There are many reasons to consider taking out a small business loan, and just as many options available when it comes to choosing the type of loan you want. You may have a fixed idea of how a loan should work and might even have taken out a business loan before. However, for business owners in 2024, the varieties of loan types are more expansive than ever.
If you do not understand all the options available, you risk selecting a less than ideal business loan.
When looking for the perfect loan, there are a variety of factors to focus on. This includes the state of your business and your credit score. The purpose behind the loan application also affects your choices, as some loans are designed for specific business activities or purchases. Once you have determined the best loan for your business, you can also find many companies to provide the loan. While a business owner in 2021 can utilize a traditional big bank loan, there are several alternatives to consider in order to get a better overall deal.
Term Loans
For most business owners, this is the most familiar type of loan. With a term loan, you are paid the full amount of the loan immediately. You then pay back the loan over an agreed length of time. This is available from online lenders as well as banks. You are usually required to put up an asset as collateral, and repayments typically start immediately. For this reason, term loans are generally recommended for large, immediate purchases.
Some of the best alternative sources for term loans in 2024 are companies such as OnDeck Capital, Funding Circle and Fundation. Funding Circle and Fundation are better for businesses with experience and a good record. OnDeck is available to small businesses in need of immediate funding, but you can expect higher rates as a result.
SBA Loans
These loans are guaranteed by the Small Business Administration. It is difficult to apply and qualify for one of these loans, but the low-interest rates make the effort worth it. The limit for borrowing is traditionally higher than other types of loans. The repayment time for SBA loans depends on the purpose of the loan, with longer terms permitted for equipment or real estate loans.
Lending companies such as SmartBiz offer SBA loans alongside their other loans. You can also receive these loans from a bank, or use SBA backing to increase your chances of qualifying for a bank loan.
Lines of Credit
This is another type of loan commonly associated with big banks. Through these lines, you are given a credit limit. Once your limit is established, you can draw on credit up to the determined amount. You are only charged interest on the amount you draw. The flexibility of this option makes it a preferred loan type for small business owners looking to solve immediate problems, such as dealing with cash flow issues.
Smaller, unestablished businesses often struggle to qualify for a line of credit from a large bank, as they are expected to have good credit to qualify. However, alternative and online lenders frequently provide these types of loans. You can use the lenders, Kabbage or Street Shares, for example. However, these options may come with a shorter term. If you are able to qualify with bad credit, expect significantly higher rates.
Equipment Loans
If you need a loan to purchase equipment for your business, consider a specialized equipment loan. Because the equipment you purchase serves as collateral, the rates for this type of loan are often relatively low. However, this is affected by the value of the equipment, as well as your credit status.
Lenders for this type of loan include Credibility Capital, Currency Capital and Crest Capital. When looking at the options for this type of loan, you may have the option to lease the equipment you require. This is preferable if you are not concerned with owning the equipment yourself.
Invoice-Based Loans
Using your unpaid invoices to obtain a loan is not a good idea for established businesses, as the costs you incur are very high. However, if you are not able to qualify for another type of loan, you can use one of these options:
- Invoice factoring, where you provide your unpaid invoices in exchange for a loan. The factoring company collects the account from the customer.
- Invoice financing, where you use your unpaid invoices as collateral against a loan.
These options are relatively easy to qualify for, although it important to consider the potential cost before applying. Alternative lenders such as BlueVine and Fundbox offer invoice finance options for small business loans.
Merchant Cash Advances
This type of loan is based on your future sales. The lender provides you with a certain amount upfront, in exchange for the sales you have yet to make. Often, repayment is made by providing a percentage or portion of your card sales directly to the lender. Alternatively, you can set up a fixed transfer schedule for repayments.
These loans normally have extremely high-interest rates. Some loans may be approved within a single day. Lenders such as Rapid Advance and CAN Capital Merchant Services can provide this type of loan. If you require immediate financial assistance, this is one of the best options.
Peer-to-Peer Loans
An interesting alternative to more traditional loans for the 2024 business is peer-to-peer lending. These loans are not provided by a lender, but by investors operating independently. The arrangements are set up through peer-to-peer sites such as Funding Circle or Lending Club, and the loan is financed by a group of the site’s investor members.
You sign up to for the service of your choice and apply to have your loan request posted. If you meet the qualifications, your loan is made available to the investors on the site. The rates for this type of loan can be high. However, if you are just starting your business, or if you have a poor credit rating, a peer-to-peer program is one of the best alternative options.
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