Are you among the 42 percent of Americans who lack the capital to start a business?
If yes, you’ve probably tried securing bank financing only to hit a dead end. Traditional banks have a reputation for turning down small business loan applications.
But there’s good news!
Online business loans are fast becoming the preferred way to secure startup and business expansion capital. With lenient credit requirements, a digitized application process and speedy approvals, these loans are shaping the small business lending sector.
Ready to apply? Not so fast.
Read on to learn more about the various types of online business loans.
Short-Term Loans
Picture this.
You’re running a furniture store. One of your clients shows up and orders $30,000 worth of office furniture. Looking at your stock, you realize there isn’t enough to fully service this order. To make matters worse, you don’t have enough money to buy the required additional pieces of furniture.
You need money – and fast!
This is where short-term loans come in handy.
These loans are ideal for entrepreneurs who need money quickly – whether it’s to meet an unforeseen business surge or sort out a business emergency.
Most short-term loans carry repayment periods of up to 24 months and typically charge high interest rates. The shorter the repayment period, the higher the interest.
Because short-term loans are pricey, it’s advisable to first exhaust all other financing options before applying for one.
Term Loans
With repayment periods of up to 5 years, term loans are the opposite of short-term loans.
Under what circumstances should an entrepreneur go in for a term loan?
Terms loans are ideal for business owners who need large amounts of capital. This also means you need a strong personal and business credit score, and your business should be well-established.
What if you’re a startup owner?
Well, you also stand a chance of securing a term loan, but prepare to prove that the startup has the ability to pull in the revenues required to service the loan. And if your application is approved, expect to pay higher rates, but not as high as the rates of a short-term loan.
Equipment Loan
Almost every business uses some sort of equipment. But whether it’s a copier machine, a restaurant oven, a delivery vehicle or an industrial manufacturing robot, one thing remains constant: equipment is expensive to buy and maintain.
This is where equipment financing comes in.
Equipment loans are designed for both startups and established businesses, and they’re among the easiest loans to qualify for.
When you apply for this type of loan, the lender pays little concern to your credit score and borrowing history. This is because the same equipment serves as collateral for the loan. If you fail to repay, the lender can seize the asset and sell it off to recoup their money.
What about the interest rates and length of repayment?
Interest rates vary from lender to lender, but because an equipment loan is a secured loan, rates are low.
Repayment periods vary depending on the size of the loan. For instance, an equipment loan to buy an office copier would carry a shorter term length, while an equipment loan to buy delivery vehicles would carry a longer term.
Business Line of Credit
A business line of credit works like a personal line of credit.
Based on your business credit history, a lender can allow you to access a specified amount of money whenever you need it. You’ve no obligation to use the line of credit, and you pay interest only on the amount you use.
Let’s say Lender A gives your business a $20,000 line of credit that attracts a 5% interest upon use. If you spend $2,000 and charge it on the card, you’ll repay a total of $2,100.
A business line of credit is ideal when you want a protective layer on your business finances. Consider it money at your disposal, but money you don’t have to spend unless absolutely necessary.
One major advantage of a business line of credit is you don’t need to reapply for the facility. Once you repay what you’ve spent, the amount resets to the original value.
Be careful not to misuse your company’s line of credit. If, say, you max out the card and fail to repay on time, your lender can lower or even revoke your limit.
Merchant Cash Advance
Does your business accept credit and debit card payments? If yes, you’re a good fit for a merchant cash advance.
Lenders offering this type of loan look at your merchant payments history. Depending on what your business pulls in on a daily, weekly or monthly basis, they’re able to determine your loan limit.
A merchant cash advance works like a payday loan. Interest rates are high, you can get the money in a matter of hours, and the lender automatically deducts a specified amount of money from your payments until you’ve fully serviced the loan.
Cash advances are an expensive form of business financing, so you should only consider them as a last resort.
Online Business Loans Are the Future of Small Business Financing
Online lenders are taking big strides in the lending industry and their strategic decision to target small business is paying off.
What’s more, these lenders offer a range of online business loans, giving entrepreneurs the ability to choose a credit facility that best suits their business needs. From short-term and long-term loans to business lines of credit and equipment financing, you now know what the market has to offer.
As you prepare to apply, be sure to keep tabs on our blog for more entrepreneurship and startup tips.
