Business loans are one of the primary sources of financing for small businesses. Explore what they are, their functionality and how lenders determine your borrowing limit.
Each loan type has different requirements, which could include minimum credit scores, revenue requirements or duration in business. We’ll look at five loan types here:
1. Term Loans
A business term loan is a lump sum of capital you pay back over an extended period. A lender will review your business tax returns, balance sheets and income statements to assess how well you manage cash flow and determine whether you can afford repayment amounts on a term loan.
Term loans typically offer longer payment terms than lines of credit and can help your company meet high-priority expenses such as inventory to meet rising demand or buy equipment to expand production capabilities – expenses which will ultimately drive increased revenue growth for your business. Available through banks and online lenders, term loans usually have one-20 year payment plans that make qualifying easier.
2. Lines of Credit
Lines of credit offer small business owners a predetermined spending limit they can borrow against and repay on an installment plan. Most lines of credit are unsecure, though some lenders require that borrowers provide inventory or property as collateral should they fail to repay on time.
To qualify for a line of credit, lenders will review your personal and financial statements such as profit-and-loss reports and balance sheets. They’ll also evaluate your business to assess its willingness and capacity for repaying its debt on time – they may require you or any owners with more than 20% ownership to provide personal guarantees as part of this process.
3. Equipment Loans
Business equipment loans provide funding solutions that cover everything from computers and construction equipment, to furniture. Their attractive loan terms make them an excellent option for businesses seeking to expand or improve operations with new assets.
Since equipment financing serves as collateral, lenders tend to have less stringent credit requirements compared to other business loan types – making this loan type ideal for newer companies or those without an extensive credit history.
Lenders require profit and loss statements and bank statements that demonstrate sufficient cash flow to cover monthly debt payments. Furthermore, lenders will carefully analyze equipment values against financing costs to assess any possible assets that can be taken by creditors as security against outstanding obligations; should a business not make their debt payments, lenders have recourse to seizing equipment as security against defaulting payments.
4. Working Capital Loans
Small businesses rely heavily on working capital loans for daily expenses and short-term business needs. Working capital is measured as the difference between current assets (such as cash, accounts receivables and inventory) and current liabilities ( such as debt payments or credit card sales).
Gaining working capital funding doesn’t need to be a tedious or cumbersome process; alternative lenders often offer swift application and approval processes that can be completed within hours.
Working capital funding can help cover payroll, daily costs, bulk purchasing discounts and marketing. You could also use it for long-term growth opportunities such as hiring seasonal staff or expanding into new markets or upgrading equipment – none of these financing solutions require collateral security and can usually be paid back within 12 months or less.
5. Business Expansion Loans
Growth can be great, but you need the capital necessary to cover its costs. A business expansion loan can provide much-needed support by covering expenses such as hiring additional staff members and increasing inventory or advertising expenses.
Loans to fund business expansion can be obtained from banks, credit unions and online lenders. Banks tend to offer lower interest rates than other lenders with strict eligibility requirements while online lenders often provide shorter application processes with competitive terms like long repayment periods and large borrowing limits. With any form of financing comes associated costs so make sure the benefits outweigh them before making your decision.