These five loans could help you build or grow your business

It’s fair to say many business owners would prefer to fund their business themselves, and use their own cash to grow, especially in a rising rate environment. However, sometimes businesses need access to money they don’t currently have in order to expand or manage operation costs.

One way to do this – outside of seeking investors or fundraising (e.g., GoFundMe) — is to take out a loan. But which loan is right for your specific business and for your specific purpose? That can be tricky. Below are some of the most common loans and the advantages and potential disadvantages of each type. 

1. Equipment Loan

What it is: Unsurprisingly, equipment loans are a good option when looking to purchase equipment. This can be anything from a new fleet of vehicles to the latest and greatest industrial-sized ice cream maker. Essentially any tangible item(s) that is used for your business.

• Pros: The equipment you are purchasing is used as collateral. This loan also allows you to retain cash instead of paying outright for the equipment. You may even be able to write off the depreciation of your equipment for tax purposes (consult your tax adviser for more information).
• Cons: Depending on the lender, you may need to provide a down payment and have strong credit to get the best rates.

2. Term Loan

What it is: The purpose of a term loan is: (1) predictability – due to a fixed rate and monthly payment, and (2) to help you finance a big-ticket item for your business (think refinancing other business debts, buying out a business partner, acquiring a competitor, etc.). Term loans are also the most common form of a business loan and straightforward. You borrow a pre-determined amount of money and pay it back in pre-determined payments, every month over several years.

• Pros: Great thing about term loans is the payments and interest rate are fixed for the term of the loan and you know exactly what you’re getting yourself into.
• Cons: If you’re a new business, some lenders may be wary of giving you a term loan without a few years of past financial statements and tax returns.

3. Lines of Credit

What it is: Lines of credit are revolving credit used to fund short-term needs such as payment of current liabilities (payroll or accounts payable, for example), seasonal inventory, etc.

• Pros: Lines of credit can be a great emergency option and it gives you flexibility that a regular business loan just doesn’t have. By allowing you to draw and repay funds as you wish, your business is better equipped to manage cash flow and handle unexpected expenses, among other things. 
• Cons: Interest rates on lines of credit are variable rates and can go up or down depending on the market. If we’re in a high-rate environment and the Fed continues to hike up rates, like it has been, that means the amount owed to your lender only increases. In some cases, businesses may be better off with a standard loan, predictable monthly payment and to avoid the temptation of easy access to immediate cash.

4. Commercial Real Estate Loan

What it is: Commercial real estate (CRE) loans are used to purchase real estate used explicitly for business purposes. The most common reasons to get a CRE loan are to purchase a new store front, more office space, or a warehouse for inventory purposes.

When taking out a CRE loan, a lien will be placed on the property your business is purchasing to secure the loan, but you’ll also be expected to pay a down payment (a percentage of the overall building or space’s purchase price). As far as the repayment goes, CRE loans are typically structured in two ways; either an amortized loan or a balloon loan. An amortized loan is repaid in fixed monthly payments, while a balloon loan requires one large payment (after many smaller payments), at the end of the loan term, to pay off the remaining balance.

• Pros: Most CRE loans carry great terms and offer prime interest rates. CRE loans also enable you to own a property and potentially renovate the space to fit your business needs.
• Cons: Again, this depends on which bank you choose, but CRE loans typically come with high requirements, such as good credit and a sizable down payment.

5. SBA Loan

What it is: SBA (Small Business Administration) loans are backed by the SBA itself. The SBA does not directly lend the funds, but they help make loans available to small businesses by acting as a guarantor (guaranteeing a certain percentage of the loan). This incentivizes banks to lend money to small businesses by reducing the risk to the lender.

• Pros: Because of this guarantee, you can typically expect lower down payment requirements, or longer repayment periods which helps keep your monthly payment low. SBA also has slightly lower interest rates.
• Cons: SBA loans must be approved by both the SBA and the lender, so applications for SBA loans can sometimes carry longer approval times. 

While we haven’t covered every possible type of business loan, chances are your business needs fall into one of these loan solutions. As with just about everything, understanding the details is very important. Talk to your lender, and perhaps more importantly, find a lender that takes the time to understand your business in order to find the right fit for your business, at the right price.

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