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With 50% of new businesses failing in their first year, you need to give yourself every chance of success possible when you open your startup. This is why many small business owners turn to a business loan to get their project off the ground.
If you’re looking for advice and information on the types of loans available and how they differ, read on to discover five types of business loans available to small businesses.
The good news is that there are many different types of business loans out there. This helps you to find the right one to help your business in those crucial first few months.
1) Revenue-Based Financing
Put simply, revenue-based financing is a way of securing a loan or investment by offering investors a percentage of your revenues going forward. Investors would receive money at regular intervals until the arranged amount had been paid.
Revenue-based financing should not be confused with debt financing. There is no interest paid on the balance of money that you still owe, for example. Furthermore, the payments you make to your investors is linked to the performance of the company.
This means that you wouldn’t be saddled with repayment costs until your business is doing well enough to manage them. This is a major advantage for a startup company.
If you’re looking for a secured term loan, check Dealstruck, which has a range of options available for all sizes and types of business.
2) Line-of-Credit Loans: One of the Best Types of Business Loans
For nine out of ten businesses, a line-of-credit loan will be able to benefit them. Most companies take advantage of these loans for several reasons.
Quick and flexible, a line-of-credit loan is fantastic because it lets you draw from it whenever it is needed. Once arranged, you and the lender will decide on a set maximum amount of credit.
Once this maximum credit is decided, you’ll be able to use the money however it suits your purposes.
These types of loans often come with interest rates of between 7-25%. If you are willing to accept a higher interest rate, then you can get access to a line-of-credit loan even if your credit history is not perfect.
Best of all, there are many suppliers of these types of small business loans, like the SBA 504 loan. This means that you can get access to money quickly through them. Although there is much good to be said about the line-of-credit loan, it does have significant drawbacks.
Many of these loans will require you to offer up some collateral. This could mean that some of your business’s assets are sold off in the event of missed payments. In a worst-case scenario, these could even be personal assets.
Even if you do not give up business or personal collateral as part of your line-of-credit loan, there are other high penalties which can be applied instead. This can range from penalty fines to a damaged credit score. A poor credit score will stop you from securing funding going forwards.
Getting one of these loans is a great way to start up a business.
3) Government Grants
Perhaps the best of all business loans is the grant. Unfortunately, they are not accessible to all businesses and have strict requirements. This means that they may not be right for your business, even if you do qualify.
A grant is a government business loan which either does not have to be repaid at all or is repaid with little to no interest being charged.
This can be fantastic for a brand new business. If your revenue streams haven’t developed yet, the last thing you want is to contend with high-interest repayment costs that come with some business loans.
Unlike regular business loans which are provided by private suppliers, grants are often provided by local government branches. Sometimes grant money is administered through charities and NGOs which receive government funding.
As of 2019, there are numerous grants aimed at helping small businesses to get off the ground. If you’re getting ready to launch your startup, have a look here and see if one is the right fit for your business.
Because they are designed with specific customers in mind (startups, new businesses in specific industries, etc.) you may not be eligible to receive a grant. Another issue is that the application process can take a long time.
4) Small Business Administration Loans
The Small Business Administration offers a wide variety of loans which can be seen as a halfway house between a grant and a loan. They offer a bit more flexibility than a traditional loan whilst also providing lower interest rates than a traditional private lender.
The SMA has a huge variety of loan options available. Whether you need a $5,000 bridge loan for your company or require more substantial amounts up to $5 million for their project, the STA is able to help out.
Loan types range from 7a loans for general applications to smaller microloans designed for specific purposes. There is even an option for larger loans, which are aimed at companies who need to purchase major assets like large equipment.
Where STA loans really excel are their low-interest rates. You can expect to pay between 5-13% for the majority of their loans. This is significantly below the market rate, especially for a brand new company without a strong credit line.
STA loans also offer very generous repayment timings. They don’t want the money back for a microloan for 6 years. And they are happy to wait up to 25 years for the 7a loans mentioned above.
This can be vital for a small business in the first years of its life. It removes the immediate pressure to secure revenue. This allows the firm to invest their revenue into the business, rather than repaying debts.
You can see more tips to grow your business here. The only downside to STA loans is the applications process. Similar to a grant, this can take between 3 weeks and several months.
For this reason, it’s best to organize and apply for the loan ahead of time if you want to go down this route.
5) Equipment Loans – A Smart Type of Business Loan
In some scenarios, a loan of equipment could be even more useful than an injection of cash. Whether you are setting up a new office and need IT equipment, or require machinery and vehicles for a new plumbing business, there are all sorts of equipment loans schemes that can help you out.
Depending on the industry sector, equipment costs can prohibit new businesses from opening. In the medical industry, for example, state of the art equipment can easily cost hundreds of thousands of dollars.
This is why equipment loans can be such a helpful type of business loan. They provide an opportunity to lease the equipment and make manageable repayments after the assets are already generating revenue for your business.
In this way, you can see an equipment loan as self-funding. It allows you to unlock revenue streams for your business even more than a traditional cash loan would.
Business Loans – One to Suit Every Purpose
As you can see from the list above, there are many different types of business loans available. The variety means that there will be one for you on the market, as long as you do your research.
There are so many challenges for a new business in its first months of operations. From recruitment to accounting, you will have a lot on your mind in those first crucial weeks.
The good news is that business loans can be dealt with quickly, and so should give you a bit of comfort.
If you found this article interesting, please feel free to read our blog, where you’ll find all sorts of financial advice for businesses.