What are the 4 types of loans?
For small businesses, loans are a vital component towards reaching maximum success. Loans are used in a bevy of instances, including to purchase new equipment, expand, and hire new employees. Because of the vital role that loans play in a business’ success, it is critical to understand the four primary types of business loans.
Lines of Credit
Having a line of credit is likely the most convenient loaning method. Whenever businesses open a line of credit, they sign a contract with a bank, agreeing upon a specific amount of funding that the bank will provide. From there, recipients of the loan can draw out specific amounts of cash at any time necessary. This form of loaning is particularly effective if you have unforeseen costs that must be quickly paid. The primary drawback to opening a line of credit is that it typically carries with it high-interest rates.
As its name suggests, alternative financing provides businesses with the loans that they need, separate from a bank or credit union. A few of the most common forms of alternative financing include crowdfunding, microloans, and merchant cash advances.
Short-term loans are extremely useful for businesses seeking to address temporary needs. For instance, businesses may draw a short-term loan to purchase new machinery, hire employees, or increase inventory. As such, these loans are typically small and are usually expected to be paid back quickly.
Long-term loans are likely the most common type of loan. They can be useful in multiple instances, including covering the upfront costs of starting a company, helping companies build new locations, and funding equipment financing. Long-term loans are typically paid over a period of 3 to 10 years on a month-by-month basis.
If your small business is faced with a decision over which lone to choose, be sure to use this information to select a loan type that will advance the ultimate agenda of your blossoming business.