1. Term Loan
A term loan is the most straightforward type of business loan. A term loan works like a general or personal loan, where businesses borrow and repay funds over a set period. A term loan can finance virtually all types of business expenses, including equipment purchases and everyday operational costs.
A term loan is a suitable option for a business seeking a predictable financing solution that can be reliably measured and repaid over time.
2. Line of Credit
A line of credit is an ongoing arrangement that allows businesses to draw and repay funds from a lender up to a certain limit. Interest is only paid on the amount used, rather than the full credit limit amount, making it suitable for financing urgent or emergency expenses.
Businesses that run into periods of slow activity or unexpected cash flow issues can benefit from the flexibility of a line of credit.
3. Business Overdraft
A business overdraft allows businesses to “borrow” funds by spending more than the available funds in the business bank account. In a business overdraft, the bank account balance can go into the negative up to a certain limit.
An overdraft provides financial flexibility for businesses, especially when faced with unexpected costs that exceed available funds. Businesses can pay the required expenses upfront and manage repayments later on to bring the bank account balance back into the positive. Overdrafts are useful for covering short term gaps in cash flow, like when a large payment is due before accounts receivable are in.
4. Working Capital Loan
Working capital loans are specifically designed for short-term use and flexibility - the funds from a working capital loan can cover marketing costs, provide emergency expenses, and boost cash flow.
Working capital loans serve as an immediate injection of funds into the business for continued operation, and offer smaller borrowing amounts compared to other commercial loans. A working capital loan is ideal for businesses that require additional financial resources to cover daily operating expenses.
5. Equipment Loan
An equipment loan enables businesses to borrow funds for the purchase of equipment, such as a company vehicle, industrial machinery, or IT systems. Commercial equipment loans include chattel mortgages and operating leases.
Under a chattel mortgage, the lender uses the purchased equipment as security for the loan. If the business is unable to repay the loan, the lender can take ownership of the equipment to recoup the unpaid loan amount.
Under an operating lease, the lender maintains ownership of the purchased equipment and loans it to the business for use. At the end of the loan term, the business has several options: to return the equipment to the lender, extend the loan term for continued use, or purchase the equipment from the lender at fair market value. An operating lease works best for businesses that are unsure how long the equipment will be needed.
6. Commercial Property Loan
Businesses looking to purchase real estate for an office or an operating facility will need a commercial property loan. Purchasing commercial property with a loan works the same way as buying a home - you’ll be expected to pay a deposit and make regular repayments on the mortgage.
7. Unsecured Business Loan
Unsecured business loans offer businesses the least amount of risk. Since no collateral is required for the loan, there is no risk of equipment or property repossession when the business is unable to repay the loan.
However, lenders often offer higher interest rates on unsecured loans compared to secured loans. Businesses tend to borrow smaller amounts with an unsecured loan to minimise the cost of interest.
An unsecured loan is generally taken out by younger businesses that may not have significant assets to use as collateral for a secured loan.
8. Invoice Financing
Invoice financing allows businesses to access credit from outstanding customer invoices. Lenders will lend against all your outstanding customer invoices and you can get access to credit early to address your cash flow needs. Invoice financing is useful for businesses that face frequent payment delays or long payment periods - having access to payment funds early can smooth out cash flow issues.
