As a business owner, you may often find yourself wondering about the best way to maintain your daily operations. Especially in today’s dynamic environment, business finance seems tricky at times. While needs differ from business to business, all businesses require funds for their operations, such as purchasing assets, shop or new machinery, and other overhead expenses.
For such expenses and more, there are various types of business loans that you can consider and choose from, based upon the amount required, the term length, use of funds, the lender, and other similar financial factors. It is crucial to know the types of business loans available and their pros and cons to choose one that is best suited to your unique requirements.
1. Business Term Loans
One of the commonly found forms of business financing, a business term loan can be both secured or unsecured. These loans include a cash lump sum paid upfront, which has to be repaid over a predetermined period and at a rate fixed by the lender. Such loans are usually taken for a specific purpose, generally a capital expenditure.
While borrowing terms may differ from lender to lender, they usually start from INR 50,000 and go up to 100 crores with short or long terms. Numerous lenders offer business term loans, including credit unions, online lenders, and various banks.
2. Overdraft Facility
An overdraft facility is provided by financial institutions against securities, especially in terms of fixed deposits. The lender analyzes business cash flows, credit history, and the repayment history of the borrower. The borrower can withdraw an amount required and pay interest on the amount so withdrawn. The funds can be used in this manner as long as the principal amount and the interest are repaid as per the predetermined terms.
3. Equipment Loans
Most businesses need money to buy, replace, or upgrade existing equipment, depending on the type and nature of the business. Such loans help you do so with terms typically matched up with the expected life of the equipment. They can be used for purchasing types of equipment such as computers, medical machinery, industrial equipment, and other machines, which you might need to operate the business.
Equipment loans come in handy for both SMEs and large businesses. They are intended to help you provide the funds you need to increase productivity and efficiency through better equipment. The interest rate, loan tenure, and loan amount may differ from bank to bank. Lenders offer up to 100% finance for the new machinery, many at 90% or lower. However, for taking one, you will have to make a down payment.
4. Business Line of Credit
Business lines of credit provide access to funds up to your credit limit so you can buy as much as or as little as you want to set up your credit limit. You will pay interest only on the amount you’ve drawn. It provides more flexibility than a term loan.
If you go for a secured business line of credit, you will have to put your business assets or inventory as collateral. You can also take out an unsecured business line of credit, but the business lender might still require a personal guarantee or a lien on your assets.
5. Bridge Loans
This type of business loan is a gap financing loan wherein the borrower gets access to short-term loans that range from a few weeks to a few years. These loans bridge the gap during times when money is required but not available yet. They come with relatively high-interest rates and also require some form of collateral.
If you are to meet current obligations and need money for immediate expenses, this type of financing will best suit you.
6. Invoice Factoring
Let’s assume your business has some unpaid invoices, which are commonly paid in 60 days. If you need cash now, you may sell those unpaid invoices to a factoring company to get the money.
The factoring company will then be responsible to collect the money from your customer directly when the invoice is due. This type of business loan is best suited for businesses with unpaid invoices that need fast cash.
7. Merchant Cash Advances
It is a type of business funding used to get a lump sum upfront. This type of financing is generally given to business owners in exchange for a portion of their future debit or credit card sales. Businesses that use card terminals to take payment from customers can go for this type of financing option.
A great solution for businesses that need fast cash and don’t have a valuable asset, they come with the drawback that they have the highest borrowing costs.
8. Commercial Real Estate Loan
A commercial real estate loan is a type of mortgage loan that is secured by the lien of commercial property. You can avail of this loan to purchase, renovate any commercial property where you aim to run a business or renovate it. Examples include hotels, apartment complexes, and shopping malls.
Make sure you choose it only if you are financing a large-scale project, as this is a larger loan type.
9. Inventory Loans
Provided to business owners seeking finance to purchase inventory, inventory loans assist you to operate inventory successfully.
Here’s how it works: let’s say you own a clothing store, you can take an inventory loan to purchase apparel and other accessories for your business. If your business nature is such that you rely on inventory, an inventory loan would be best suited for you.
10. Purchase Order Loan
It is a type of financing that can be used to pay your suppliers for goods you’re selling to your customers. Typically used when you cannot afford to fulfill a customer order, this type of financing helps you handle all your existing working capital, particularly cash issues.
It is suggested to select the business loan based on your business and requirement. All business loans vary based on loan types and the lender. Therefore, you must do research well before adopting any of these options.
The information provided above can help you decide the type of financing best suited for your venture. Go ahead with the loan that best fits your venture.