When applying for a business loan, it is important to understand the difference between the different loan types. Not all loans are created equal and knowing which loan is right for you and your business can make all of the difference in the world when it comes to your business finance needs. We’ve outlined the three most common business loan types below to make things easier for you.

Business Term Loan
A business term loan is the most common type of business loan. With this type of loan, you borrow a set amount of money, which is paid to you in a lump sum. Then you pay that amount back at an agreed-upon interest rate over a set period of time, usually two to five years.

With a business term loan, your monthly payments remain the same, unless the interest rate is a variable rate. Then your interest rate may fluctuate depending on the going interest rate.

Business Overdraft
A business overdraft is a great short-term loan that can help you manage unforeseen expenses for your business. To access the loan, you simply write a cheque from your business chequebook and the business overdraft will cover the amount of the cheque that your cheque account doesn’t cover.

Sometimes collateral is needed for a business overdraft loan, however some banks do not require collateral for this type of loan. While business overdrafts are great for freeing up your liquid capital, they’re not necessarily recommended for long-term financing needs.

Debtor Finance
With debtor finance, you can borrow funds using the trade value of your debtors as collateral. This allows you to gain access to your accounts receivable prior to actually receiving the funds, maximising your business cash flow.

To qualify for a debtor finance, you’ll usually need a minimum amount of annual turnover (usually in the hundreds of thousands range) and your business will need an established credit history. While this type of loan is harder to get than traditional loans, it may well be worth the effort if your company qualifies for one.

Your loan broker can help you decide which loan type is best for you. Since each lender has their own programs and their own requirements, he or she can also help you understand other options that may be available to you, allowing you to choose the business loan that best suits your business needs.