For many small businesses, securing a loan is a crucial step toward growth, stability, or simply getting through challenging times. But with so many types of loans available, understanding which one is the right fit for your business can be overwhelming.
To use these loans effectively, it’s important to know how each one works and what they can be best used for in your operations. So, what are the different types of small business loans, and how can you strategically use them? Let’s look at four common loan types and explore how they can benefit your business.
Traditional Term Loans: The Backbone of Business Financing
When you think of a small business loan, a traditional term loan likely comes to mind first. These loans are pretty straightforward—borrow a lump sum of money and pay it back over a set period, usually with a fixed interest rate. They are widely available from banks and other financial institutions, which makes them a popular choice for business owners.
If you’re applying for a business loan, you’ll want to consider what you need the funds for and how you plan to repay them. Traditional term loans are great for major investments, such as purchasing real estate for expansion, investing in new equipment, or funding long-term projects. The set repayment schedule helps you plan your cash flow, and because the loan is for a fixed amount, you know exactly how much you’ll be paying each month.
Revenue-Based Financing: A Flexible Option for Growing Businesses
Revenue-based financing offers small businesses a flexible way to borrow money by tying repayment to future revenues rather than fixed monthly payments. This kind of loan allows you to repay the loan as a percentage of your revenue, which means payments are smaller when business is slow and larger when sales are booming. It’s an excellent option for businesses with seasonal income or those in a growth phase who need cash but want to avoid the pressure of a fixed repayment schedule.
The benefits of revenue-based financing are numerous. First, it allows you to maintain a steady cash flow even when times are tough, which can help businesses dealing with fluctuating sales. Also, because repayments are based on your revenue, this loan type is more forgiving if your business experiences a downturn.
Businesses often turn to companies like Small Business Choice, as an example, to secure this type of financing instead of getting a traditional term loan from a bank. With more flexible options, businesses can even use these loans to manage operational expenses or reinvest in marketing campaigns that drive growth.
Equipment Financing: Getting the Tools You Need to Succeed
Every business, whether it’s a startup or an established operation, relies on certain tools, machinery, or technology to run efficiently. Purchasing these can be costly, especially for businesses that are just getting off the ground. This is where equipment financing comes in. Equipment loans are specifically designed to help you purchase the tools and machinery your business needs without draining your cash reserves.
With an equipment loan, the equipment you’re purchasing usually serves as collateral for the loan, which can make it easier to qualify. The loan is then paid off over a set period, and once it’s fully paid, the equipment belongs to you outright. This type of financing is great for businesses in manufacturing, construction, or even healthcare, where machinery and equipment play a vital role.
Commercial Real Estate Loans: Expanding Your Physical Space
If your business is growing and you need more space, whether it’s for a storefront, warehouse, or office, a commercial real estate loan can be a crucial tool. These loans help businesses purchase, refinance, or renovate commercial properties. Much like a traditional mortgage, commercial real estate loans come with long-term repayment options and are secured by the property itself.
One of the best ways to use a commercial real estate loan is to expand your business’s physical footprint. Whether you’re opening a second location or renovating an existing space to increase capacity, having the right location can boost your brand’s visibility and attract more customers. Alternatively, if you own a building and want to refinance your loan at a better rate, this type of loan can help you free up cash for other parts of your business.
