How to Choose the Right Business Loan for Your Company
Many companies turn to business loans to address cash-flow gaps, expand operations, and cover unexpected expenses. But not all business loans work the same way. That’s why understanding the best business loan types for your situation is so important.
The four most common options are term loans, lines of credit, SBA loans, and commercial real estate mortgages. At Jeanne D’Arc Credit Union, we offer each of these to help you reach your goals. Let’s take a closer look at how they work so you can better understand how to choose a business loan that fits your needs.
Term Loans
With a term loan, you receive a lump sum upfront and repay it over a set period with fixed payments. It may have either a fixed or variable interest rate. Variable rates can change over time based on economic conditions and Federal Reserve actions, while fixed rates remain the same for the life of the loan. Fixed rates also provide predictable monthly payments, which can make budgeting easier.
Term loans are typically for large, one-time business needs, like purchasing new equipment. For example, a manufacturing company might use a term loan to buy new machinery to replace worn-out equipment or to increase production capacity.
They can also be used for:
- Business expansion projects
- Technology upgrades
- Renovations
- Debt restructuring
- Business acquisitions
- Increasing working capital
Term loans provide a stable payment structure, and they usually give you more time to repay what you borrow compared to other options, like credit cards. This can help keep your monthly payments manageable and improve cash flow. Term loans may also have lower interest rates than credit cards, which can help your business save over time.
Before you apply for a term loan, it’s important to keep in mind that your business will be committing to a long-term repayment period. The longer it takes to repay the loan, the more interest you will pay over time. Collateral may also be required. If you fall behind on your payments, you could risk losing the assets you pledged.
Business Lines of Credit
A business line of credit works differently from a term loan in how you access and repay funds. Instead of receiving a lump sum with fixed payments, a line of credit lets you borrow only what you need, when you need it. It works much like a credit card, but with a lower interest rate. As you repay what you borrow, your available credit is replenished and ready to use again.
A business line of credit may be a good option when you need ongoing access to funds. For example, it can help you manage cash flow during slow seasons by covering payroll and other operating expenses until business picks up again.
A business line of credit can also be used for:
- Inventory purchases
- Payroll timing gaps
- Emergency expenses
- Short-term operating costs
An important benefit of a business line of credit is that you only pay interest on what you borrow, not on the full credit line. Some lenders also allow interest-only payments during the draw period, which can help with cash flow and budgeting. Keep in mind that business lines of credit typically have variable interest rates during the draw period, and your rate can change over time.
SBA Loans
Small Business Administration (SBA) loans are similar to term loans in how they are structured. The main difference is that they are partially backed by the U.S. government. Because lenders’ risk is reduced, they are often more willing to approve them.
This type of financing can be used for a wide range of business needs. Many small business owners choose this option because it often offers lower interest rates than other loans. It may also come with longer repayment terms, including up to 10 years for equipment and working capital and up to 30 years for real estate and long-term projects.
SBA loans also have relatively low down payment requirements of just 10-20%. Because they are partially backed by the government, they are often easier to qualify for than conventional term loans. This can make it easier for startups and small businesses to get the capital they need when they lack sufficient collateral or credit histories.
SBA loans have strict eligibility requirements, and not all businesses will qualify. The application process also requires extensive paperwork. Applicants may be required to submit financial statements, business plans, tax returns, earnings projections, and more. SBA loans also require business owners to guarantee repayment personally. If the business defaults, the owner could be held personally liable.
Commercial Real Estate Mortgages
Commercial real estate mortgages are designed specifically for purchasing business property, which can help your business transition from renting to owning and build equity over time. The property purchased serves as collateral, and the typical repayment terms range from 5 to 30 years.
Common uses include:
- Office buildings
- Warehouses
- Retail spaces
- Mixed-use properties
- Industrial buildings
- Multi-family investment properties
A commercial real estate mortgage can be used to refinance an existing business property loan when interest rates have dropped. It can also be used to change your loan term. A shorter term can help you pay off your loan faster, and a longer term can lower your monthly payments. Keep in mind that extending the term may increase the total interest your business will pay over the life of the loan.
Commercial real estate mortgages typically require a 20–40% down payment and have strict eligibility requirements that startups or businesses with thin margins may not meet. Interest rates are usually higher than for residential mortgages, and the application process often requires extensive business documentation.
Your Partner in Business Financing
The best commercial loans often depend on your needs and how you plan to use the funds. Each loan type is intended for different purposes and has different requirements. Before you apply, research your options and weigh the pros and cons to find the option that best fits your needs and goals.
Ready to take the next step? Click below to learn more about our business loans. Our friendly team is here to answer your questions and help you determine the best financing solution.
