How Do Business Loans Work?

Whether you’ve been in business for a day or a decade, you have possibly reached the point of wondering about obtaining a loan. Even if you’re an expert on personal financial topics, you might not know about the specifics of how business loans work why not check with loan advisor. While one type is almost identical to a consumer car loan, the others are quite different from personal loans. Here’s a quick rundown on the six main kinds of business loans:

Term vs. Short-term Loans

These forms of business financing are very similar to personal loans. Term loans are for larger amounts than short-term loans. Term loans also tend to have lower interest rates and longer payback periods than their short-term counterparts. The business owner receives a lump sum of money in exchange for a commitment to repay the amount, with interest, over a specified period of time. You can look for a better interest rate online, but always check with a company rep by telephone or in person to verify data.

Equipment & Invoice Financing

Equipment financing works well for companies that want to buy a large piece of machinery, for example, but can’t afford to pay in cash. Lenders simply use the equipment as collateral and loan the entire amount of the purchase price to the company. This setup is strikingly similar to a personal vehicle loan, by the way.If your company has a large number of outstanding invoices, you can use those invoices as collateral to obtain an invoice-financing loan. The process and terms are complex, but if your firm has a large number of invoices awaiting payment, it’s possible to get favorable rates on this type of financing.

SBA Loans

Offered by banks but backed by the federal government, SBA loans carry low interest rates and generally favorable terms for owners of small companies. However, these desirable loans can be tough to qualify for. There’s no harm in filling out an application form for an SBA loan to find out if you qualify.

Lines of Credit

Depending on your company’s credit rating and how long you’ve been in business, you can obtain a line of credit. It acts like a credit card in that you have a specified amount that you can borrow at any time. The advantage is that if you don’t need the entire line of credit, you only pay interest on what you borrow. Rates range from the high single-digits up to about 25 percent on amounts from $10,000 to more than $1 million. Payback times are between six months and five years.

Merchant Cash Advances

Merchant cash advances are one of the newer kinds of business loans because they are based on complex technology. In exchange for a sum of money, the business owner allows the lender to install software that tracks company revenue that comes in in the form of credit card sales. The data is typically collected at the point of sale. The loan is repaid with a specified percentage of credit sales. A very large loan might call for a higher percentage of sales. The good thing about merchant cash advances is that owners never really see the money. It is instantly routed to the lender in order to satisfy the terms of the loan’s repayment.

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