Types of Business Loans

 

Throughout the life of your business, you’ll no doubt rely on reliable funding at various stages of growth. Whether it’s to back a bold move, improve your cash flow throughout the year or cover unexpected costs, the odds are, you’ll need a business loan eventually.

There are many sources that business owners can turn to for funding. The most common lenders include established banks, credit card companies and private loans companies. In the vast majority of cases, you don’t need to know exactly which product to apply for before you make contact. Most loan advisors will be happy to point out the type of business loan that seems best suited to your current circumstances.

Here are some of the main types of business loans out there and how each works:

 

Standard business loans

These can also be called commercial loans. This is perhaps the most common type of business loan that you’re likely to come across. They’re usually set over long-term agreements, have lower interest rates compared to short-term options like credit cards and overdrafts, and you’ll usually need a solid credit history to achieve one.

The banks and companies that supply these loans often like to see your business plan as well as evidence of your previous business activity. If you have a major venture or project that you want to fund in the near future, this is the type of loan you could look at first as a starting point. Lump sum payouts can take a while, so they’re not suitable if you need the money right away.

If you need a larger amount of capital, you might have to consider taking a loan with a variable rate. These agreements feature an interest rate that is can change in accordance with fluctuations in interest rates throughout the wider marker.   

Your business account might come with a business overdraft facility. Just like personal overdrafts, this can be one of the easiest but most expensive ways for your business to pay for goods, especially if you don’t plan on paying back into your account anytime soon. Be sure to check the terms and conditions of your overdraft before using the funds for business purposes.   

 

Secured business loans

With a secured business loan, you’ll have to put up one or more of your assets as collateral. Pay the debt back as agreed and you can keep your asset. Fail to repay the loan and the lender has the right to resell your assets to make up the amount lost. This is only an option if you have assets that are worth more than the amount you’re looking to borrow.

In most cases, the loan amount offered to you will be less than the market value of the assets you wish to offer up. For example, with a $15,000 car as security, most lenders will only offer you a loan amount of around $10,000. The security has to be enough to more than cover the principle of the loan as well as the interest you would owe as agreed in your arrangement.

Why go for a secured loan and take the risk? Business finance can be very hard to access if you have no previous track record of stellar business performance, a bad credit score or no assets your name. The security gives loan providers the confidence to accept the loan agreement. It’s like an extra term that helps seal a deal that would otherwise be well out of your reach.  

 

Short-term loans

Short-term loans are not designed to be repaid over a series of years like the options above. These faster loans are paid out to you within hours and need to be paid back within a year or over the coming months. Generally speaking, you’ll only be able to access limited amounts and the interest rates are usually higher than longer-term loans.

The biggest advantage of short-term borrowing is the ability to access the cash within hours. Rather than waiting weeks or days for the money, most short-term options will have the funds sent to your account within 24 hours of your application being approved. Some loans can have terms as long as 12 months if an extended loan period suits you better.

Unlike credit cards, short-term solutions offer you the exact amount you need so that you can be sure you’re only paying for what you need without the temptation to spend more than necessary. This is one of the best types of business loan for situations where timing and practicality is top priority.

What are short-term loans used for most? Any business activity that can’t afford to wait. Where other lines of credit will come with delays and other hurdles, a short-term loan is more useful in situations where you need to buy or pay for something immediately. Business owners large or small can use these types of loan to address cash flow concerns, cover urgent costs, buy new gear or space, hire new staff, or replenish key stock quickly.