This article covers:
- Fixed monthly payments
- Variable monthly payments
- Percentage of sales payments
- Fixed revenue-based payments
- One-time payments
- Other considerations for selecting a loan
If your business is looking for a loan, whether itâs to expand your business or just help out your cash flow, you may be feeling overwhelmed with all of the options. To help you make the best financial decision, this guide covers all of the different ways that businesses can pay off loans and the types of loans that correspond with each payment type. This approach will help you pick an option that best suits your financial situation and will put the least pressure on your bank account.
1. Fixed monthly payments
Fixed payments are one of the more common forms of loan repayment. Generally, fixed payments for small business loans work in the same way that payments for non-business loans do, like student loans or mortgage payments. However, within this broader category of fixed monthly payments, there are several types of loans and other variables that will affect how much you pay and the amount of money youâre getting to begin with.
Business financing options that typically involve fixed monthly payments include:
A term loan is a loan that is repaid over a preset period of time. These are common and can be secured from a traditional bank, a credit union, or from an online lender. They frequently require a personal guarantee or collateral such as business or personal assets to protect the lender in case of default, and they can have a variety of repayment periods.
Term loans have multiple uses and are a reliable source of funding. For example, this restaurant used a Biz2Credit loan for renovations.
SBA loans are term loans that are backed by the Small Business Administration, making them very reliable for lenders, and as a result, they have a lower interest rate than a traditional loan. The repayment term for an SBA loan can range from seven years for working capital loans, to 10 years for buying equipment and 25 years for commercial real estate purchases.
The SBA 7(a) loan program is the âstandardâ type of loan backed by the small business administration. They have a $5 million cap, and the SBA will guarantee 85% of the loan.
However, with this type of loan, there are prepayment fees intended to keep you paying a fixed monthly payment with interest. If you prepay your loan, youâll owe an additional 5% if you pay in the first year, 3% if you pay in the second year, and 1% if you pay in the third year. After that, the prepayment fee disappears.
Working capital loans
Working capital loans are loans that are specifically intended to help fund the cost of day-to-day business purposes. Because of this, they have much shorter repayment periods than other types of loans, which will affect how much youâre paying on a monthly basis and what your interest rate is. Short-term loans are a great option for businesses that are not undertaking large expansions or projects but still need extra funding. Working capital loans are available both as SBA loans and as traditional loans.
Equipment loans allow you to âownâ equipment you need to get your business started without having to pay the full cost upfront. Instead, youâll pay a percentage of the price upfront and then continue paying off the cost in fixed monthly payments. The repayment terms for this type of financing are designed to last as long as the equipment is likely to be useful. However, sometimes the equipment can become outdated in less time than the repayment period, so make sure you are comfortable with the terms before taking out a loan like this.
SBA microloans are small loans, typically $50,000 or less, that are offered by nonprofit organizations and mission-based lenders instead of traditional banks or other financial institutions. Theyâre usually available to startups, newer businesses, and businesses in disadvantaged communities. Microloans have repayment terms that are less than 6 years, but typically donât require collateral.
The repayment on a personal loan works the same as a business loan. However, these can be easier to get for new business owners and entrepreneurs because approval for these loans is based solely on your personal credit score and personal financial history. Loan amounts are usually up to $50,000 like with a microloan, but these types of loans often have higher borrowing costs.
2. Variable monthly payments
If youâre not looking to take out a lump sum of cash with one of the loan options described above, you might choose a financing option that allows you to pay based on what you spend. This includes business funding options like:
Business credit cards
With a business credit card, youâll have monthly payments, just as you would on a personal credit card, but youâll only pay for what you use each month. This is a great startup financing option. And, because some business credit cards offer deals like 0% APR for up to 15 months, you can meet your business needs without high-interest rates as long as you can pay it back in time. Of course, credit cards come with credit limits that may be lower than what you need. However, if your business expenses arenât too high and you have good credit, you may be able to get a great card with additional perks like points and other bonuses.
