Unlike consumer loans, which tend to be purpose-driven, e.g. if you need to buy a house, you will just go for a property loan, businesses tend to be cashflow driven and have an array of loan types available to ease their cash flow, and it can be at times confusing to know which loan to go for.
Here are a few questions that may help you decide.
For example, a term loan tends to be cheaper than an unsecured overdraft or invoice financing on an interest p.a basis - but if you only need the cash flow for a quick inventory purchase which your customer will then repay in a few weeks, there might not be the need to get a term loan and getting locked in for a few years and paying interest longer than you need to.
If you foresee demand to be strong and there will be a need for constant cash flow, a term loan that you can use for any purpose might be better than having to keep applying for invoice financing every few months.
For example, while a property gear-up loan may offer you a longer tenure and cheaper interest rate, meaning the monthly installment is lower, there might be a longer processing time for property loans such as having a lawyer to arrange the title deed, which may mean you may have to consider a term loan for the time being and later use proceeds from the property gear-up loan to pay off the term loan, replacing it and paying a cheaper interest rate subsequently.
Broadly speaking loans can be classified into secured and unsecured.
Secured loans like the name suggests are loans that are backed by an asset or securitized with collateral such as property, reducing the risk for the funder as in the event of default, they will have an asset which they can sell off in the event of defaults, to recover some of the loan amounts. Examples of other secured loans are equipment or property gear up, merchant cash advances etc. You can read more about each loan type in our glossary. Secured loans involving properties usually have lower interest rates, larger quantum and longer tenure as they are strong assets.
Examples of unsecured loans are working capital loans (also called a term loan), unsecured overdrafts, credit cards, personal loans, renovation loans etc.
To help you narrow down the loan types you can consider, especially among the dozens of business loans(including sub-types) you can also consider checking out our Loan Type Recommender tool
If you have decided which loan type to go for and want to know how to compare the loan offers you have received, please refer to our How to Compare Loans article.
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