If you are a business owner, you probably know the importance of business capital financing. Looking for small business financing can feel quite overwhelming and confusing. There are many types of financing for businesses, leaving entrepreneurs spoilt for choice.

Unfortunately, most people often forget to look at the qualifying requirements of different small business financing options before applying. If you’re wondering which business financing option is best for you, below is a guide to help you understand the different types of financing for businesses and make the right choice.


Term Loans

This is one of the most common types of business financing. A term loan is a lump sum of money that you may borrow and repay over a specific term. Term loans often include fixed monthly payments, which comprise the principal balance and the interest rate.

If you’re looking for small business financing, you should consider a term loan. Businesses are free to use term loans however they see fit. For example, you can use the loan for numerous needs, such as purchasing business-related equipment or other everyday expenses.

Small Business Administration (SBA) Loans

SBA loans are great and enticing for many entrepreneurs and start-ups. Who doesn’t want a low-cost, government-backed loan to help with certain aspects of starting or expanding their business?

While SBA loans are the best for businesses looking for financing, the biggest drawback is the lengthy application process. Sadly, this process could significantly affect when you will receive the money. In fact, some business owners have reported that it could even take up to three months for your loan to be approved and the money disbursed to your account.

If you don’t need the money urgently, you could greatly benefit from a Small Business Administration loan. Not only will you be backed by the government, but you will also enjoy extremely low-interest rates and loan fees.

Also read: What Are The Best Accounting Software For Small Businesses?

Business Equipment Loans

Does your business require large pieces of equipment to function? Buying large equipment can easily cost you thousands and even millions of dollars. Unfortunately, most small businesses don’t have that kind of money to finance the purchase of this equipment.

If you find yourself backed in a corner and need a large piece of equipment for your business, but you don’t have the capital required, consider getting an equipment loan. These are great loans for businesses looking to purchase equipment, expensive machinery, furniture, vehicles, and work computers. Once you’re approved for the loan and purchase the equipment, it will be held as collateral if you default on the loan.

Business Line of Credit

Business lines of credit are small business loans, often similar to a credit card. It provides you with a revolving credit limit that will always be available for your use. You can access this cash through a checking account.

A business line of credit works similarly to a credit card. This means you’re allowed to spend money to your maximum credit limit then repay what you have used.

After repaying the money you can now withdraw more money for spending. If you need a business loan for something but aren’t sure of the total amount you will require, this is the perfect loan for you.

That’s because you will only be charged an interest rate for the amount of money you withdrew from the line of credit. This is quite convenient compared to other types of business loans, such as term loans. These loans require borrowers to pay interest for the entire loan, whether you utilized half of the loan or not.

Additionally, most business lines of credit are unsecured. Hence, you don’t need any collateral to qualify.

Business Microloans

If you’re experiencing some cash flow issues, you should consider getting a microloan. This is an ideal financing option for small businesses looking for less than $50,000.

Business microloans’ amount is relatively low. Hence, it’s also a great financing option for start-ups and small businesses that only require a small financial backing. Another great thing to consider is that you can access a microloan through third-party organizations. These include non-profits, the government, or even the SBA.

However, you will need to put up collateral such as real estate property, business equipment, and personal assets to qualify for the loan. If you default on the loan, these assets will be used to cover your remaining principal and interest rate.

Invoice Financing and Invoice Factoring

If your business has an issue with receiving on-time payments, you should consider invoice financing and invoice factoring. This is also known as account receivable financing.

Through the invoice factoring process, you can sell your business’s unpaid invoices to specific lenders. The lender will give you a percentage value of the invoice upfront. This method allows you to use unpaid invoices to access money and get your business out of a jam.

On the other hand, invoice financing involves using unpaid invoices to get an advance payment on the amount you are owed. This means that the unpaid invoices act as the collateral for the loan.

The major difference between these two methods is that with invoice financing, you will collect payments from your clients, then use the money to pay off the loan. But, in invoice factoring, the lender will have full control of the collection of funds from your clients.

Commercial Real Estate Loans

These loans are also known as commercial mortgages. They can help you find some money for financing new or existing properties such as a warehouse, office, and retail building.

These loans are quite similar to term loans and allow you to buy a new commercial property, expand your business premises or even refinance an existing commercial real estate loan. If you want to find the best commercial mortgage, check out Parkins Finance for a range of financial options for both business and personal projects.

Now You Know the Different Types of Financing for Business

With so many financing options available for small businesses, it can be quite challenging to choose the right business loan for you. However, if you carefully evaluate your business needs and read through our above guide on the different types of financing for business, it will be quite easy to narrow your borrowing options.

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