It used to be that when small business owners were denied loan from banks, they were out of options. But with the emergence of online and alternate lending, that’s no longer the case.
There are more types of business loans available online than ever before, which means more opportunities to get funding for your business. But it’s also important to make informed choices about which loan type is best for you so you can streamline your application process and access cash to continue growing your business.
Here’s a breakdown of the most popular types of business loans you can find online.
Similar to a traditional bank loan, many online lenders offer term loans. These lenders utilize the same concept that you’re probably most familiar with in any type of loan: you get a set amount of money and make set monthly payments for a set amount of time until the loan has been repaid in full, plus interest.
While online term loans come with higher interest rates than bank term loans, they are typically much easier to qualify for, and borrowers are typically able to access funds in a few days or weeks, compared with the drawn out process of applying for a traditional bank loan.
Business Lines of Credit
Business lines of credit come in three general types. Unsecured lines of credit are just like those you’d get from a bank, but with higher interest rates. Secured lines of credit utilize collateral, such as a piece of equipment. Short-term lines of credit can be secured or unsecured and tend to be a good fit for younger businesses.
These are all great to have on hand even if your business doesn’t have immediate capital needs. The universal rule is that the best time to apply for any type financing—but particularly for a business line of credit—is before your business actually needs the cash.
Equipment financing is a very popular loan alternative for businesses that are planning to use funding for a major purchase of machinery, vehicles, kitchen equipment, or even office computers. Instead of paying for a new piece of equipment outright, if you take out a loan, you can collateralize the loan with the equipment. This increases your chances of qualifying and potentially helps you get a better rate.
In this scenario, you would pay back the loan just as you would any other loan, and at the end, you own the equipment.
Another popular loan type is invoice financing, in which you use your outstanding invoices to get a cash advance from a lender.
Invoice financing works in many different ways. Usually, a lender will advance you a percentage of an invoice (say, 80 percent), and holds onto the remaining percentage. Then, as you both wait for your customer to pay, the lender charges a certain percent per week (say 1 percent). When your customer pays, the lender will settle up with the remaining 20 percent, minus fees (1 percent per week plus an additional flat processing fee around 3 percent).
Business Credit Cards
While not technically a loan, credit cards can be a great financing option for certain businesses. Financial experts endlessly debate whether financing your business with a credit card is a smart idea, but the incentives and bonuses offered by credit card companies—along with relative ease of qualifying—have made business credit cards an attractive option for entrepreneurs seeking funding.
Introductory APR offers, rewards programs and cash back incentives are all designed to attract the small-business owner. It’s ultimately a personal decision, and the key factor is whether you have the forecasting ability and the discipline to pay your balance down.
The Credit Line Builder
When lenders say they offer startup loans, this is usually the product they are referring to. The credit line builder is a more complex line of credit made up through combining various credit cards.
For a fee, lenders offering this credit line will help you draw cash from your credit card- based line. The advantage is that many of the cards in the credit pool come with a 0 percent introductory APR offer. The downside is that this can be a confusing product to wrap your head around, and it is critical to make sure that you make payments at the right times to avoid unexpected fees. But as long as you understand all of the nuances before committing to it, this can be a great product for fledgling business owners.
The Next Step
With so many types of business loans, your financing search can quickly become overwhelming. But understanding the options is a great first step. Just by knowing all the small business loan types out there, you can save tons of time down the road and increase your chances of selecting the right product.
Meredith Wood is the head of content and editor-in-chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.