Business lines of credit
Lines of credit are similar to credit cards but can be harder to get and can offer larger amounts of capital. Unlike with a standard loan, if you use a revolving line of credit, you only pay interest on the amount that you use each month. Most revolving lines of credit are usually in the $10,000 to $1M range and have higher interest rates from 7 to 25 percent.
However, while there are credit cards that cater to low credit scores, you wonât be able to get a business line of credit with a bad credit score. Both your business and personal credit history need to be excellent to qualify.
3. Percentage of sales payments
Instead of paying in regular monthly installments for a set period of time, you can pay a percentage of your future sales to your lender with a merchant cash advance. With this type of funding, you receive a lump sum of cash and then your lender automatically takes a percentage of your debit and credit card sales on a daily or weekly basis until your cash advance is paid off.
If you have steady sales and revenue and are not concerned about your financial future, but need a larger amount of money quickly, a merchant cash advance with this form of repayment can be a great option. However, this type of small business financing comes with a higher borrowing cost than other options.
4. Fixed revenue-based payments
You can also get a merchant cash advance with repayment based on your estimated annual revenue. Instead of waiting to see how much you make in sales and taking a percentage, this payment method automatically withdraws a pre-determined amount from your bank account each month. The amount taken out is based on your estimated revenue. Because of this, itâs possible for this type of payment to put more strain on your finances than the percentage of sales payment, especially if you have a seasonal business.
5. One-time payments
While there are not many options that allow you to truly pay off a loan in one payment, there are two types of financing that come close.
Invoice factoring allows you to sell your invoices at a discount to a factoring company in exchange for a lump sum of cash immediately. The factoring company then owns the invoices and gets paid when it collects from your customers.
Invoice financing is similar but allows you to retain more control over your finances. In this scenario, a lender gives you a portion of your unpaid invoices upfront, in the form of a loan or line of credit. Once your client pays the invoice, you’ll pay the lender back the amount loaned plus fees and interest.
While a bank would likely require stellar personal credit plus collateral, invoice financing or invoice factoring doesnât have these qualifications, making it an easier option for businesses who get paid on net 30, 60, or 90 terms.
6. Other considerations for selecting a loan
Understanding how youâll be expected to pay back each loan option is crucial because some repayment terms wonât be feasible for all small business owners. However, as youâre choosing the type of loan you want to apply for, there are a few other considerations to keep in mind as you do your research:
- Interest rates. Loan rates vary by lender, even within the same category of loan and repayment terms. Lenders may assign different weights to your creditworthiness or financial statements, so itâs worth checking around to find the option that is best for you.
- Repayment periods. Similarly, not all repayment periods are the same. For example, every type of loan that is paid back in fixed monthly payments will have a different lending period, depending on what you need it for, how large of a loan you get, and where you get it from.
- The application process. While you may decide that you want a fixed monthly payment on a loan, if you need the cash quickly, you may be forced to consider some different options. This is because some loans, like SBA loans, often have more lengthy and rigorous loan applications and approval processes, and you may not qualify, or you may not get funding within a period that is reasonable for your business.
- Eligibility requirements. As the old Rolling Stones song goes, âyou canât always get what you want.â Banks and online lenders arenât in the business of giving money away for free, and so they have eligibility requirements that ensure that the people and businesses they lend to are likely to be able to pay them back. When considering a loan for your business needs, youâll need to make sure you qualify first. Youâll need your credit score, credit history, tax returns, business plan, financial statements, and more depending on the type of loan youâre applying for.
Take the time to research your options while considering these factors to make sure you pick the best loan for your small business and your personal financial situation. Every business and every lender is different, so make sure you do due diligence.
Whether youâre looking for the lowest monthly payment, a flexible repayment option, or the fastest repayment possible, there is an option out there for every type of business. Decide what level of financial risk you can take on, how quickly you need money, and how much you need before you make any financial decisions. As you begin researching, consider online lending options that can give you increased flexibility and access to instant financial information about your loan.