As the economy continues to grow, more and more people are interested in starting their own businesses. Having a business of your own can be an excellent source of income and financial security. But it also requires making an initial investment that not everyone has.
Unfortunately, many aspiring entrepreneurs find it difficult to get financing from banks and other financial institutions due to the stricter loan requirements that have been put in place after the recession. Luckily, there are many different types of small business loans available.
Which one is right for you? Read on to find out! Every small business will have unique needs when it comes to getting funding for its venture. However, most loans for businesses fall into one of three categories: asset-based lending, equity-based lending, and debt-based lending. Each type of loan has its advantages and disadvantages. So it’s important to understand the differences before you apply for financing.
Business Lines of Credit
For businesses that have a good credit score, you can apply for a business line of credit to help you get started. This type of loan is also known as a “business line” because it’s designed for businesses that are looking to expand their business. This type of lending requires no collateral, so you can use your credit score to get the funding you need.
Asset-based lending is a financial arrangement in which a business owner borrows money by using their assets as collateral. These types of loans are often the most straightforward option for entrepreneur. Especially those who are looking to get the money they need to start or expand their businesses.
The major benefit of an asset-based loan is that the lender will not be responsible for paying back your loan if you die or become unable to pay. Instead, they will take control of your assets and use them to pay off your loan.
If you have valuable assets such as real estate, vehicles, stocks, or a business that you can use as collateral for a loan, this is a great option for funding your business. This type of loan will allow you to access funding. And it doesn’t matter if you have a low credit score because it’s based on your assets.
Credit Card Financing
If you have a bunch of credit cards, equipment, or other assets you can use to help get your business off the ground, this type of lending may be the best option for you. For example, if you have a piece of equipment that you plan to use in your business but cannot currently afford, you could get a credit card that is linked to that piece of equipment. And you can use the card to purchase what you need.
You will have to pay back the card with interest. But you do not have to pay for the equipment upfront. This is a great way to start your business without having to spend a lot of upfront capital.
Credit is a number that shows how well someone’s credit is. Your credit rating is important to lenders since it helps determine whether they will approve your loan application or not. If your credit score is too low, lenders may not approve your application. And you could lose out on qualifying for financing.
A good credit score is important to lenders because they want to make sure that you don’t default on any loan you receive. If you have a poor credit rating and can’t get a loan. This can be an expensive mistake for you in the long run.
Equity-based lending is a type of financing in which a lender will finance your business by taking a percentage of ownership in your company. If you take out a loan through a Small Business Administration (SBA) loan, it will usually be an equity loan.
This type of loan is usually available only to very experienced business owners since the lender wants a piece of your company in exchange for the funds. Equity-based lending is a great option if you have a proven track record of success and a desirable industry. But it will likely be difficult to obtain if you don’t fall into these categories.
It’s important to note that an equity loan is not a good option if you need funds urgently. Since the lender will take a percentage of your business, you will have to wait until the business is profitable and you pay off its percentage before you can access the funds.
Debt-based lending is when you take out a loan by promising to pay back the funds plus interest. Depending on the type of loan you take out, it is possible to get funds quickly and without having to put up collateral. While this type of funding is helpful for bridging the gap between obtaining funding and liquidating your assets, it does have a few drawbacks.
One of the main drawbacks of debt-based lending is that it can be difficult to find a lender willing to work with your business if you have a low credit score. Depending on the type of loan you take out, you may also need a co-signer if you have a low credit score. Debt-based loans come in many different forms. But they can generally be split into three categories. Traditional loans, asset-based loans, and equity/debt hybrids.
Which type of loan should you take?
Simply put, the best type of loan for your business will be the one that gets you the funding with the best terms. While each type of loan has its benefits, there are no guarantees that one type of lender will be more willing to work with your business than another.
If you have a good business plan and a strong financial background, you should be able to find a lender willing to work with you regardless of the type of loan you take out. It’s important to understand the pros and cons of each type of loan. This way you can decide which is the best option for your business.
Generally speaking, if you need a large loan, you will have more options with an equity-based loan. If you need a smaller amount of funding, a debt-based loan is likely the best option.