Whether you are just starting out as an entrepreneur, or are looking to take advantage of an opportunity, there might come a time when you need a loan for your business. There are many types of loans out there, and they all serve a different purpose. Here’s a guide to 5 of the most common types of loan, and how to get them.
Line of Credit
A line of credit uses the same concept as a credit card, but there is no card. You can borrow up to a set limit, and you only make payments and pay interest on what you’ve used. This is a good option for businesses that don’t necessarily know how much cash they will need. It’s also good for a seasonal business who might need access to cash during a slow period, but knows that they will be able to pay it down when business picks up.
However, lines of credit have a drawback. Because they get paid off on a regular basis, they come with higher interest rates. They are usually best in certain situations, but not for large purchases, since you’ll be paying a higher rate on that amount. Lines of credit are available at all major lenders, and some online lenders.
If you have good credit and a strong business history, then a long-term loan may be right for you. These loans are granted for spending on big acquisitions, expanding your business, refinancing, or capital. To be approved for a long-term loan, you’ll have to show them your business plan, and have a good credit history. They tend to have low interest rates, because you are locked in over a long period of time. They are the most popular type of loan, however they are not easy to get for some businesses.
Short term business loans are just what their name would suggest. You get a lump sum of funds, however rather than pay it off over a long period of time, you pay it off very quickly. Sometimes they are set up so that you pay off the entire amount all at once. The purpose of a short-term loan is to make up for any immediate cash flow issues. They are short-term so that the borrower doesn’t have the debt for too long. There are several types of short-term loans, such as invoice financing. Traditional banks usually don’t offer invoice financing, so to get one you should seek out an online lender.
If you have to purchase a large piece of equipment and do not have the capital, then you may have to take out an equipment loan. They work in a similar way to vehicle loans. The term of an equipment loan tends to be the expected amount of time that the piece of equipment will be in use. The interesting thing about these types of loans is that the equipment you are purchasing will serve as collateral. Banks and online lenders can give you good rates for these loans as long as you have a strong credit history. While you are paying off the loan, you still own the equipment and take advantage of the equity you build up.
There is also the option of using a personal loan for your business. Many budding entrepreneurs do this because they have good credit and their business does not have any history. You can get your funds faster and it’s a good way to get some startup money. However, the interest rates tend to be higher, and how much you can borrow will be limited. If you don’t pay it back because there is a problem with your business, it will hurt your personal credit score. Personal loans can be taken out at all traditional lenders and online lenders.
Don’t let a little thing like having no capital stop you from achieving your dreams. Weigh the pros and cons of all of these loan options, and make the choice that is best for your business.
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