Before you apply for a business loan, you need to know what types of loans are available and what they are used for. Learn more about the different types of business loans and which ones best meet your needs and the needs of your company.
There are two kinds of loans available: short-term and long-term loans. Short-term loans mature in 12 months or less and can help you out when you own a seasonal business, such as a snow removal business or Christmas tree business. Types of short-term business loans include working capital loans, lines of credit and accounts-receivable loans.
Long-term loans mature in 1 to 7 years, but it depends on what type of loan you decide to take out. For instance, a real estate loan takes a lot longer to mature than many other types of loans. Loans such as these are usually used for major business purchases such as construction, vehicles, purchasing facilities and furnishings. They also help carry a business through tough times, like when sales are down.
Types of Business Loans
- Working Capital Lines of Credit – Working Capital Lines of Credit are used for regular day-to-day operations. Most lines of credit are short-term lasting 90 days; however after many years can go up with yearly reviews. The interest rates for working capital lines of credit are variable.
- Credit Cards – Credit Cards such as a revolving credit card can be a good way to manage cash. Revolving credit is a line of credit where a customer or business pays a commitment fee and can use the funds when they are needed. It is often used for operating purposes and fluctuates each month according to the business or customer’s cash flow.
- Equipment Leasing – Loans that deal with equipment leasing usually require that you have a history of operation. Often banks won’t approve you for a loan unless you show proof of operation.
- Letters of Credit – Letters of Credit entails that the bank acts as a liaison that promises to pay the seller only when all the requirements are met. It is important for reducing the risk for a business practicing international trade.
Each business loan has certain requirements and each one is used for different things. By knowing which business loan provides you with what you need, you and your business will prosper. Choosing the right business loans also helps you make smarter business decisions so you can manage your money better and keep track of expenses.