Types of business loans

There are various types of business loans to consider when you are trying to finance your small business. Here is a guide to help you understand the different business loan options you have available:

Term Loans
A term loan is the most popular type of business loan. They can be used for expansion, refinancing, working capital, and for acquisitions. Like a mortgage, you will re-pay the loan each month for a set period of time until you officially pay off the loan and own the assets you borrowed the money for. Term loans normally have larger limits so they are great for companies that need to borrow upwards of $100,000.

Short-term loans
Businesses that apply for short-term loans need to money quickly to purchase equipment that will produce a quick return. Most short-term loans last less than one year and they do not require monthly payments. Instead, you will re-pay the amount you borrowed in one lump sum plus interest. Companies that use short-term loans normally used them for seasonal inventory buildup or other quick investments that produce fast returns.

Line of Credit
When a company experiences cash-flow problems, they normally turn to a line of credit to help them out. A line of credit allows a company to borrow up to a certain amount each year. This allows you to set your limit at say $40,000 and borrow $15,000 now with the ability to borrow $25,000 periodically throughout the year. The amount you borrow must be re-paid quickly (within 12 months) or else you will face expensive interest charges. Lines of credit are useful, but you should only use them in an emergency situation.

Equipment financing
Another type of business loan is called equipment financing. To obtain a loan, you are using your current equipment as collateral. If you default on the loan, the bank has the right to re-possess your equipment, which can literally shut-down your business. Equipment financing is a great way to expand your business since there normally are not limitations on the loans.

Credit Card
If all the other sources of business loans fail, you can turn to your creditors for help. Business credit cards tend to come with higher limits and lower interest rates. If you need to use the money to purchase new equipment, try to get a credit card that has a 0 percent interest rate for at least 12 months. This will give you plenty of time to expand your business and come up with the money to pay the loan in full before you are charged interest.

Credit Card Advance
A different type of loan is called a credit card advance. You must have a high percentage of sales done via credit card in order to obtain this loan. Basically you will be given a lump sum now for future credit card sales. Normally you can only borrow up to 6 months worth of credit card sales. The advancement company will deduct a portion of each credit card sale until you have paid off the loan. It's a good way to fix an immediate cash-flow problem.

Accounts Receivables
If you are unable to get approved for a loan based on your cash-flow situation, consider hiring a factoring company. Factoring involves selling off your old invoices for a lower percentage. Normally you will collect about 85 percent of the invoice and the factoring company will do all the hard work to actually collect the money. It's a great way to fix your cash-flow problems and come up with the money you need now to expand your business and watch it become successful.