Small business owners often need access to capital to get their businesses off the ground or expand existing operations. Although there are a variety of loan options available, it can be difficult to know which type of loan is right for you and your business at this stage. Here are three types of personal loans available to small business owners.
1. Installment Loan
An installment loan is a personal loan you repay with regular payments over a fixed period like, for example, a payment due on the 1st of every month. This type of loan is best for small business owners who need to purchase expensive equipment and finance over time. There are two types of installment loans: secured and unsecured.
A secured loan is one where you must put up some form of collateral to receive the funds from the lender, which could be anything from your house, car, or even an asset like stocks or bonds. In other words, if you default, the bank will take the item you offered as collateral. The advantage of a secured loan is that the interest rates tend to be lower than those for unsecured loans, and repayment terms can also be longer.
An unsecured loan does not require you to put up any collateral to receive the funds. However, this convenience comes at a cost, as the interest rates tend to be higher on unsecured loans than on other types of loans. It is also important to note that unsecured loans usually have shorter repayment terms than other loan types.
2. Line of Credit
A line of credit is another type of personal loan that is a great choice for small business owners who require access to capital on an ongoing basis. A line of credit works like a credit card in that you have access to certain funds as you need them, and you can borrow up to the limit you are given. The advantage of a line of credit is you only pay interest on the funds you use instead of paying interest on the full amount you are given. For example, you may have a $10,000 line of credit but only need $1,000. After paying it back, you may need to use $3,000 another month.
3. Invoice Financing
Invoice financing, sometimes called factoring, is a type of loan where you can borrow against the value of unpaid invoices you have issued to customers. The lender will evaluate your invoices, and if you meet their criteria, you can receive a loan for a percentage of the invoice. This type of loan is a great way to bridge cash flow gaps while waiting to receive payment from customers.
No matter what kind of small business you own, there are likely to be cash flow struggles at some point that require a personal loan. Understanding these different financing options will help ensure you make the right choice.
For more information on personal loans, contact a professional near you.