What are the different types of business loans?

types of business loans

If you intend to start up your own business or are looking to invest more money in your existing one, there are lots of factors you will need to consider. One of the key decisions is funding, which is an issue that can create challenges for businesses of all sizes. Whether you are setting up a new business or trying to grow your current one, it is advisable to be familiar with your options when it comes to raising finance.

The good news is that there are lots of options available when it comes to business finance, so you can find a solution that is suited to your needs with far greater ease these days. Naturally, you do have to consider your business and personal credit score with many of these options, as this is something that potential lenders will look at in most situations. In this article, we will look at some of the more popular types of business loan you may be able to consider.

Some of the Top Business Loan Options

Your situation, the nature of the business, the amount you need, and a variety of additional factors will play a part in which of these solutions are right for you. Some of the options when it comes to business loans include:

Business Startup Loans

Many people these days decide they want to start their own business and shape their own future. However, one thing that stands in their way is the funding they need to get started. Well, a business startup loan could be the perfect solution, as these loans are designed for people in this type of situation. You can access government-backed schemes in conjunction with other organisations such as the Prince’s Trust. If successful, you can look forward to getting the funding you need and, in some cases, additional support.

Unsecured Business Loans

Many people opt for an unsecured business loan when looking at financing for their new or existing business. This type of loan represents a lower risk to you as the borrower because there is no collateral involved. However, it involves a higher risk to the lender for the same reason, which means you will generally have to provide evidence of a very good credit score and history to be eligible.

These loans can be obtained from your own bank as well as other banks and online lenders. It is important to ensure you shop around before you decide which of these loans to apply for. The interest rates on unsecured business loans tend to be higher because of the higher risk represented to lenders. 

Secured Business Loans

A secured business loan is one where you will need to put up some form of collateral in order to get the finance you need. Of course, other factors will also need to be taken into consideration by the lender in order to reach a decision regarding your application. The interest rates on these loans are often lower than with unsecured business loans because of the collateral.

With this type of loan, you have to be mindful that you could end up losing whatever you have used as collateral if you default on repayments. You should, therefore, make sure you do your calculations very carefully to ensure you will be able to comfortably afford the repayments.

Peer-to-Peer Business Loans

A more recent method of business funding is peer-to-peer loans (P2P). Also known as crowdfunding, this is a method whereby you borrow money directly from individuals who are interested in offering loans for business and other purposes. There are various platforms through which you can access P2P lending such as Zopa. This type of business loan enables you to gain access to lower rates of interest on your borrowing, as it essentially cuts out the middleman.

Alternatives to Business Loans

It is also important to remember that there are alternatives when it comes to getting finance for your business. If you are unable to get a loan or you want to explore other avenues of business financing, you can look at options such as:

Business Credit Cards

A business credit card may be a good solution if you need finance for your business but are unable to – or prefer not to – get a loan. Again, these cards are available from both mainstream banks and online lenders. As with all credit cards, the rate of interest on borrowing can be very high. However, by choosing a low rate or zero percent card and repaying the balance as quickly as possible, you can help to keep interest costs down or even avoid them altogether.

Line of Credit

Some businesses opt for a line of credit if they need finance to invest in their business or want to avoid cash-flow issues. This type of finance is basically a revolving line of credit that can be suitable for short-term finance issues. You can benefit from increased flexibility with this type of credit, and it helps to ensure there is always cash available to aid the smooth running of your business.

Business Overdrafts

One other option you can look at is asking your bank for a business overdraft. This gives you a financial safety net to cover unexpected costs and can be used as a short-term finance option if you need to make purchases for your existing business. The amount you get by way of an overdraft can vary based on the lender, your financial status, and your business finances.

Choosing the Right Option

When it comes to business loans and finance, it is vital that you choose the right option for you and your business. With this in mind, you need to consider factors such as how much you need to borrow, what the money is for, how quickly you can repay the money, and how much it will cost in terms of both interest and monthly repayments. 

You should also ensure you get a copy of your personal and business credit report so you can determine which loan types you are eligible for based on your credit score and history.

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