Five Types of Business Loans

If you are a business owner, the good news is that there are several types of business loans available to help your business succeed.

Navigating all of the business loans options can get a little confusing, though. That’s why it is important to focus on your specific business needs. Just like with a house, beginning with the right foundation is what ensures things will go smoother as time moves forward. If the objective of your loan is unclear, then it’s also time to consider precisely what your specific needs are prior to speaking with a lender.

Business loans vary from traditional consumer loans. Just like with consumer loans, business loans come in different forms. However, the differences are a little wider in scope, as business loans may help finance different aspects of your business or even require different financial criteria.

An important aspect of a business loan is getting to know the business. While individual housing loans are fairly predictable within the wider context of the housing market, your business may be an entirely unique concept in your specific niche. Profit margin, overhead costs, and cash flow will change from business to business. This is why it is important to work with a local bank who knows your area and is familiar with local trends and factors that may not always show up for a larger lender.

The choice of business loan product will vary from situation to situation. Here is a quick list of the common types of business loans.

Common Business Loans

Commercial Real Estate Loans

It is common for most homeowners to require a mortgage to purchase a home. A business will also need a semblance of a home, whether it is a production facility, storefront, or office space. Other commercial properties include the purchase of locations to lease to other businesses. Either way, real estate loans are a common business loan option if you need a place to build your product or offer your services. They may also be leveraged to help grow your business to the next level with more space or a better-located storefront.

Short-Term Lines of Credit

A line of credit is useful for businesses that may encounter a cash crunch when it comes time to purchase inventory, make payroll, or pay the bills. A short-term line of credit is a business line of credit with a specific term. This enables your business to draw on a pool of funds when you require capital. It is a flexible tool that can be exercised in times to cover unexpected expenses or capitalize upon a new and unforeseen situation.

Term Loans for Financing Long-Term Assets

A longer term option to help your cashflow comes in the form of a commercial term loan. These longer-term loans offer financing for larger assets such as large equipment, real estate acquisition, or other business needs. Repayment is structured over an extended period of time, offering the ability to spread the cost of large, expensive purchases over a greater time period than would otherwise be possible with short-term financing.

Real Estate Acquisition, Construction, & Development Loans

Loans for real estate acquisition, commercial construction, or commercial development are more specialized business loans that target the specific circumstances for which they are named. Loans in this category are commonly used to help expand the business with the addition of commercial property, new facilities, or development loans for builders. While these loans may sound very similar to more traditional commercial real estate loans, these loans are designed for expansionary tasks. These enable businesses to use financing to expand operations or add additional capacity.

Letters of Credit

Letters of credit are a legal document from a bank that delineates a promise to pay the holder if the holder fulfills their obligation. Another way of stating this is that a letter of credit guarantees payments on behalf of a customer to a beneficiary for a stated period of time under certain specific conditions. The beneficiary receives certification that they will receive the expected payment, even if the bank has to cover either the full payment or the remaining amount of the purchase. This document helps facilitate transactions between parties that may otherwise cost more or not be feasible due to the overall risk of the transaction.

It is evident from the array of previously mentioned business loans that there are several options to consider when it comes to commercial financing. A shorter-term loan or letter of credit may make more sense in one situation, where a more costly and capital-intensive venture may require a more sophisticated long-term loan. Each type of loan exists to address a certain need, and understanding the business loan options available can help narrow down the choice. If you are still unsure of your desired business loan, then speaking with one of our loan officers can shed more insight on your specific requirements. 

First Palmetto Bank has been providing business loans to business owners just like yourself for a long time. Give us a quick call today to discuss your business loan needs.