Which One is Best for You?

Businesses are very similar to a living, breathing entity. And much like living beings, your business needs nourishment to grow. Instead of vegetables and vitamins though, your business’ nourishment is cash.  Cash helps transform your vision to reality, increases your buying power, expands your physical footprint and hires more expertise.

One way to obtain the vital nourishment 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. 

Equipment Loan

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

  • The equipment you are purchasing is typically used as collateral for the loan. 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).
  • Depending on where you go, you may need to come with a decent down payment and have strong credit to get the best rates.

 

Term Loan

What it is: The purpose of a term loan is: (1) predictability – due to the fixed rate/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 pretty straightforward. You borrow a pre-determined amount of money and pay it back in pre-determined increments, with interest (either fixed or variable), every month over a number of years.

  • Great thing about term loans is there’s nothing unexpected and you know exactly what you’re getting yourself into.
  • 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. Not all banks are like this, so make sure you speak to a bank that really listens to your goals, vision and understands your projections (ahem…FirstBank).

 

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.

  • Lines of credit 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. 
  • In some cases, businesses may be better off with a standard loan to avoid the temptation of access to immediate cash.

 

Commercial Real Estate Loan

What it is: Commercial real estate (CRE) loans are used to purchase real estate that is 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 that secures the loan, but expect to pay a down payment as well. 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 installments while a balloon loan requires one large payment (after many, smaller payments) at the end that pays off the remaining principal. 

  • 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.
  • Again, this depends on which bank you choose, but CRE loans typically come with high requirements. 

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.

  • 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.
  • 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.

2 comments on “The Pros (and Potential Cons) of Five Common Business Loans

  • Is it true that people turned down for a regular biz loan may get an SBA loan? Read that in a blog post on sbalenders.com

    • Hi Tim. Good question. SBA Loans are specifically designed as an avenue to finance businesses when they are just outside the parameters of where a traditional business loan can be obtained. A bank will typically utilize the SBA program to mitigate a minor deficiency in a business credit request, such as having insufficient collateral to cover the loan. The SBA also has options under their Community Advantage and Main Street loan programs, which are offered by non-bank lenders, that can be used when an SBA loan option does not fully mitigate the risk present for a bank. FirstBank is an SBA Preferred Lender and we offer both SBA 7(a) and SBA 504 loans. You can learn more about them here: https://www.efirstbank.com/products/business-loans.htm#SmallBusinessAdministrationLoans.

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