It’s always said that those who own a business should know how to juggle many different things and be financially savvy.
However, running an entire business can be a huge financial burden, especially in the beginning, to get it up and running successfully. That’s why many business owners take out a business loan to help them out, and here’s how you can decide on whether or not it’s right for you.
What Is a Business Loan & How Do They Work
A business loan is a certain amount of money given by a lender and paid back by the borrower with interest over a specific period of time. Lenders differ according to the type of business loan which we will get to below in detail. Whichever type you choose, lenders will require certain documentation and make the decision to fund your business. As for the interest rate, it will depend on how risky the lender views the decision of funding your business. If your interest rate is fixed, it won’t be changed for the entire period of loan repayment.
Should You Get a Business Loan?
Before you look into the different types of business loans, you should first look into whether it’s the right decision to get one. You need to ask yourself why you need a business loan in the first place and ensure you are getting it for the right reasons. Put together a plan for the amount of the business loan, and decide whether it would help your business grow. Do you need the money to improve cash flow, or to purchase a new building? Knowing the reason will help you in determining which loan type suits you the most.
Types of Business Loans
Now that you’ve finally made a decision to get a business loan for the right reasons, you need to delve deeper into all the options available. You need to make sure you are choosing the best business loan type that will serve your needs. Since business loans are a wide category with a huge variety in the market, the types might be overwhelming for someone outside this world. That’s why we put together each loan type with its pros and cons for you to make an informed decision.
1. Small Business Administration Loans
Provided by The Small Business Administration (SBA), small business administration loans are specifically designed for owners of small businesses with certain criteria requirements. These loans are divided into four major types; the 7(a) Loan Program, Microloan program, CDC/504 Loan Program, and disaster loans.
The 7(a) Loan Program is the simplest and most basic type with the pros of long repayment time and no collateral requirements- yet with the con of a very difficult qualification process and specific documentation requirements.
The microloan program can be used on different business costs and has quick distribution yet has spending restrictions.
The CDC/504 Loan Program has affordable fixed interest rates yet has usage restrictions.
Finally, disaster loans have great lenient terms and flexible usage yet a strict qualification process.
2. Traditional Loans
For those who don’t qualify for SBA loans, you can always go for the traditional business loan options which are more flexible. They also fall into various types; equipment loan financing, line credit, secured loans, unsecured loans, term loans, and more.
Equipment loan financing is perfect for businesses who only need financing for equipment and they have the proof of fast funding and flexible terms yet they have higher interest rates.
Line of credit loans are for businesses with unstable cash flow where you can only take cash when you need it and pay only for what you use and is very flexible yet it features lots of additional fees and charges.
Secured loans are the basic loan type backed with an asset with low-interest rates yet are only for established businesses.
As for unsecured business loans, they differ from the secured ones in how they don’t need collateral and have no risk of losing your property, yet they have lower loan amounts and higher interest rates.
Now that you know all about business loans and how you can decide to get one as well as all the different types you can choose from, you should be able to make a wise decision. There are several factors you need to consider before getting a loan for your business like your credit score, the amount of money you need, and how fast you need it. At the end of the day, it all boils down to your business plan and both short and long-term goals and what best suits them.