If your a small business owner, the ability to get approval for a loan is just as important as having the right insurance or a clever accountant. This is because loans can provide a blood infusion in times of rapid growth or unexpected slowdown.
An installment loan is the most common type of business financing. These type of loans have a set term of the length of the loan, a payment schedule, and a fixed or variable interest rate. These loans can be secured or unsecured and rely heavily on the business’s credit and payment history.
Line of credit
This type of loan allows you to have an approved amount of funds sitting in an account to be used when you need it. You can draw either the whole amount or any partial amount. Whatever that amount drawn would be the balance to which you pay interest on.
Lines of credit is good if you don’t need funds right away but still want availability of cash on hand whenever an emergency comes up.
Accounts Receivable Finance
This is where a business receives cash on their accounts receivables. Depending on the lender, it is either an advance against your outstanding invoices, or the lender buys your A/R at a discount, also known as factoring. This type of financing allows you to bridge the gap of cash flow issues while waiting for your invoices to get paid.
Merchant Cash Advance
Merchant Cash Advance gives you an advance based the business’s credit card revenue. The lender would then receive money back for the loan through your credit card transactions, along with their financing fee.
Merchant cash advances work best for business’s that do most of their revenue through credit cards.
The fees can be very expensive due to the high risk the lender is taking, since their return is based on credit card volume, which changes daily.
Equipment and inventory loans
Your business’s equipment and inventory have value that can be used as a collateral to get approved for a business loan. This includes the products you sell, computers, machinery, vehicles, or other assets you use to run the business.
It important to note that the lender focuses less on your business’s financials than the actual value of the assets, allowing flexibility if your a new business or have bad credit.
Lenders who lend to start ups take a creative approach to this type of lending, since the business is new. Many times the lenders qualify you based on the revenue model, or industry your in.
If your a new business or even an existing business confused of which route to take, it is best to speak to a variety of lenders that each offer these different types of loans. This can give you a comparison of the different terms and rates you qualify for and the risks involved with each loan type. Only then will you make the more informed decision.