Types of Business Lending

Types of Business Lending

4 July 2019
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Business lendings are financial solutions offered by banks and non-banking financial companies to help emerging and fast-growing businesses. These solutions vary from one loan provider to another. As a result, a borrower needs to compare several parameters such as interest rates, loan terms and conditions, tenure, etc. of the various business-lending solutions offered in the market. Below listed are seven popular business lending types that are opted by dynamic entrepreneurs to fund their businesses-

1.    Term Loans

A term loan is the most common way to raise funds for a business. Term loans are traditional bank loans, wherein you are credited with a lump-sum amount and you repay it in installments over a pre-decided loan tenure. A major reason why businesspersons prefer opting for a term loan is the fact that the capital gets instantly credited to their account after the loan’s approval. Also, as the interest can be paid in installments over a long period, the chances of getting approval for a higher amount are also more with a term loan. However, the banks may ask for a collateral in return of granting such high amounts.

2.    Business Line of Credit

These lending types are good for business owners who already enjoy a healthy credit but are looking for a cash buffer. A business line of credit works on the same line as that of a credit card. Here, your loan provider lends you a specific amount with a pre-approved limit. A business owner can withdraw funds from this amount from time to time. The interest rates are levied only on the amount that is borrowed. A business line of credit is ideal for urgent financial needs or unexpected expenses. Because of the flexibility offered in the number of cash-withdrawals and repayment options, a business line of credit is preferred by several business owners.

3.    Equipment Loans

Equipment loans are asset-based loans. They are specifically granted to businesses for buying machinery and pieces of equipment.  Most industry-level equipment that are used in the manufacturing processes of several products are priced relatively high. Thus, instead of paying for such expensive equipment outright, most business owners prefer taking out an equipment loan and repay it in installments. These loans can even be used to stock the inventory in bulk before a peak sales season.

4.    Personal Loans

Not many people are aware, but you can avail a personal loan to fund your business. In the case of newly emerging start-ups, with no major operating history or lack of business credit, it becomes difficult to avail a business loan. However, if the entrepreneur has a good personal credit score, he/she can avail a personal loan to fund his/her business venture. However, a borrower must keep in mind that failure to repay a personal loan will have a negative impact on his/her personal credit score.

5.    Non-Profit Loans

Non-profit loans are micro-loans provided by non-profit organizations to minority small business owners in an effort to uplift the local economy.  The amount loaned as a non-profit loan is very less as compared to other types of business loans. To avail a non-profit loan, you can approach local government agencies who can guide you to the right loan lenders. While any business owner can apply for a non-profit loan, the major beneficiaries are generally women and minority entrepreneurs.

6.    Invoice Discounting

Unlike other popular business loan options, invoice discounting requires the business owner to liquidate his/her assets to avail funds. In this case, a loan provider provides the entrepreneur with an advance amount that is a percentage of the total invoice raised by the entrepreneur. The entrepreneur can then use this loan to cover the business expenses while waiting for the customer to pay.

7.    Working Capital Loan

As the name suggests, the loan is granted to help fund the working capital requirement for a business. You can use these funds for managing the business’ everyday operations such as recruiting, payroll, modernizing processes, stacking the inventory, etc. A borrower needs to have an excellent credit history to avail a working capital loan. This loan is especially beneficial for businesses that do not have a predictable revenue all year round. Most working capital loans are unsecured loans. You need not provide any security against them. Rather, the loan is granted on the borrower’s personal credit.

 

Before You Make the Final Choice-

As is evident, there are many options when it comes to applying for business lending. However, before you zero-in on any type of loan, make sure you weigh all the pros and cons of these different types of business loan. Once you have found a suitable business lending facility for your business, make sure you carry out a detailed research about their eligibility criteria, the terms and condition of their business loan, along with the discounts offered by them before applying for a business loan. You will also have to consider factors such as your personal credit, business vintage, along with the total financial requirement before approaching the loan provider.

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