Loans For Small Business: Which Type Of Loan Is Best?

If you're looking for a loan to expand your business

, purchase equipment, buy inventory or simply increase working capital than this post will provide some helpful information.

First, before you begin looking for a loan it's worth the time to fully understand the types of loans for small business that are available to you. Each type has its pros and cons and it really depends on your particular situation.

Here is a breakdown of the most common loan types for small business:

Term Loans

This is a loan that pretty much speaks for itself. You'll repay the loan over a set term and the interest rate is usually fixed. You can also obtain a short term loan where it's paid in full at the end of the term (usually 12 months or less) instead of dealing with monthly payments.

Secured Loans

This is one of the easiest ways to qualify for a loan because you are putting up collateral like commercial real estate, receivables or inventory to secure the loan. Your rates are usually lower and you have a greater chance of negotiating as well.

Now I wouldn't suggest putting up your home or car for collateral because if you are unable to pay off your loan your personal assets that you pledge can be seized.

Unsecured Loans

A complete opposite of the secured loan is the unsecured loan which requires no collateral. Because these loans carry much more risk lenders place greater underwriting guidelines so strong business credit scores and other factors will come into play so be prepared.

Lines of Credit

This is a popular source of capital because of its ability to obtain large sum of cash, what I call cash on demand. Typically, it works like a revolving credit card but the major difference is that it has a much lower interest rate and higher credit limits than a revolving credit card.

You have payment flexibility and some banks provide special features that provide monthly interest only payments which keep payments small when you tap into your credit line.

Merchant Cash Advance

By borrowing against future credit card sales you can receive cash rather quickly with this type of loan. It doesn't matter if you have bad credit or no collateral because the loan is based strictly on credit card transactions and best of all you pay back the loan in small amounts with your credit card sales so no need to track payments or worry about defaulting.

Factoring

Also known as receivables financing you're basically selling your invoices to another company instead of waiting for your customers to pay you. The factoring company pays you usually 80% of the funds immediately with a small fee taken out. Once the customer pays then you get the remaining funds.

Equipment Financing

Qualifying for this type of financing is easier compared to others because the equipment serves as the collateral. You not only benefit from tax deductible lease payments but you also can get a buy-out option as well.

Keep in mind it's always tougher to get a loans for small business when you need it the most. So plan ahead and prepare to provide a solid written plan to support your request. It helps to have skin in the game so if you have already committed funds of your own for your startup then make sure you provide this information to the lender if it will help close the deal.

While some of these loans don't require so much due diligence it's always smart business to know what options are available.

by: Marco Carbajo

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