When running a business, a matter of funding will become one of the biggest issues there is. For a lot of people without any experience in this field, the problem comes from the fact that they don’t understand that fundraising isn’t over when you launch. Your business will constantly need an influx of cash, which means that you need a reliable solution that you can call upon at any time. To make the long story short, you need to learn how to use different types of business loans. Here are six common types you should get familiar with.
1. Term loan
The default business loan (what the majority of people think of when the term business loan is brought up) is a common form of business financing. You get a fixed sum of cash and you get to pay it over a predetermined period of time. There are two major types of term loans – secured and unsecured. This is based on whether they require collateral, to begin with. Another, probably more popular, term used for this type of loan is – installment loan. Whether or not this loan type is worth it mostly depends on the terms themselves.
2. Commercial business loan
Another special type of business loan is the so-called commercial business loan. According to experts dealing in commercial business loans in Australia, this type of loan is usually used as working capital. In other words, it can be used for all sorts of equipment and real estate acquisitions but it can also be used to launch a business. This is actually a great way to fund your initial inventory and equipment and a technique you can use in order to provide your business with a healthy start. Keep in mind that this loan type is usually used to fund capital expenditures.
3. A business line of credit
If you’re unsure of how much money exactly you’ll need, it might be for the best that you apply for a business line of credit. This is a sort of an open loan that allows you to borrow money up to a certain figure. It gives you more flexibility and it’s quite convenient for operational expenses. The problem is that that a line of credit usually comes with additional fees (maintenance fee, draw fee, etc.). In other words, some of the money gets “wasted”. Still, many entrepreneurs see the flexibility that they get in exchange as worth it. In a way, this is a great method you can use to achieve even some of your short-term goals as a business.
4. Equipment loan
There are a lot of loans that exist for specific purposes. For instance, if you need to buy new equipment, you have the equipment loan available. If you want to buy a business vehicle, you look for a business auto loan, etc. Equipment financing is one of the quickest, most convenient ways to accelerate your ROI. This allows you to make smaller payments and get equipment that will make the profitability of your operations skyrocket. The acquisition of equipment, in principle, is supposed to increase profit by so much that this alone would be enough to cover the repayment.
5. Invoice factoring
This isn’t necessarily a conventional loan but it’s a way to use your account receivables in order to improve your cash flow. You see, not all income is made equal. While account receivables are real money, this is the money you can’t use to pay your rent, pay your supplier or even pay salaries to your employees. For this, you need cash. So, instead of getting a loan, what you do is find a factoring company and sell them an invoice. The way this usually works is that they give you 90% of its value in cash right away and they give you the rest when the money arrives. The usual fee that they charge is between 1,5% and 5% of the total value. In other words, this is more of a business loan alternative than a business loan type.
6. Personal loans
While this is not a business loan, if you’re running a sole proprietorship or even a single-member LLC, there’s really no reason why you wouldn’t fund your business via a personal loan. Keep in mind that this involves less paperwork and you’ll get money far more quickly. The downsides of this are the fact that borrowing amounts are fairly small. Also, your ability to repay the loan will affect your personal credit. Needless to say, this is not necessarily a bad thing.
In the end, figuring out which type of loan is the best for your business depends on your specific situation and your financial needs. Chances are that you’ll have to go for more than one loan type in order to keep your business afloat. Like always, it’s better to do some research on the topic and have some idea of what you’re up against long before you actually start a business.