Everything You Need to Know to Prepare to Apply for a Business Loan

A business loan is a financial asset that can help cover an unexpected expense, purchase expensive equipment, establish the groundwork for business expansion, or solve sudden cash flow problems. Seeking a business loan requires preparation and research, including determining the type of loan that is suitable and works best for you and your business.

Here’s what you need to know about various types of business loans and how to prepare to apply for one.

What types of business loans are available?

Choosing the type of loan that best suits your needs and repayment ability is essential. You should take out a loan with the idea that it will help your business, not saddle you with debt.

Line of credit loan

This short-term loan is considered a useful option for small businesses. With a line of credit, you’re given a certain amount of cash which you can draw from. You only repay the amount you draw and that’s the only amount you pay interest on.

Term loan

This type of loan is the one with which most people are familiar. Term loans come in both short- and long-term options, with generally lower interest rates for longer-term loans. Borrowers receive a lump sum of cash upfront and make monthly repayments of principal and interest. These loans have some of the lowest interest rates and generally require collateral.

Specialty financing

Specialty financing includes loans for very specific purchases, such as leasing or buying equipment. You usually pay equipment loans over the estimated lifespan of the equipment you’re financing, and the equipment serves as collateral. Specialty financing also includes commercial real estate loans. The main issue with these loans is that sometimes the loan outlasts the life of the equipment.

Invoice financing

With invoice financing, you use unpaid invoices as collateral to secure a cash advance, which is usually equal to a percentage of the invoice. You then repay the advance once the invoice is paid, along with a fee. A similar type of financing is invoice factoring, where you sell your outstanding invoices to a factoring company for it to collect on.

Merchant cash advance

Like a payday loan, a merchant cash advance is an expensive form of borrowing where you get a cash advance in exchange for a percentage of your future credit card sales. Because these loans are short, and repayment is taken out daily, they can have the equivalent of a 70–200% APR. The upside is that these loans are very quick and easy to obtain.

Personal loan

If you have a very strong personal credit score but have a new business or limited collateral, you might consider taking out a personal loan for business expenses. Keep in mind, though, that if you default on the loan, it will impact your personal credit.

Secured and unsecured loans

To receive a secured loan, you must provide collateral. The collateral, such as real estate or inventory, must outlast the loan. The advantage of a secured loan is that it usually has a lower interest rate than an unsecured loan.

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