Small business loans are used for business expenses. While some loans are intended for general corporate financing, other small business loans serve specific purposes, such as Working capital, commercial mortgages or the purchase of new equipment or furniture.
Types of loans for small businesses
Business lines of credit. Business credit lines are alike to credit cards and offer a lot of flexibility. With a business credit line, a lender approves you for a revolving credit line with a maximum amount that you can borrow. Similar to credit cards, you will be charged interest on the amount of money you have paid, not your maximum limit.
You can access your line of credit for all your business needs, be it buying inventory or equipment, investing in marketing, or controlling seasonal sales fluctuations. As long as you make the minimum payments and do not exceed your limit, you can use your line of credit and repay the borrowed loans as long as you like.
Equipment loans can be used to purchase and distribute the cost of a large machine or equipment for your business. The deposit is usually 10 to 20 percent but can be up to 5 percent. Sometimes the device serves as collateral for the loan. Instead of a loan, you may also have the option of leasing equipment.
Invoice Finance If your small business is struggling with cash flow problems because you are waiting for payment of invoices, you can use factoring. With invoice factoring, you sell your unpaid bills at a discount to a lender. The lender will provide you with most of the amount due on the bill in advance and will hold part of the outstanding amount (usually 20%) until the bill is paid.
Companies that pay the invoice may find it difficult. You should weigh the costs carefully when considering the invoice financing. There is a fee based on a percentage of the bill plus interest on the cash advance.
Trading cash advances. If you need instant cash, a dealer cash advance can provide access to funds. With a dealer cash advance, the lender provides you with a cash allowance for part of your future sales. You are responsible for the payment of the loan plus fees.
You pay back the advance either with part of your future credit and debit card sales or with fixed daily or weekly transfers from your bank account. Their fee is determined by a risk assessment, with lower fees for lower risk borrowers. Due to the high interest rates, which can be in the three-digit range, no advances are recommended for dealers.
Commercial mortgage loan.
The money borrowed from a commercial mortgage loan is used to purchase, develop, or refinance commercial real estates such as a warehouse, mixed building, or retail center.
Commercial mortgage rates are typically 0.50 to 1 percent higher than the best 30-year residential mortgage rates, reports C-Loans.com. Loans guaranteed by the SBA are typically 2 to 2.5 percent above the best interest rate for residential real estate.
If you want to buy or expand a franchise, you can pay with a franchise loan. Franchise loans can be used for standard business opening costs and franchise-specific expenses such as marketing fees or the franchise fee paid in advance for opening a franchise.
While you can finance a franchise with a traditional term loan, there are lenders that offer loans specifically for franchise companies. Some franchisors may provide funding to help you build your franchise.