What kind of business loan do I need?

In October 18, 2017

Header image: What kind of loan do I need?
When someone is ready to borrow money, figuring out the right type of business loan can be difficult. The variety of options are dizzying. Is a line of credit appropriate? Should I consider an SBA loan? What is a USDA loan? Why do interest rates vary so much?

According to Nathan Burnell, Horizon Community Bank’s vice president and commercial loan officer at the Lake Havasu City branch, most people come into a bank to ask for money without knowing the type of loan they need. They request a line of credit when a term loan would be more suited to their needs.
An experienced banker will typically act as a finance advisor, guiding a borrower in the right direction and answering questions, but it’s a good idea to know a few basics before you approach them.

Term Loans

“Term loan” is a broad label that includes any kind of loan with a specific schedule of payments to repay the loan, and either a fixed or variable interest rate. Most term loans require a down payment, but this depends on the amount purchased, the intended use of the loan, the borrower’s creditworthiness, the type of loan product and other factors.

Term loans require substantial paperwork and detailed processes to be considered, with review and approval periods that can range from thirty days to more than six months.

The majority of business loans are some variation of a term loan, with a repayment schedule typically ranging from five to 20 years to finance expensive purchases like equipment, renovations or commercial real estate.

Term loans with a shorter repayment schedule are also available, used to fund short-term needs or smaller dollar amounts with a repayment schedule that can range from 30 days to five years.

If someone needs to pay suppliers in 60 days, for example, a long-term loan wouldn’t be used to cover the invoice. A line of credit might be appropriate, a credit card, or a short-term loan that allows them to pay the supplier, then repay the loan with revenue income.

Not only are bank products different in purpose, but interest rates can vary widely, too, depending on the level of bank risk, need for collateral and other factors. Be sure to shop around and compare options by the type of loan, rather than interest rate alone.

Small Business Administration (SBA) loans and USDA loans are examples of term loan programs offered through a bank. Unlike conventional loans, however, they are backed with a government guarantee to the bank that the loan will be repaid. The SBA does not actually fund the loan itself, they simply provide the guarantee to reduce lender risk, making funds available to those who might otherwise not be approved.

Commercial real estate loans and working capital loans are also examples of term loans. Some projects are financed through a combination of short- and long-term loans.

Quick Loans

Separated from other types of loans by its self-serve online application process, quick loans can be excellent for short-term financing needs, opening a credit card or line of credit in just minutes. They aren’t designed to allow for consultation, however, so the opportunity to work with an experienced banker to ensure the right product is sacrificed in exchange for the faster process.

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Quick loans are often the path of least resistance for busy people who don’t want to spend time on paperwork and don’t mind paying a higher interest rate. Exploring online-only options with local community banks like Horizon Community Bank can reveal competitive rates that are lower than credit cards, but will typically be higher than a conventional loan.

As a general rule of thumb, more risk for the bank means a higher interest rate for the borrower, and vice versa. Because the rates are determined by the bank and influenced by their own loan portfolio, goals and processes, it’s especially important to compare products before applying for the quick loan. Read the terms and fine print to be sure you completely understand them before you commit.

Learn more: 5 Red Flags to Consider Before Signing a Loan Contract

Quick loans are a term loan or line of credit that can be offered by a bank, which includes rigorous federal oversight, or a non-bank lender.

Line of Credit

A business line of credit usually includes a 12-month repayment schedule, ideally used for short-term financial needs like floating receivables, which can be paid down monthly. While it’s simply an offer of credit that remains open, a line of credit then becomes a term loan once funds are borrowed from the account.

Similar in some ways to a credit card, the borrower is approved for a maximum credit limit, which they can withdraw against as needed. It’s less expensive than a credit card for a cash advance, but not intended to carry a balance for longer than a few months.

When the borrowed amount is paid down after twelve months, the account refreshes to make additional funds available. The renewal generally includes a simplified approval process to confirm creditworthiness has not changed, but it’s less involved than a new loan application.

If it’s continually used month-after month, it is often better to obtain a term loan with more attractive interest, and if it’s not getting paid down in full quickly, a working capital loan may be preferable.

It’s important to understand a line of credit is intended to be used, paid off, then used again—remaining open as much as possible for urgent, short-term needs.

If you have questions about the right type of business loan for your needs and are located in Arizona or near Henderson, Nevada, contact your nearest branch or loan office today to schedule a no-obligation, no-pressure appointment. 

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