Loans - The Most Common Form of Business Financing
When seeking business financing for their companies, many people start by exploring the different types of loans that are available to them through banks and other financial institutions.
Business loans have traditionally been the go-to option, and for good reason: banks are usually very accessible, government-regulated and insured, and offer a variety of interest rates and repayment plans. In this day and age, many innovative, customizable business loans have been developed, and several are offered by non-bank financial institutions.
Obtained through a bank, traditional loans offer structured repayment terms and either a fixed or variable interest rate. To qualify, business owners must submit personal and business financial records for credit assessment. Business loans can be used for almost any purpose, but in some cases will be connected to a specific project or piece of equipment as collateral, such as a construction loan or a loan to purchase a new vehicle. Since banks are heavily regulated, these loans usually carry the most stringent credit and repayment requirements.
A traditional loan is usually granted and disbursed as a lump-sum payment to the borrower. Principle and interest is repaid over a preset term (in years or months) and has a fixed monthly payment amount. This is the most common form of business financing.
Learn More about Traditional Business Loans
The federal government, through the Small Business Administration (SBA) has several loan programs that offer business owners low- or no-interest repayment plans to start or grow their businesses, or to recover from disasters.
Designed to stimulate the economy and promote business ownership, SBA loans aren't offered directly by the government, but can be obtained through banks or other entities (like nonprofits and community organizations). Loan programs from the SBA have specific personal qualification and business-type requirements. An SBA-backed loan is notoriously one of the most difficult forms of business financing to obtain due to the stringent requirements.
more about SBA Loans
Non-Bank Lending Institutions
Sometimes, business owners either cannot qualify for a traditional bank loan or may desire a more flexible repayment option. In these cases, non-bank lending institutions exist to offer loans that banks cannot. These lenders can include online-only companies, in-house financing by equipment manufacturers or retailers, and others like lending clubs.
Since these companies exist outside of the traditional banking world, they can offer loans to business owners who may have troubled credit histories or limited experience, and may venture into areas of business that banks traditionally view as higher-risk (restaurant funding, for example). Interest rates and repayment plans are still subject to limits put in place by federal and local law but are typically at the discretion of the lender, which may mean higher cost to the customer over time.
Learn More About Non-Bank Lending Experiences
Lines of Credit
Like loans, lines of credit can be obtained from banks or other entities, and generally require a credit and financial assessment prior to receiving funds. The main difference between the two is that lines are set up to be drawn against up to a certain amount. Business owners who receive lines of credit are not required to take the entire amount they are approved for up front and may choose to draw over time - much like a credit card. Interest rates and payment terms are set by the lender, but payments don't start until there have been funds drawn against the line.
Lines of credit are a flexible way for business owners to obtain funding, as the money can be used as needed for things like operating expenses, payroll, and other general needs. Care must be taken in withdrawing funds, however, as the line of credit should not be treated as a regular source of additional income - only being drawn upon when receivables or revenues are delayed or when a short-term financial bridge is needed.
Learn more about a Business Line of Credit