The Right Types of Business Loans for Your Business | Foro

Most types of loans for business fall into one of four buckets:

• Loans for new and growing businesses
• Loans to cover operating expenses
• Loans for quick access to capital
• Loans to support major investment

Let's look at some of the different types of business loans in those categories.

Types of Commercial Loans

Loans for new and growing businesses

Are you a start-up or a growing small business? You can access types of business loans that support your strategy, even if you have limited assets.

SBA loans

The Small Business Administration (SBA) is not a lender per se, but it can act as a guarantor on commercial loan applications. This is an invaluable support for emerging companies that might not have sufficient collateral for a regular loan.

There are many flavors of SBA loans — the core 7(a) program alone has seven options — and they usually offer favorable interest rates, which are capped by the SBA. You also have access to additional SBA resources, including business development advice. On the flip side, the approval process can be drawn out, and your loan liability may include personal assets.

USDA Loans

The United States Department of Agriculture (USDA) also helps businesses secure debt financing for growth projects. USDA operates several funding programs, including the Rural Business Loan Guarantee scheme, which offers backing for relevant commercial loans.

USDA loans come with some restrictions — for example, Rural Business loans are only available for projects in towns with a population under 50,000. You'll also have to provide a down payment, as lending is capped at 80% of the investment value.

Venture debt and growth capital

Tech companies with high growth but low cash reserves might consider venture debt and growth capital. This type of debt usually has a short term — around four years — and lending limits are based on projected revenues.

Lending of this kind might come from a venture capital firm or a specialist tech bank. Often, these agreements will allow for a flexible structure so that you can treat it as an asset sale or a loan.

Mezzanine financing

As the name suggests, mezzanine financing is a kind of halfway house between equity and debt. If your business fails, mezzanine debt will be paid before equity holders but after senior debt such as bank loans and lines of credit.

Mezzanine financing is usually combined with senior debt to round out the capital stack or the combination of debt and equity used to finance a business. It's often structured as a term loan, so you only make interest payments during the life of the loan. When the loan ends, you repay the principle.

It's also an attractive deal for the investor since mezzanine debt has priority over equity. If you default on your mezzanine debt, the investor will typically have the option to convert their debt to preferred equity.

Loans to cover operating expenses

Loans can help fill a financial gap, like when you have an extended lead time on goods or seasonal revenue fluctuations.

Purchase order financing

PO financing is helpful when paying suppliers up-front. Your lender will offer capital based on your outstanding purchase orders, and you then repay the loan when your customers settle.

PO financing partners will generally make payments directly to your supplier, which cuts down on lead time and helps keep your processes moving.

Asset-based lending

Asset-based loans are secured against working assets, such as property, inventory, equipment, or accounts receivables. Often, these loans are aimed at companies that are and require working capital financing.

Loans for Quick Access to Capital

Sometimes, your business needs money — and fast. These types of business loans might involve higher interest rates but more flexible payment terms.

Business line of credit

Commercial lines of credit are similar to a credit card — they're a pre-agreed lending function that you can access when needed and repay when you're ready.

The key difference is that lines of credit offer much larger sums, typically from $1 million to $100 million. The loan may have a term of 1-2 years, but lenders will generally offer the chance to renew. Lines of credit are most often secured by working capital (current) assets such as accounts receivables and inventory.

Working capital loan

A working capital loan helps to cover an immediate cash need, such as payroll or accounts payable. Companies with high seasonality of cyclical sales may rely on these types of business loans to get through periods of reduced activity.

Working capital loans generally have shorter terms and higher interest rates. Small loans might not require collateral, while you may need to secure larger loans with assets or property.

Accounts receivable factoring

These types of business loans are a way of getting financing by selling your unpaid invoices to a so-called factoring company that will collect them from your customers.

Factoring looks at your accounts receivable and projected future revenue. This is a useful approach for growing companies that need capital while awaiting full revenue realization.

Loans to support major investment

Ready for a major expansion? Lenders can help when you need a substantial injection of capital.

Business term loans/commercial real estate loans

Term loans — including loans for purchasing commercial real estate — tend to be quite simple. You borrow a lump sum and then repay that over a pre-agreed term. Lenders receive regular payments from borrowers with an interest rate that can be constant or variable. This is one of the best types of business loans for large-scale expenditure.

Acquisition loans

Acquisition loans play a crucial role when you're looking to acquire another business or a significant stake in one. Lenders provide this type of financing to assist in the buying process, with the acquisition often serving as the loan's collateral. The loan amount is usually a percentage of the acquisition price, and it's repaid over a pre-set term, similar to a business term loan. This form of financial assistance is especially useful when you're aiming to expand your operations through mergers or acquisitions.

Equipment loans

Another type of term loan but for buying essential assets such as manufacturing equipment or vehicles. The equipment itself may act as collateral for this loan.

Construction loans

Construction loans are really two loans in one. First, there is an interest-only bridge loan that covers construction costs. When the project is finished, and you begin to realize revenue, the loan converts into a standard term loan.

What type of business loans do you need?

All business loans have the same purpose — to help your business grow. Whether that means providing short-term capital or long-term investment, there's a loan product suited to your needs.

Foro cuts through the complexity of evaluating different types of business loans. Our algorithm matching platform can find your perfect lender in seconds. And that’s just the beginning: Our commercial lending experts have decades of experience at leading financial institutions and will help prepare you for every interaction with potential lenders.

Start your business profile today, or get in touch if you have any questions about our services.

About The Author

Ber Leary worked in investment management for over ten years. He’s now a full-time content marketing consultant specializing in finance technology and management strategy. Connect with Ber on LinkedIn.