Many small businesses struggle to pay back COVID-19 loans to the government. An average startup has over $663k as its loan amount. Combining these two seemingly unrelated statistics explains why more small enterprises are looking into alternative loan types today.

Entrepreneurs often need a quick cash injection to bridge the gap between a good idea and its successful execution. Whether they’re scaling business operations or seizing a new opportunity, they have to look into various loan options. Most importantly, they must understand when to use a particular type of loan. It helps them find the best funding source for their enterprises.

This blog will go over seven different loan types and then give you a list of important factors to keep in mind when applying for a business loan. So, let’s start learning, shall we?

Term Loans

Suppose you need a lump sum of money immediately to acquire another business, meet sudden vendor expenses, pay back owed taxes, or something else. Term loans will give you this amount, and you’ll then repay this loan in installments. These loans are perfect for startups that are:

Opening a new location

Launching a product line

Marketing a new line of products

Compared to other loan types, this one has high borrowing limits. Also, repayment schedules are predictable so that you can simplify your financial planning. However, SBA-approved lenders will need a very strong credit history from your business to approve term loans in the first place.

If you’re looking for debt refinancing, then a credit card loan is a much better option. It will allow you to consolidate high-interest credit card debts into a single loan with lower rates via:

• Lower, fixed rates
• Zero origination fees
• A simple monthly payment
• Same-day fund transfers (up to $100k)

Lines of Credit

The second option is to open a business line of credit. You will get revolving access to monetary funds up to a pre-approved limit. But here’s the catch: Interest is only paid on the amount drawn from these funds. So, you can easily cover your short-term expenses with these funds. Payroll or inventory during seasonal ups & downs! A line of credit also funds time-sensitive deals.

Imagine you need money for bulk supply purchases or don’t know exactly how much money you will require to keep your business afloat during crises like COVID. That’s when lines of credit will come to your rescue! You get the flexibility to borrow as per your needs without reapplying.

Lucky for you, SBA’s new lines of credit offer up to $5 million in small business funding. Usually, seasonal businesses like hospitality and retail use this loan type in the United States.

SBA Loans

Talking about SBA loans, the US Small Business Administration guarantees a portion of them. In FY2023, over 1,200 small businesses throughout America received SBA loans, and this loan type is everyone’s favorite since it offers very low interest rates (10.25% of $50k) and longer terms of repayment (up to 25 years). Here’s when you can apply for SBA loans:

• Launching a new business in the United States
• Expanding business operations like hiring more staff
• Investing in a new kind of tech for your enterprise
• Buying office supplies or purchasing real estate (through SBA 504 loans)

Just keep in mind since SBA loans are like low-hanging fruits, everyone wants to apply. So, the application process is quite time-consuming and needs thorough documentation.

Equipment Financing

Let’s say you want to buy new office equipment. It can be anything ranging from office supplies to heavy-duty machines. This loan type will let you borrow money for these purchases, and your equipment (the very item you want to buy with this loaned wealth) will be used as collateral. So, this loan type’s benefits include:

• You’ll preserve your cash flow 
• You acquire assets that are essential for business
• You may even get tax benefits via depreciation deductions
• You can get funds transferred to your accounts much faster 

Many businesses use equipment financing loans to upgrade business tools so their startup will have a competitive advantage. Also, these machinery purchases will increase your capacity to produce more goods. Also, you can reduce downtime by getting your hands on new equipment.

Invoice Financing

Do you want to borrow against outstanding invoices? If you do, then invoice financing is just the loan type you need! You can get cash even though you have awaiting customer payments.

Now, this loan type helps you bridge cash flow gaps caused by long payment cycles (when you fail in your recollection endeavors) and manage expenses during recession periods (by using unpaid & yet-to-be-realized invoices as leverage). Invest in new projects without waiting for receivables!

Microloans

Data from 2022 says that 60% of American startups don’t even have $50,000 in debt. However, it is also true that 90% of small businesses fail! That’s why we have microloans designed to assist nonprofits and community-based ventures. If your startup finds itself in a financial pit, then you can apply for a microloan, especially when your business:

• Can’t cover initial startup costs like office supplies or marketing campaigns
• Doesn’t have enough cash to manage day-to-day expenses during the early stages
• Needs support as a minority-owned business or female-run enterprise

Even with your limited credit history of collateral, you can get these loans right away. Also, this loan type offers you very low interest rates.

Commercial Real Estate Loans

Commercial loans are for business owners who want to invest in commercial real estate, such as office spaces or warehouses. You apply for these loans when you wish to acquire real estate instead of leasing land long-term. This way, you can build equity in your business property over time and also get fixed-rate options for stability against market fluctuations.

How to Choose the Right Loan Type?

Here’s how you can choose the right loan type for your business:

Match the loan type with your specific needs (e.g., working capital vs. long-term growth).

Assess your cash flow projections honestly before committing.

Understand what lenders look for, credit score, revenue history, and collateral, and prepare accordingly.

Some loans (e.g., MCAs) offer rapid disbursement but at higher costs; others (e.g., SBA loans) require patience but deliver better terms.

Keep in mind that loans are not just a financial lifeline; they’re strategic tools that can propel your business forward when used wisely.

Learn the nuances of each loan type and align them with your entrepreneurial goals. This way, you can unlock new opportunities while maintaining financial health.

Whether you’re managing cash flow with a line of credit, scaling operations through term loans, or investing in assets via equipment financing, thoughtful borrowing can be the catalyst that transforms challenges into success stories.