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Understanding Business Loans
The phrase “loan terms” usually refers to the term length of your loan (however it is sometimes also used to describe other loan conditions). For example, loan terms can range from 6 months, 12 months, 24 months, 4 years, 5 years, 10 years, or longer—depending upon the nature of the loan.
Loan stacking is where a short-term loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics with no consideration of the borrowers ability to manage the debt. It often happens when a lender, who you don’t know and likely have never spoken to before, sees the UCC filing for your first loan (because it’s part of the public record), and contacts you to inform you that you now qualify for an additional loan. Loan stacking could put a business at risk of default and bankruptcy.
A line of credit is a revolving loan that provides a pre-determined amount of capital that can be accessed as needed, repaid, and then used again. A business loan is a fixed amount of capital in a lump sum that is repaid over the term of the loan.
There are non-profit micro-lenders that offer very low or zero interest loans to qualifying business owners. They are typically in the form of micro-loans (the SBA and most traditional lenders consider loan amounts of $50,000 or less to be micro-loans). Beyond those options, bank loans for established businesses with strong collateral will typically be the next cheapest option.
There are many options available for most small business situations. The first questions to ask to find the best loan for your situation are 1) What is my loan purpose? 2) How much capital do I need to meet that need? 3) What type of loan can I likely qualify for? The answers to these questions will lead you to the best loan for your business and situation.
A specific type of asset-based loan secured by real property. This type of loan is usually issued by private investors or companies, and are usually used as a bridge to more traditional financing.
Accounts receivable financing uses a company’s outstanding AR as collateral for a loan. This is also known as factoring. Factoring is technically not a loan. A third party, known as a factor, purchases a company’s invoices or purchase orders at a discount giving the business owner access to a percentage of that invoice now, instead of waiting for the invoice or purchase order to be paid. The balance, minus the agreed upon fees are then paid to the business owner once the factor has collected payment from the business’ customer(s).
A short-term business loan is typically a loan with a term of 12 months or less (see What are loan terms?).