types of business loans

Types of Business Loans

  • March 29th, 2016
  • Tyler Heaps

Starting a business requires funding, and the way businesses acquire this funding can play a key role in their future. Whether they obtain capital through angel investors, VC, or business loans, business owners should know what each means.

There are two types of loans: secured and unsecured. A secured loan is obtained by using either personal assets or the assets of the company as collateral; this means those assets are at risk if the loan is not repaid. An unsecured loan is obtained solely on the creditworthiness of the applicant and is not protected by a guarantor or collateralized by assets. As a result, those with poor credit will often seek secured loans in order to receive the most funding possible.

Timing on each of the loans below is an estimate. Motivated borrowers that return documentation requests quickly and have existing relationships with a bank can improve the time estimates provided.

SBA Loans

An SBA, or small business loan, is a secured loan granted by lenders in the private sector to small businesses. Interest on these loans typically ranges from 5.8 to 8.5% with a repayment period of anywhere from 5 to 20 years. These typically take 2 to 6 months to obtain.

Merchant Cash Advance

A merchant cash advance is another way to receive funding but doesn’t qualify for a loan. Instead, it’s the term used when business purchases against a fixed amount of its future credit and debit card receivables. Up to $150,000 in funding can be obtained this way, but the interest rate is usually high — anywhere from 18 to 22%. However, this is a secured loan due to the asset-backed nature of it. These funds can be obtained in under a week.

Startup Loans

Startup loans are becoming increasingly more common as startups take hold of the economy. These are loans granted from the private sector to small businesses, usually at a rate of between 5 and 7.5% interest. Starts up loans tend to have a repayment period of up to five years. These loans typically take from 2 to 5 months to obtain.

Franchise Startup Loan

A franchise startup loan is specialized financing given to well-known national franchises. These loans are secured, requiring as much as 30% of the necessary capital to be provided by the borrower. Due to the nature of this loan, it’s available only to those working to create another branch of franchised business and often provided by the franchise itself. Timing varies depending on the franchise but typically is 2 to 3 months.

Business Acquisition Loan

Business acquisition loans are provided when attempting to acquire a pre-existing business, either by an individual or another business. These loans are granted at 4.75 to 7.5% interest and require up to 9 months to be granted.

Loans granted through lines of credit are special cases, in that they can be both secured and unsecured. Up to $200,000 can be granted without collateral, and even more, can be given based on existing inventory. These loans are given at anywhere from 5 to 24% interest and are obtainable within one to two months. The repayment terms vary based on the lender.

Professional Loan

Professional loans are granted to those in white-collar industries, such as doctors, dentists, and lawyers. These loans carry 5 to 10% interest, and can be both secured or unsecured, depending on whether or not the borrower provides collateral. These loans typically take 1 to 3 months to obtain.

Equipment Loan

Those working in industries that require specialized equipment may qualify for an equipment loan. These loans are secured loans that carry 8 to 25% interest and can be obtained within one to three months. However, if a company already has the equipment and wishes to obtain cash for it while still leasing the equipment from the lender, they may qualify for equipment cash out refinancing. This can be obtained within a matter of weeks, with a value of roughly 50 to 75% of the vendor’s valuation.

Construction Real Estate Loan

Construction financing is similar to a mortgage in many ways. It’s used for commercial construction, with a standard interest rate of between 7 and 8%. The repayment period is up to 25 years. Real Estate loans typically take 2 to 4 months to complete.

Hard Money Equity Loan

A hard money equity loan is a type of loan that is typically more difficult to obtain and usually granted from a local lender. They’re obtainable within two months, with a standard rate of anywhere from 15 to 30% interest.

Working Capital Loan

Working capital loans are used to fund the everyday operation of a business. These are low-interest loans, anywhere from 3 to 7%. These loans can be obtained within one to three months, and can be either secured or unsecured.

A/R Loan

Those looking to obtain a short-term loan quickly, in just two months, should look into A/R or P.O. financing. This is a type of secured loan with an interest rate of anywhere from 8 to 30%.

Peer to Peer Loan

Peer-to-peer loans are loans given from one individual to another. While these loans can vary in size, the average is anywhere from $1,000 to $35,000, typically carrying an interest rate of 6 to 36%. This is a secured loan, as the borrower puts up their personal assets as collateral.

More than 59.7% of business loans are greater than $250,000. It’s important to understand that taking a loan out is completely normal, and in many cases, expected. Small businesses cannot gain the momentum they need without a bit of a push, and financing can provide that.

About the Author

  • Tyler Heaps

Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

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