4 Types of Small Business Loans You Should ConsiderWhen you’re looking for small business loans, it can be tough to find the right lender. There are so many options to choose from, and it’s possible that none of them feel like a good fit for what your business needs. However, it may help to know that there’s not just one single kind of loan. There are a lot of different ways to borrow money, all with their own terms, features and purposes. We’ve detailed four distinct types of business loans, along with the best ways to use them and some of the lenders that offer these loan options to help you find a match for your business plans and narrow down which lender to go with.

Term Loans

When you think of small business loans, the first thing that probably pops into your mind is a term loan. Term loans offer a lump sum of cash up front that the borrower repays, with interest, in regular installments over a set period of time. They’re great for funding business expansions, whether that’s buying new assets or hiring new employees. At the beginning of a term loan, the borrower and lender agree to the terms over which the loan will be repaid, typically between one and 10 years. In most term loans, the interest rate is locked in at the beginning as well, though some term loans have variable rates that go up and down depending on the market. If you’re borrowing at a time when interest rates are high, a variable rate could mean you pay less interest overall, but it also makes the amount you’re paying each month fluctuate, as opposed to fixed rates that allow you to pay the same amount each month for the duration of the loan. While you may be tempted to go to your brick-and-mortar bank to get a term loan, you should know that there are a number of online lenders that process your loan quickly in exchange for slightly higher rates. What’s more, a number of online lenders often have more lenient application requirements, and some of them will lend to brand new business owners, which isn’t something all brick-and-mortar lenders will do.

Lines of Credit

Functioning similarly to a business credit card, a line of credit lets you borrow a variable amount of money up to a maximum. You can use as much or as little of that maximum as you want, and make regular payments with interest based on how much money you’ve withdrawn. How they differ is that business credit cards offer smaller minimum payments and let you borrow and repay extremely quickly, while lines of credit give you more flexibility in how you spend because the money is actually transferred to your bank account. Lines of credit are useful for dealing with predictable short-term costs, periodic expenses and projects where you aren’t sure exactly how much the total cost will be. Though lines of credit used to be rare online, in recent years, more online lenders like Lending Club and Fundation have started offering them.

One thing to note about lines of credit is that there are quite a few potential extra fees, such as closing fees when you open the line, draw fees when you take money out and even unused line fees based on the amount of money you didn’t use that year. Keep an eye out to see if your lender has these and calculate how much they could cost you before you open your line, as a business credit card could end up being a better option for you.

Equipment Loans

Loans can either be secured or unsecured. Unsecured loans aren’t guaranteed by anything except for the borrower’s credit history, so they usually come with higher interest rates because of the risk they carry for the lender. Secured loans, on the other hand, are guaranteed with collateral, which the lender can take if the borrower defaults on the loan, so the interest isn’t usually as high. Equipment loans, offered by select online lenders like Funding Circle, are specialized loans for financing equipment where the purchased item (the borrower’s new equipment) and the collateral for the loan are one and the same. The loan amount is equal to the value of the equipment, and the term is the equipment’s expected lifespan. They’re especially great for small businesses, since the loan is secured by something that is equal in value to the loan, which is why equipment loans are often approved quickly and have lower interest rates. The main downside of equipment loans is that they can only be used for equipment, so if equipment is only one of several things you need a loan for, you’ll have to take out multiple loans.

Invoice Financing

If your business has ever been strapped for cash while waiting for customers to pay their invoices, invoice financing was made for you. Invoice financing is a short-term loan that gives businesses quick access to funds by using outstanding contracts as collateral. A lender advances you a percentage of the invoice amount while you wait for payment, with some lenders like StreetShares advancing up to 90% of an invoice. In return the lender takes a small percentage fee that increases as long as the invoice remains unpaid, and once the invoice is settled, you receive the remaining percentage. While it’s not something a business should rely on habitually, invoice financing is a practical way to avoid late fees on upcoming bills and speed up reinvestment between invoice payments.

Still not sure where to get a loan that’s right for your small business? Our small business loan reviews are an excellent resource to find your ideal lender. For more advice on how to get a great loan, take a look at our small business loans blog.