How to Secure the Right Loan and Fuel Your Business Growth
Your credit score, the age of your company, and the goals behind the need for financing all play key roles in determining the best business loan option. A business loan is a financial asset that can help cover an unexpected expense, purchase expensive equipment, establish the groundwork for business expansion, or solve sudden cash flow problems. Seeking a business loan requires preparation and research, including determining the type of loan that is suitable and works best for you and your business.
Here’s what you need to know about various types of business loans, how experts rank them based on different financial needs, and how to prepare to apply for one.
Choosing the type of loan that best suits your needs and repayment ability is essential. You should take out a loan with the idea that it will help your business, not saddle you with debt.
- Line of Credit Loan
Best for: Managing short-term cash flow fluctuations
This short-term loan is considered a useful option for small businesses. With a line of credit, you’re given a certain amount of cash which you can draw from. You only repay the amount you draw and that’s the only amount you pay interest on. Experts rank this as a highly flexible financing option, ideal for handling unexpected expenses or seasonal downturns.
- Term Loan
Best for: Long-term investments and expansion
This type of loan is the one with which most people are familiar. Term loans come in both short- and long-term options, with generally lower interest rates for longer-term loans. Borrowers receive a lump sum of cash upfront and make monthly repayments of principal and interest. These loans have some of the lowest interest rates and generally require collateral. Experts recommend term loans for businesses with clear long-term investment goals.
- Specialty Financing
Best for: Equipment and real estate purchases
Specialty financing includes loans for very specific purchases, such as leasing or buying equipment. You usually pay equipment loans over the estimated lifespan of the equipment you’re financing, and the equipment serves as collateral. Specialty financing also includes commercial real estate loans. Experts caution that businesses should ensure the loan term does not exceed the useful life of the equipment.
- Invoice Financing
Best for: Businesses with outstanding invoices and cash flow issues
With invoice financing, you use unpaid invoices as collateral to secure a cash advance, which is usually equal to a percentage of the invoice. You then repay the advance once the invoice is paid, along with a fee. A similar type of financing is invoice factoring, where you sell your outstanding invoices to a factoring company for it to collect on. Experts rate this as a useful tool for businesses that struggle with slow-paying clients.
- Merchant Cash Advance
Best for: Businesses with high credit card sales needing fast cash
Like a payday loan, a merchant cash advance is an expensive form of borrowing where you get a cash advance in exchange for a percentage of your future credit card sales. Because these loans are short, and repayment is taken out daily, they can have the equivalent of a 70–200% APR. The upside is that these loans are very quick and easy to obtain. Experts rank this as a last-resort option due to its high cost.
- Personal Loan
Best for: Startups or businesses with limited credit history
If you have a very strong personal credit score but have a new business or limited collateral, you might consider taking out a personal loan for business expenses. Keep in mind, though, that if you default on the loan, it will impact your personal credit. Experts advise this as a viable alternative for startups without established business credit.
- Secured vs. Unsecured Loans
- Secured Loans: Require collateral such as real estate or inventory and have lower interest rates.
- Unsecured Loans: Have higher interest rates and require strong creditworthiness.
Experts rank secured loans as preferable due to their lower interest rates, while unsecured loans are recommended only for businesses with strong financials and proven profitability.
Selecting the right loan depends on your business’s financial needs, ability to repay, and the cost of borrowing. Experts recommend businesses carefully analyze their financing needs and consult with financial advisors before making a decision. By choosing the right loan type, businesses can leverage financing to grow and succeed without taking on unnecessary financial risk.
12 Smart Tips for Getting a Small Business Loan
