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From lines of credit to SBA loans, there are six main types of loans that startups can consider when they find themselves in need of business funding. — Getty Images/Tero Vesalainen

In our Startup2021 series, we're helping aspiring entrepreneurs navigate the new business climate of the COVID-19 era. Each week, we'll share an in-depth look at one step you can take toward launching your business in 2021.

Many new entrepreneurs finance their startups with a business loan. Between figuring out which type of business loan is best for your business, what each entails and actually applying for the loan, the process can become overwhelming.

Here's what you need to know about exploring your options and applying for the best loan for your business.

[Read: 5 Loans to Start a Business]

Types of startup business loans

Here are six different types of startup business loans:

Term loans

Term loans are often granted to an established small business with sound financial statements. These loans come in specific amounts and have either a fixed or floating interest rate throughout the specified repayment schedule. Term loans are usually used by businesses to purchase a new building, real estate or equipment and may require a larger down payment to lessen payment amounts.

Lines of credit

A line of credit gives businesses flexible access to cash for expenses. Like a credit card, you decide when you withdraw money and the amount, and you’ll also have a spending limit and only accrue interest on the amount withdrawn. The disadvantages associated with business lines of credit include the difficulty of getting approved if your business is less than three years old and the potential to worsen debt.

SBA loans

Small Business Administration (SBA) loans are granted based on a business’s years in business, credit score and annual revenue. With qualifications and requirements less stringent than a normal bank loan, these loans are a great option for small businesses to pursue.

Peer-to-peer lending

For entrepreneurs who don’t want to borrow money from a traditional bank or lender, this method is a great alternative. With dozens of safe, reputable websites that connect qualified applicants with excited investors, peer-to-peer lending enables business owners to receive loans with rates and terms just like a bank loan, but cut out the financial institution middleman.

Equipment loans

Equipment loans are a type of financing used to purchase much-needed equipment and pay for it across a few years. This option enables small businesses to buy gear they couldn’t otherwise afford to pay for outright. Because the equipment itself serves as collateral for the loan, businesses usually don’t need to worry about their credit score too much.

Merchant cash advances

This financing option provides immediate cash taken from the future profits of a business. Small businesses may want to be wary of merchant cash advances, as they can end up heavily costing the borrower, but this option usually doesn’t rely too heavily on credit score and is quick to set up.

[Read: What Is a Short-Term Loan?]

How to apply for a business loan

Now that you understand the different types of business loans, here’s how to apply for one:

  • Know your personal and business credit: Ensure you’re familiar with your two credit profiles so you know exactly what lenders and banks see when you apply for a loan. In addition to understanding your personal credit score, also know your business credit. Doing this, along with building a strong business credit history, will prepare you for success in applying for a business loan.
  • Write a business plan: Many lenders will want to view your business plan to understand the risks, discover how you’ll use the money and what will drive your ability to pay it back. Writing a business plan is a great exercise in determining if “right now” is the best time to borrow.
  • Choose the right type of loan for your startup: Based on the descriptions above of the types of startup business loans, you may already have a good idea of which option is best for your organization. Ensuring your business meets the qualifications like time in business, annual revenue and credit score will expedite the application process and help it run smoothly.
  • Submit your application: Sometimes, submitting the application is the easiest part of the process, especially after all the due diligence of researching what’s best for your startup. Depending on the lender and loan, you may be able to apply over the phone, online or in person.

For more information on different types of small business loans, check out our guide.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published June 01, 2021