Are you looking to take out a loan to fund your business? Whether you need cash to buy equipment and stocks or to manage cash flow, there is a wide range of business lending options available for you.
Qualifying for several types of business loans, however, may not be a piece of cake. Before you can take out a loan, lenders will assess your credit score, cash flow and income, existing debts, assets, age of business, and industry to determine whether or not you’re qualified and able to repay.
Depending on your qualifications and business needs, here are 6 business loan options you may consider, as well as their pros and cons.
1. Business Term Loan
A term loan is a loan from a bank, with a specified repayment schedule and either a fixed or variable interest rate.
With a traditional business term loan, you can borrow a larger sum of money for any purpose (equipment, real estate, or working capital) and repay it through monthly installments over several years. The terms are based on your business’ credit score, financial health, and average yearly or monthly revenue.
Pros:
- It can be used for any business purpose
- You can borrow larger amounts
- Predictable repayment terms
Cons:
- Rigorous approval process
- Several term loans have early repayment charges
- May require collateral or a “blanket lien” placed on your enterprise if you have poor credit ratings.
2. Business Line of Credit
A business line of credit is a type of small-business loan that provides more flexibility than other regular business loans. It’s a revolving credit, which works like a credit card.
With a business line of credit, you can borrow up to a certain limit and then only pay the interest on the amount you actually spend. You can draw funds whenever you need, as long as you don’t go beyond your credit limit.
The average APR rates are 7% to 25%, and the repayment terms are usually between 6 months and 1 year. The terms vary depending on your business revenue and credit score.
Pros:
- Flexible funding
- Available for emergencies
- Faster approval times
- Lower APR rates
- High maximum borrowing amounts
- No to low cash advance fees
Cons:
- High penalties for missed payments
- High credit requirements
- May require a collateral
3. Equipment Loans
Equipment loans help you pay for any physical asset your business needs for its daily operations. While you can use regular business loans to purchase equipment, you can also consider a dedicated equipment financing loan, which uses the items you buy as collateral against the loan. Loan amounts, of course, depend on the value of the equipment.
Pros:
- Open to businesses with poor credit ratings
- The equipment acts as collateral for the loan
- Fast financing, which only takes a couple of days
Cons:
- Limited uses of fund
- Your equipment depreciates, which means you could end up paying more than it’s worth.
- Potential to owe on obsolete equipment
4. Invoice Factoring Loans (a.k.a accounts receivable financing)
Invoice factoring loan is a form of short-term lending, extended by a bank or a lender to its customers based on unpaid invoices. No more waiting on your clients who are slow to pay up – the lender pays you the value of your outstanding invoices.
Invoice factoring loans allow the business to meet its short-term liquidity needs based on the invoices generated which are still unpaid by its clients or customers.
Pros:
- Immediate, ongoing cash flow
- Faster approval time (just a few hours)
- Easy to get qualified, with no minimum credit scores or trading history required
- Ability to outsource the task to a factoring company
- No collateral required
- Best for solving issues with tardy clients.
Cons:
- High rates and fees, like early repayment charges
- Low funding amounts
- Lack of control and potential damage to your reputation
5. Merchant Cash Advance
Merchant cash advances are lump-sum payments given to businesses in exchange for an agreed-upon set percentage of their future credit card and/or debit card sales. These are usually given to businesses with a steady volume of credit card sales, such as retail stores, medical offices, and restaurants.
Pros:
- Fast money for funding your business
- Suitable for businesses with poor credit scores
- Suitable for businesses that failed to qualify for other business loans
- Fast, easy approval times (within a day or two)
- Flexible payments
- No collateral
Cons:
- You’re paying factor rates, not interest rates
- Potential cash flow problems
6. Cash Flow Loans
Tired of banks that make business lending time-consuming and complicated? If you’re looking to borrow somewhere other than banks for financing, you may shop for reputable lenders which cater to small businesses.
Cash flow loans refer to several types of loans designed to help with short-term cash flow needs. This unsecured financing is backed by the borrower’s personal or business’ cash flow. They are known for their high approval rate, quick application processing, and clarity about the interest rates and repayment schedules.
Pros:
- Fast funding
- Low application requirements
- Help for cash flow
- Suitable for unfortunate emergencies
Cons:
- Higher interest rates
- Potential for debt cycle
- Risk of future forecasting
Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which connects clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.