Subscribe to Entrepreneur for $5
Subscribe

Choosing a Business Loan Type

When you're in the market for business financing, determining what kind of loan you can qualify for is the first step.

By
Opinions expressed by Entrepreneur contributors are their own.

Q: Can I get a loan? What kind should I apply for?

A: Most entrepreneurs need to borrow money at some point. The good news is, there are many different loan programs. Unfortunately, that's also the bad news. In other words, the money's out there, but it can be confusing to decide which small business loans to apply for, especially because many loans fund specific things. Here's a quick breakdown of some common loan types.

loans: The SBA backs various types of small-business loans made through local banks and agencies. These loans can be used to buy equipment, inventory, furniture, supplies and more. For information on SBA-backed loans, visit www.sba.gov/financing/sbaloan/snapshot.html.

Line-of- loans: These short-term loans let you access a specified amount of money that's deposited into your business checking account on an as-needed basis. You pay interest on the amount that's loaned to you. Line-of-credit loans can be used to buy inventory and pay operating costs for , among other things, but not to buy or equipment.

Revolving lines of credit: When a lender offers a certain amount of money to a borrower and allows the same amount to be borrowed again upon repayment, it's a revolving line of credit.

Loans from friends and family: Money borrowed from friends and family can come with the best low-interest repayment plan you'll ever get. Borrowing from loved ones, however, carries risk. Set up a repayment schedule in writing, and stick to it so Thanksgiving dinner doesn't become a family battleground.

Angel investment: Of course, most family members won't eagerly write you a check for $250,000 to fund your startup. This is where an angel investor comes in, particularly between the first and second years of your company's existence. Angel investors, however, typically demand equity, a high return on investment and a well-defined five-year plan in return.

More Solutions

Entrepreneur Editors' Picks