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Business Capital Glossary: Types of Loans for Small Businesses

small business types of loans

There are many reasons a business owner might need some extra capital—from making payroll during tough times to planning an exciting renovation. With multiple lenders, types of loans, cash advance options, and different financing terms, obtaining that funding can be overwhelming. It’s important to do your research and we’re making it easier by explaining several common types of loan and financing options small business owners should consider.

Line of Credit

A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower—you—can take money out as needed until the limit is reached. In the case of an open line of credit, as money is repaid, it can be borrowed again. General Contractors, for example, may not need money today for new equipment or tools, but when the time does come, there’s no stress or time wasted waiting on a bank loan. A line of credit is a great way to be prepared for the day when the unexpected happens and you need capital on the spot.

Term Loan

A term loan is a loan for a specific amount that has a predetermined repayment schedule. A term loan is often appropriate for an established small business with sound financial statements. Note that a term loan may require a substantial down payment to reduce the payment amounts and the total cost of the loan. If you need money to bring on additional staff, add training, or expand your business, a term loan would provide a lump sum of money to help accomplish your growth goals.

Equipment Loan

At some point in any small or large business, it will be necessary to upgrade, improve upon, or replace various pieces of equipment. This is where equipment loans are a lifeline to any business owner. Equipment can include such things as lawn mowers, kitchen appliances, vehicles, tools, and more. All this equipment is essential for your business to run at maximum efficiency and maximum productivity. Each lender will have different terms, but in general with an equipment loan you can finance around 80% of the total purchase price of the item. When choosing to buy your equipment and finance through a loan, you own the item from day one. A down payment of around 20% is generally required for most small business equipment loans. The collateral for the loan is the item or items you purchase with the equipment loan.

SBA Loan

An SBA loan is a small business loan that is partially guaranteed by the government (the Small Business Administration). The terms you’ll be able to access with an SBA loan will vary depending on your business’s qualifications. SBA loans can range in size anywhere from $500 to $5.5 million. Repayment terms for SBA loans can range from 5 to 25 years, but 10 years is a standard SBA loan repayment term length. From commercial real estate to equipment needs, there are SBA options for you.

A/R Financing

Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Think Pools & Spas, HVAC, Plumbing, Lawn Care Services and/or Construction; where invoices are often paid 30+ days after being sent out. AR financing deals are usually structured as either asset sales or loans. Many AR financing companies link directly with a company’s accounts receivable records to provide fast and easy capital for accounts receivable balances.

MCA Loan

A merchant cash advance (MCA) isn’t a loan, but rather a cash advance based upon the credit card sales deposited in a business’ merchant account. You can apply for an MCA and have funds deposited into your business checking account quickly—sometimes as fast as 24 hours after approval. MCA providers evaluate risk and weight credit criteria differently than a banker or other lenders. They look at daily credit card receipts to determine if a business can pay back the advance in a timely manner. Rates on an MCA can be much higher than other financing options, so it’s critical you understand the terms you’re being offered and make an informed decision about whether an MCA makes sense for your business.

Still looking for answers? Ask one of our Business Capital Specialists your specific questions. We’re always here to help you find the right funding solution for your business needs.

Call 800.890.7611 or visit getbeyond.com/business-capital to learn more.

Source: Adesso Capital

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