If you own an established business, or in the stage to develop one, you might have already calculated that your business needs more financial support. Borrowing money from friends or family could be an option. However, there are different types of business loans for SMEs available depending on some factors, such as:
- what you need the money for
- how much do you need the money
- how fast do you need the money
- whether you need it for short-term or long-term
- the stage your business is in
- credit record and score (Click here if you are interested to improve your credit score fast)
Types of Business Loans for SMEs
1. Line of Credit
A line of credit is a form of credit facility that enables borrowers to draw down the money at any given time only when they need the fund. Lines of credit can be fixed or revolving. The credit line will then reset to their full amount after they pay the balance, like a credit card.
Benefits of credit line for small business:
- To pay unexpected expenses or when in emergencies
- Cover seasonal cash flow droughts
- Bridging the gap in cash flow while waiting for customers to pay
2. Equipment Loans
As the name suggests, this loan would be irrelevant if your business doesn’t have an urgent need to purchase equipment or vehicles. However, this type of loan will be very useful if otherwise as they usually have pretty good rates from 8%, depending on your business’s credit, finance, and age.
3. Invoice Financing
Invoice financing is another popular type of loan for b2b businesses that is still relatively new. Basically, how invoice financing work is by using your outstanding invoices to get a cash advance from the lender. However, this type of loan won’t be suitable to most b2c business, or those who do not invoice customers.
With invoice financing, the lender advances you a certain amount of your total invoice amount (for example 80%) and holds onto the remaining. While waiting for your customers to pay, you can use the advance to cover expenses. There will be a weekly fee charged by the lender. Once your customer has paid, the lender will return the remaining 20%.
4. Business Credit Cards
A lot of people often consider credit cards for personal use compared to business use. However, business credit cards can be an affordable option to borrow money when you need to pay expenses quickly.
Moreover, most credit cards offer:
- Reward points
- Introductory 0% interest rates
- Insurance/protection on car rentals, travel purchases, etc
Business Loans to Avoid for SMEs
1. Bank Term Loans
“Large banks reject about 75% of small business applicants” – Washington Post
In general, it’s not easy to get a bank loan for small amounts of capital because of these loans arent profitable for the banks. In addition, for an established business, you should have strong credit and finances.
2. Merchant Cash Advance
Only after you tried applying for the less expensive business loan products, then you can try applying for a merchant cash advance. With a merchant cash advance,
If you are able to qualify for other less expensive business loans, try to avoid MCAs or Merchant Cash Advance. This will usually end up more expensive than other loan options. With an MCA, a lender will grant you an advance of capital and purchase a portion of your daily credit card sales. You pay back the advance with a percent of your daily credit card sales.
If you find MCAs interesting, we have more about the topic here.
Which Type of Business Loans for SMEs is Better?
Well, as mentioned in the beginning, it really depends on your business’ state, credit score and what you need the money for. You’ll need to consider and narrow down the options to decide which type of loans will suit your business best. Subsequently, you will have a number of loan options to grow your business.
We envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across Southeast Asia.
Our current product provides SME and startup owners in Singapore with financial flexibility through a line of credit of up to S$150k. Which, can also be used to make business payments to enjoy 60 days free credit terms.