Business loan vs. personal loan

In their most basic form, all business loans operate the same – your business borrows a sum of cash and you then repay the money, plus interest charges and fees. However, there are many types of business loan and each has its own unique way of working:

Business term loan

A business term loan is the simplest form of business loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required.

• Pros: Fixed interest rates and predictable repayment instalments
• Cons: Few options to ask for extra funding or change the terms of the loan after closing

Business line of credit

With business line of credit withdraw as much as you want when you want from a loan facility up to the limit of your borrowing. You only pay interest on the sums you withdraw, not the whole credit line. This can make the borrowing significantly cheaper. Collateral may be required.

• Pros: Only pay interest on the cash you use
• Cons: Higher levels of reporting usually required to maintain access to the loan facility

Merchant cash advance

Merchant cash advance is available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

• Pros: No added collateral required. The loan facility grows as your card sales go up
• Cons: Not suitable for businesses that don’t take card payments. Loan facility can also go down if your card sales fall

Secured business loans

Secured business loans demand that you provide hard assets, such as real estate, plant and machinery, or inventory as security for the loan. The lender holds a lien on the assets until the loan is paid back, then full ownership returns to you. Secured loans typically come with lower interest rates and fees than many other business loans.

Revenue-based financing

Similar to a merchant cash advance, but revenue based financing offers a higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral is required.

• Pros: Fast and easier to secure than many other large business loans
• Cons: Strong cashflow necessary to service the loan

Equipment financing

Buying big ticket machinery and equipment can put a major dent in your cashflow, but equipment loans can pay for your new plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage. Once the loan is approved, the lender sends the funds to the equipment vendor, who then delivers the machinery. You use the equipment as you pay for it and the lender maintains a lien on the title to the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright.

• Pros: No need to provide your own collateral
• Cons: Can only be used for equipment purchasing, does not provide any cash

SBA Microloans

Available up to $50,000, SBA microloans come with relaxed qualifying rules and can usually be secured with FICO scores as low as 500, or even with no credit score at all.