Running a business requires money. Sometimes that means getting a business loan. Yes, it would be great if cash flow was enough, but for most businesses, it’s not.
You have customers who never pay on time.
You need to expand your business.
You need to buy equipment or increase inventory.
Just like there are lots of reasons why you need to take out a business loan, there are different types of secured business loans. How do you choose the best loan for your business?
Although there are different types of secured business loans, they all have one thing in common — collateral. Collateral is a business asset that can be converted to cash in case you default on a loan. Lenders are taking a risk when they loan money, and collateral is one way to minimize that risk. As the borrower, you risk losing the collateral; but if you pay off the loan, you get your collateral back.
Traditional Term Loans
Traditional term loans are probably the most common type of secured business loans. They can be long- or short-term cash loans. You borrow a certain amount of money which you receive all at one time. You agree to pay back the money plus interest over time. How you spend the money is up to you. Applying for a traditional loan can take time, and the requirements are generally the same for a long- or-short-term loan.
SBA Loans
Small Business Administration (SBA) loans operate the same as traditional term loans. The difference is the SBA backs part of the loan amount. That means you do not have to provide collateral for the full amount of the loan. Check out the SBA website for details on how to qualify for an SBA loan.
Business Lines of Credit
A line of credit operates much like a credit card. You have access to funds that you can use whenever and for whatever you want. You have access to the full amount of your line of credit from the start of the loan; however, you only pay interest on the amount of money you use. You may be able to secure your line of credit with equipment or through invoice financing. Secured lines of credit offer a great deal of flexibility. You can use them like small short term loans to help cover a shortfall in cash flow.
Equipment Loans
Equipment loans are a different type of secured business loan. As a business owner, you don’t have to provide collateral. The equipment you want to purchase serves as the collateral. If you default on the loan, the lender tries to sell the equipment to recover the loan amount.
Start-Up Loans
There are different types of secured business loans for startups: traditional term loans, lines of credit, and SBA loans. Since your business doesn’t exist, you should plan on using personal assets as collateral. Depending on the size of the loan, lenders may require a business plan with revenue projections for three to five years. They want to know that you have a solid budget and realistic revenue projections.
Merchant Cash Loans
If you need small cash loans quickly, you could look at two types of merchant loans. Merchant loans operate like cash advances, where the lender is advancing you money based on anticipated revenue. Typical short term loans direct lenders offer cash advance loans online based on:
- Prior credit card receipts.
- Past revenue and cash flow.
These quick short term loans operate like fast payday loans. Even though these loans are secured by anticipated revenue, they come with a higher interest rate and fees, because the associated risk is higher.
Bottom Line
Different types of secure business loans meet different business needs. Deciding which type of loan is just the first step in the process. Now, you have to find a lender who will give you the loan. You could go from bank to bank asking for money, or you could look for funding in the comfort of your home, using an online financial services like us.
