Types of Business Loans

The majority of large and small businesses will, at some time, need outside funding in order to survive. Luckily, business loans are available to help with all types of needs, from start-up costs to equipment purchases to costs of acquistion.

Many types of business loans are available to companies and business owners in need of a cash influx. These loans vary in:
  • amount available
  • repayment terms
  • security
  • qualification requirements.
Before pursuing a business loan, business owners need to inform themselves on the different types of loans and the various aspects and limitations of each.

Common Business Loans

Here are some of the most common business loans available to business owners:
  • Business-Acquisition Loans: Business-acquisition loans are a very specific type of loan whose purpose is to allow expansion of an existing business through the acquisition of another established business. These loans may also be used by individuals or organizations seeking to purchase an established business rather than start their own from scratch.

  • Commercial Real Estate Loans: This type of loan is used for the acquisition of commercial property for business. This includes retail stores, warehouses and shopping malls.

  • Equipment-Financing Loans: Equipment-financing loans are used to purchase equipment for manufacturing, construction, sales, etc. These loans are generally easy to obtain because the equipment itself serves as collateral for the loan.

  • Lines of Credit: Lines of credit are established by a business to assist with cash flow problems when they arise. Unlike traditional loans, lines of credit do not offer a lump sum of money up front. Instead, they create a pool of funds that a business may access as necessary. However, there are limits to the amount that can be accessed, and withdrawn funds must be repaid on an set basis.

  • Long-Term Business Loans: Long-term loans are the most common type of business loan. These loans offer a lump sum of money that must be repaid in monthly installments over a varying timeframe. These loans often require collateral and can be used to pay for all aspects of the business, including equipment, wages, inventory and property.

  • SBA Business Guarantees: The Small Business Administration (SBA) is a part of the federal government set up to assist in the development and growth of small businesses. The SBA will guarantee up to 80 percent of the amount of a business loan up to $750,000. These loans are obtained from approved lenders. The SBA guarantee helps make it easier for small business owners, especially those whose businesses are considered high-risk, to secure loans.

  • Short-Term Business Loans: Short-term loans usually offer a limited amount of capital, often $100,000 or less, for a period of no longer than one year. Unlike long-term loans, these loans are repaid in full at the end of the term. Short-term loans are best suited for short-term investments, such as inventory build-up for seasonal sales.

  • Start-Up Business Loans: Start-up loans are loans specifically designed for the creation of a new business. This type of loan does not have collateral requirements and is based on an individual's personal credit rating. Start-up loans are granted specifically for expenses related to the new business.

  • Working Capital Loans: Businesses with a short-term cash deficiency may seek this type of loan to assist them through a difficult period. Working capital loans require a business to use part of its assets to secure additional cash to pay for all aspects of the business. Assets used to secure the loan cannot be included in a company's capital worth.
Getting a business loan of any type carries the same risks associated with all types of loans. Over-borrowing can put a business in a financial hole from which it may not be able to get out. Business owners should be diligent in determining the right type of loan and loan amount to help the company grow and be successful.