For small and medium-sized businesses, debt is virtually always a reality that must be addressed. Ensuring your business’s debt is properly modified can significantly improve its operations – including freeing up cash flow. 

Below we will take a look at the various types of business debt, review the basics of debt financing, and discuss how National Credit Partners can help your small or medium-sized business secure debt relief or modification solutions for the short and long-term. 

What are the Different Types of Business Debt?

• Short Term Loan:

Short term loans can be enticing in the fact that they provide businesses with almost instant access to financing. If approved, many short term loans can be accessed in as little as 24 hours. However, a maximum short term loan is typically around $500,000, and if your business obtains one you will be responsible for paying it off quickly – often within one to three years time. Interest rates for short term loans vary, but a business in good standing (not in financial hardship or distress) can typically secure a rate between 8% and 10%. Unexpected expenses, increasing personnel, replacing equipment, and company expansion are common reasons for taking out a short term loan. 

• Business Term Loan:

A popular financing option for entrepreneurs, business term loans may offer a small or medium-sized business the ability to acquire working capital, expand company operations, hire additional personnel, or purchase company equipment. A business term loan amount can vary considerably on a case-by-case basis – typically starting at around $5,000 and maxing out around $2 million or even $3 million in some cases. A Business term loan repayment plan could be anywhere between one and five years. 

• SBA Loan:

Small Business Administration (SBA) loans are guaranteed by the government, but offered by banks and various other types of lenders. A repayment plan for an SBA loan can vary depending on whether you’re primary purpose for taking our said loan was either to acquire working capital, purchase company equipment, or purchase company property/real estate. This type of loan can be a solid option for businesses looking to either refinance existing debts or expand operations. That said, they are more difficult to qualify for than other loans given that they typically include some of the lowest repayment percentages available anywhere. 

• Business Line of Credit:

Business lines of credit offer companies access to the amount of funds up to your specifically set credit limit. These can offer more flexibility than term loans because businesses are only paying interest on the money being accessed (or drawn). Such loans are typically unsecured and do not require upfront collateral. 

• Merchant Cash Advance:

Essentially a lump sum of cash upfront that can be used accordingly by your business, a merchant cash advance offers access to fast and unsecured financing. That said, those upfront advantages of sort can also include significant disadvantages – such as repayment terms that can include up to 350% interest in some instances. If your business operates with consistently high credit card transactions, you may be able to handle the repayments for a merchant cash advance. However, many small and medium-sized businesses experience cash flow problems as a result of MCAs. 

• Business Credit Card:

As revolving lines of credit, business credit cards are often essential staples for companies to manage specific expenses – such as travel, office utilities, office supplies, office equipment, etc. As a general rule, credit cards should only be used for expenses that can be paid off on a monthly basis without incurring the often substantial interest rates (commonly exceeding 25%). Monthly rewards programs, cash back, and other types of perks may be advantages available for business credit cards, which are commonly accessed without any upfront collateral required. 

• Commercial Mortgage:

From restaurants to office spaces to warehouses, a commercial mortgage can cover virtually any type of business property need. For businesses with excellent credit history as well as overall performance history, commercial mortgages are typically accessible. The same is commonly true for businesses starting out that are looking to secure an office location. For businesses in distress, however, accessing a commercial mortgage can be next to impossible. Commercial mortgages are what’s known as an asset-based loan. This means that the amount as well as the repayment rate of your business’s commercial mortgage will almost certainly be based (perhaps exclusively) on two key factors: your credit score and total value of any property you’ll be using as collateral. Amounts of commercial mortgages can vary significantly on a case-by-case basis – often starting around $250,000 up to $5 million or more. Interest rates for commercial mortgages typically start out between 4% and 5% depending on your business’s credit score and collateral value. Such loans typically exist on 25-year or 30-year repayment plans. 

• Equipment Loan:

When your business needs equipment, an equipment loan is an excellent option (and not simply as a result of the name). Amounts can vary, but one enticing aspect of equipment loans is that they can be secured in multi-million dollar amounts (commonly up to $5 million). Another benefit or advantage of equipment loans is the ability to access the capital quickly – potentially in as little as 24 hours. Interest rates for equipment loans are typically competitive – often starting around 7.5%. Equipment loans typically do not require a down payment or upfront collateral (aside from the equipment) to be secured. That said, credit scores above 650 are preferred. Furthermore, bringing in (or being able to demonstrate consistently) at least $50,000 in annual revenue is often preferred with equipment loans. 

• Invoice Factoring:

Does your small business have unpaid invoices (those frequently requiring repayment within 60 days)? You could be eligible for what’s known as invoice factoring. By selling your invoices to an invoice factoring company, you could secure access to quick cash. In turn, that factoring company would then be responsible for collecting the invoices when they are due. 

• Invoice Financing:

Very similar to invoice factoring, invoice financing involves using your business’s invoices as collateral to secure a cash advance. This can be an excellent means of securing quick cash flow for your small or medium-sized business, but they can be costly in the end. Furthermore, your business is still ultimately responsible for collecting all of the invoice payments when due.

• Personal Loans:

A common option for startups, personal loans can be used for business purposes in some cases. If your business has no operating history, you may need to resort to this particular type of financing option. The borrowing amounts for personal loans are often small, however, particularly when compared to the other options reviewed within this list (often only up to $50,000). If you end up defaulting on a personal loan – even though it’s used for your business – a downside can be that it ends up hurting your personal credit score. But if you, as the startup founder, are willing to take such a risk, this can be a viable option. 

• Microloans:

Capped at $50,000 or less, microloans are typically offered by non-profit organizations and mission-based lenders. Often available to startups and new businesses, microloans are commonly accessed by companies in disadvantaged communities or those seeking small financing sums.