The plethora of business loan options made available to business owners today is overwhelming. However, the good news is that businesses of any size can qualify for assistance. According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems. Many businesses make use of business loans to ensure they do not miss out on growth opportunities or the implementation of the newest technologies.
Before we dive into some of the most common business loan options, take into consideration this qualifier:
How is your payment history?
An important factor in considering a business loan is the evaluation of repayment history. It is important you understand that while you do not have to have a perfect credit score in order to gain access to a business loan, but you should be able to prove that you are capable of paying back any borrowed funds.
Now let’s dive into some types of the business loans available!
- Business Credit Cards
A business credit card is a revolving line of credit. Business owners can use and repay the credit line as many times as they want. However, the minimum monthly payment must be made and the balance cannot exceed the credit card limit. Use this type of business loan to purchase new inventory, pay bills, or cover expensive office supplies.
Keep in mind collateral is not required to open up a business credit card. This means that assets will not be foregone if the credit card is not paid. However, that doesn’t mean there are no consequences for late payment. Instead, lack of monthly payment will cause your credit score to go down and will affect any future requests to borrow money.
While opening a business credit card holds many positive attributes, there are some downfalls as well. Keep in mind that credit cards generally hold higher interest rates than other types of business loans. If not paid off in time, you may end up paying a lot more than you originally anticipated.
- Equipment Financing
When new technology is available that can boost productivity and reduce internal costs, you have to have it, right? The reality is that not every business can afford the latest and greatest. With equipment financing, the best technologies become available to you.
Equipment financing is easy to qualify for, and the amount of money you'll be approved to borrow is based on the type of machinery needed. This is a great loan option when you cannot afford to pay the full amount for new equipment upfront. This type of business loan allows you to pay down your debt into payments that won’t break the bank.
- Working Capital Loan
According to Investopedia, a working capital loan is defined as "a loan that works to finance the everyday operations of a company." Companies that experience seasonal sales cycles usually rely on working capital loans to help with periods of reduced business activity.
Whether it’s needed to purchase new equipment, pay monthly expenses, aid in business expansion, or hire to new talent, a working capital loan may be the answer. This type of loan is great for businesses of all sizes that have found themselves in a period of low cash flow.
Unlike some of the other business loans mentioned in this article, working capital loans are more flexible. The business owner is not required to submit an extensive application stating the purpose for the loan. Additionally, these loans act as unsecured debt, so you are not required to provide traditional collateral either.
- Accounts Receivable Financing
Net 30 and even net 60 are both common payment terms. While this allows the client to pay for their products/services at a later time, it may leave business owners with a lack of immediate funds. Fortunately, with accounts receivable financing, business owners can finance those slow-paying invoices. However, this type of loan is dependent on the fact that you have credit-worthy clients, so be sure you have records to prove incoming cash flow before pursuing this type of financing.
The Bottom Line
Whether this is simply a new research initiative or you’re evaluating new lenders to fund existing projects, it’s important to understand each type of business loan in depth in order to get the most out of your financing, and thus your business.