Are you thinking of taking out a business loan? Especially for small business owners and first-time business owners, a loan can seem like a daunting process, but it doesn’t have to be, As long as you do your due diligence with research, you can be prepared when you apply for a loan and know exactly what you’re getting into.
Let’s look at the five most popular types of loans, and then we will get into the pros and cons of each.
Line of Credit Loan
The most popular type of business loan is a line of credit loan. This is a loan that allows access to credit as part of your regular banking, so if your company is in need of funds and cash flow is blocked, you can easily access funds and pay back the amount and the interest later. This is a low-risk loan and you usually pay the interest monthly, though some banks will negotiate.
- Pros – low-interest rates, low risk, fairly easy to obtain
- Cons – requires proof of projected business revenue
Personal Loans for Business
As the name suggests, this is a personal loan a business owner takes out based on his or her own personal financial profile, rather than the financial profile of the business itself. A great option for small business owners and start-ups.
Pros – doesn’t affect the business, easy to obtain with good credit, flexible rates and terms
Cons – personal debt, affects borrower’s personal credit score
Short-Term Loans
A short-term loan is perfect if your business needs cash in a hurry. This type of loan is also good if you don’t have the best credit and therefore don’t qualify for long-term, bigger loans.
Pros – fast cash for emergencies, great for startups or businesses that have low or no credit
Cons – Limited to smaller amounts most of the time, often come with high interest rates
Installment Loans
The go-to loan for most small businesses, an installment loan is when a specific amount of money is paid back in installments over a period of time. The terms vary, and times can range from months to years.
Pros – great interest rates for established businesses, flexible terms
Cons – interest rates may be high for startups
SBA Loans
Low-cost loans offered by the Small Business Administration and its partners. These loans are government-funded and can be used for most business purposes such as working capital, equipment purchasing, etc, but the caveat is you must qualify, and the process can be quite long.
Pros – Low cost, lots of options
Cons – the application process can be tedious
This is by no means an exhaustive list, so be sure to research other options like microloans and equipment loans before you head to the bank. Information is power.
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