan agreement. These agreements are sometimes called private party loans.
- Borrowing from yourself: You can also loan money to your business as an alternative to investing in it, but make sure you have a written contract that specifically spells out your role as a lender, with regular payments and consequences if the business defaults.
As you look for a lender, consider the type of loan you need, whether you have any assets to pledge against the loan, and the other factors that will determine your ability to get a business loan and the terms of that loan. Be prepared by creating a personal financial statement, a business plan and financial statements for your business. MoneyThumb has all the tools you need to help you create your financial statements in no time at all.
You might also consider the Small Business Administration, which works with lenders to provide guarantees for loans to small businesses. Their 7(a) loan program helps small businesses get loans who might not otherwise qualify because of “weaknesses” in their applications. The SBA also has other special loan programs that your business might qualify for.