Understanding Short-Term and Long-Term Business Loans

A Guide to Understanding Short-Term and Long-Term Business Loans

If you are ever strapped for cash, getting a loan can be a good method to help you get back on your feet. However, personal loans are a little different from business loans. Business loans tend to require predictions of future income as a form of collateral. There are also numerous examples of businesses that do not have a lot to their name but are able to get a sizable loan as their startup capital because they provided a good business plan and had sound future goals.

Types of Business Loans

The first thing that you are going to have to do if you want to take a business loan is to understand the various types of loans that you can look into. There are a lot of different options out there, so it is important that you ascertain which option would work best for you. Listed below are some of the most popular options that people look into when it comes to business loans, whether said loans are short-term or long-term.

Bank Loans

The most traditional place for you to get a loan is the bank. In a lot of ways, going to the bank is still the best way to get the help you need. There are a lot of benefits associated with taking loans from a bank, one of the most important being the fact that you would be able to pay off your interest at a much cheaper rate than if you went to any other loan provider.

There are two types of business loans that you can get from a bank. The first is the term loan. This is a lump sum of money that you get which you have to pay back within a set period of time. Failure to repay this loan can result in heavy penalties, but as long as you have your business plan sorted out, the chances are that you will end up paying it back well before it is due.

A major benefit of these business loans is that you can get access to a large amount of money and to top it all off, the terms are usually longer as well, which means that you would have more time in which you would have to pay the money back. Such a large influx of funds can help you turn your company around entirely and with longer terms, you would not have to start worrying about paying the bank back until your income stream is a lot more stable.

The second type of loan is a line of credit, which is lot like a term loan but is quite different in one key element: you do not get a lump sum. A line of credit is essentially an amount of money that you can withdraw at any point in time. You can use as many of the available funds as you need. This can help you use funds as and when required instead of a large amount, allowing you to minimize costs and not borrow as much from the bank as you would have otherwise.

One benefit that you would get from a line of credit is that it would give you a safety net. Term business loans are only offered to businesses that have a set plan and know what they are going to be using the money for. Often, businesses that are running smoothly need a sudden injection of cash, which makes applying for a term loan severely unhelpful since it can be a very time-consuming process.

If you are thinking of starting a business, you should apply for a line of credit as soon as you can so that you can ensure the continued success of your business, even if things end up going badly for you at any point in time. A line of credit can help you weather things like periods of loss and sudden increases in expenses, which clearly makes it the perfect option for small businesses and the like.

While there are certainly quite a few benefits associated with taking business loans from banks, there are a number of pitfalls as well. One of the biggest problems people have is that banks are very stingy with the business loans they offer. What this means is that you can apply for a line of credit or a term loan, but the chances that the bank would actually give you such a loan are not very high. Hence, you are going to have to look for other options as well so that you don’t end up relying on something that is unlikely to happen.

Government Business Loans

The bank is not the only place where you would be able to get a loan. The government has a vested interest in helping out small businesses as well since these businesses are the backbone of the economy and without them, the country would not do nearly as well as it currently is.

Hence, if you have a good idea or just want to start something that could earn you an income stream without you having to work for somebody else, it would be a good idea to look at what options the government provides.

The majority of loans granted to small businesses by the government are overseen by the SBA or the Small Business Administration. This is a government agency that is tasked with making it easier to start a business in America. The loan itself is usually referred to as an SBA loan, although there are a few different kinds of business loans that you can get from the SBA as well.

Pretty much all of these business loans have similar qualities which make them some of the best business loans that you can get outside of those that have been provided by banks.

Pros of SBA Financing

• Government Guarantees: The business loans that the SBA provides are partially guaranteed by the government, which means that lenders are guaranteed to get at least part of their money back if nothing else. This is great because it eliminates some of the need for collateral and in a lot of cases, you might be able to get a loan from the SBA even if you don’t have any collateral at all, depending on where you are trying to start a business.
• Less Equity, Longer Terms: When you are being given a business loan, one of the biggest prices that you are going to have to pay is in equity. This is when you have to give up partial ownership of your company to the lender. With SBA loans, you don’t have to give up as much equity. To top it all off, you end up getting much longer repayment terms as well, which can help you focus on setting up your business rather than settling debts.
• Consistent Payments: There are no balloon payments when it comes to the SBA. This allows you to set up a consistent repayment scheme that would facilitate a steadier cash flow for your business. Balloon payments tend to disrupt cash flow drastically, making it essential that you apply for loans that do not include such repayment terms.

Cons of SBA Financing

• More Documentation Required: When you are borrowing from the SBA, you are basically borrowing from the government. More precisely, the government is personally signing off on your loan. Hence, it is understandable that they are going to ask for a significant amount of documentation in order to ensure that everything is in order. This can be a problem for entities that do not have a lot of documentation for their businesses.
• Not Suitable for Moderately Large Businesses: The government has very clearly defined who is and who is not eligible for an SBA loan, so if your business is not decidedly small, you are not going to qualify for it. If you have a hundred employees, for example, SBA financing is pretty much impossible for you. That being said, most small businesses that would require such an injection of cash are going to fit the bill, so it is unlikely that you are going to face any serious problems in this aspect.

Types of SBA Loans You Can Receive

There are two major types of SBA loans that you can receive. The most popular one is the 7(a), which is the standard loan that this government agency provides. However, if your interests are not all that similar to a lot of other small businesses, the chances are that you are going to benefit more from the 504 SBA loan.

Essentially, a 7(a) is going to give you up to 2 million dollars, but if you need to acquire large plots of real estate or need other large-scale acquisitions that are essential to your business, you would be better off looking into the 504.

While these two may be the most popular forms of SBA loans, there is a third type as well that people often don’t know about. This is referred to as the SBA microloan. These loans can provide you with up to fifty thousand dollars and are generally meant for businesses that are very small in scale and don’t need an enormous amount of money.

Such loans are perfect for businesses that just need a small injection of cash to help them get through a bad patch and are a good option for a lot of owner-operated businesses in the country.

Alternative Loans

While bank loans are very old indeed and SBA loans have been around for quite some time as well, they are not the only two options that you can look into if you want some short- or long-term financing for your business. A slew of new options have arisen recently, all of which are worthy of inquiry since they provide benefits that traditional loans do not.

Online Term Loans

These loans are pretty much identical to bank loans except they come from an online source. The terms of the loan involve you receiving a lump sum of money that you will have to pay back after a predetermined period of time has elapsed.

However, there are a few differences between online term loans and bank term loans. One major difference is that you are going to have to pay a lot more interest than would have been the case if you had gotten a bank loan. That being said, online term loans often are a lot easier to get, which means that they are perfect for businesses that need an injection of funds as quickly as possible.

Equipment Financing

These are special loans that are designed to help new businesses get the equipment they need to become viable in the long term. You can use these loans whenever you need to buy new equipment so that you don’t need to have the funds ready at all times. Instead, you can pay the lender back over a period of time, which would become a lot easier since new equipment is going to help you earn a lot more money.

Invoice Financing

This is another common way for businesses to get the money they need as quickly as possible. If you have an invoice that is due after a period of time, you can get a loan of up to eighty five percent of the owed amount in exchange for paying the full amount whenever you receive it. Since you are getting an amount that is less than what you are owed, it can be considered an interest of sorts.

This is a great way for you to get the money you need now rather than later. Businesses often can’t afford to wait for funds, and these types of loans are perfect to help you out if you are struggling to stay above water at any point in time.