Three Different Types of Small Business Loans

If you own a small business, you may have gotten to a point where you need a large sum of cash to expand. Expansion is expensive, but with a proper business plan, you will find that expansion is worth the investment. There are different types of loans you can apply to for financial assistance. Here are the three top types of small business loans.

  1. Term Loans

Term loans are a common financing option for small businesses. You will receive a large amount of cash upfront. You will be required to repay the loan with added interest over a specific period. The time period greatly varies; it could be five years or 10 years. You will speak with a term loan professional to determine whether or not this is a good option for your business and discuss the payment plan.

You can borrow up to one million dollars. The lenders provide faster funding to you than other types of loans at financial institutions. You will receive cash upfront faster for your business and, generally, you can borrow a higher amount than other loans.

Term loans often require collateral. This means they are a type of secured loan. If you are unable to repay your loan in a timely manner, the lenders can seize your collateral. Collateral is typically an asset such as your property or valuable business equipment. Secured term loans are best for business owners who need cash upfront fast and have a high credit score.

  1. Merchant Cash Advances

Unlike term loans, you will not have to supply collateral for an unsecured loan. Merchant cash advances are a type of unsecured financing. You will receive a large sum of cash upfront. Instead of making fixed payments, you will repay your loan with a percentage of your sales. They will have access to your bank account and require daily or weekly withdrawals.

Although merchant cash advances are unsecured, they are one of the more costly types of unsecured business loans. In the end, the borrowing costs may be up to 350%. For example, if you borrow $1,000, you may end up repaying $3,500 after interest.

  1. Invoice Financing

Invoice financing is when you secure a loan by using your unpaid invoices as collateral. This is extremely helpful as a small business owner, as you may have thousands of dollars of unpaid invoices. For example, if you have $30,000 of unpaid invoices and need $10,000 to expand, you can apply for invoice financing. The lender will have a high-interest fee. In this example, you may need to use $13,000 of unpaid invoices for collateral to cover the interest fees. You will get cash upfront and fast. Customers will not know that you used their unpaid invoices to finance your expansion. You will be responsible for collecting the invoice payments from the customers.