4 Types of Loans Available for Your Small Business

One of the greatest problems small business owners have is lack of funds, or its inadequacy. There’ll be infrastructure to be invested in and you’ll need to increase inventory. You might not even need anything huge, just some finance to keep operations running.

When situations like this come up, there are usually two options the entrepreneur can choose from; bringing in investors, or taking out loans. As attractive as both are, loans are more preferable. This is becauseit gives you the upper hand in your business instead of an outsider’s intrusion, includes tax deductible interest payments that come with lower rates and sets clear terms, based on the funds that will be received.

However, before jumping at securing the necessary capital needed by your company, you need to understand the various loans available in order to make the best choice for your company’s needs.

1. Long term loans

They are often used for refinancing, business expansion and acquisition of working capital. They are distributed by large commercial lenders and are often repaid on a monthly basis in larger amounts and with lower interest rates, unlike short term loans.

They are easy to obtain if you have a business with a strong growth plan or one that is well established.

2. Lines-of-credit

Lines-of-credit are distributed by banks and licensed lenders and provide access to funds as the need arises – more like using a credit card.

However, the interest and fees can be very high, so it’s best they are only used for shortage of income instead of large projects like business expansion.

3. Short term loans

These loans – usually below $100,000 – are often used for short term needs such as small business funding, completing small projects that will yield huge and quick returns, building up inventory or raising cash for accounts payable.

Unlike the long term loan, they are fully due at the end of the agreed upon term and are issued by credit unions and banks. They are more useful for seasonal businesses.

4. Secured and unsecured loans

There are two forms through which loans come; secured and unsecured. You get an unsecured loan when your lender is familiar with you and are willing to take the risk of lending it because they are convinced that your business is running well and the loan will be repaid in no time.

No collaterals as secondary sources of payment should you default on the loan, are involved.  However, you’re unlikely to qualify for the loan if you’re new in your business or you have a low profitability and success track record.

With a secured loan, it’s different because collaterals are necessary and it comes with a higher interest rate. The collaterals will be valued appropriately since they are supposed to pay off the loan in case the borrower defaults.

There are also other loans such as inventory and equipment loans, account receivable loans, commercial loans, guaranteed loans, account receivable loans, personal loans, etc.

The purpose of getting familiar with these loans is to be able to make the right choice for your business so you don’t get cheated by lenders or end up discovering better ways through which you could have raised capital, after making an unfavorable choice.