Types of Business Loans for Startups and Expansion

At any given moment in life, almost everyone has had a thought of how he/she can venture into any type of business, either as a side hustle or main income hustle. Owning a business, either as a sole proprietor or in partnership form, makes one self-employed and enjoys the privileges of being the boss.

However, on top of other factors, the biggest challenge in starting a business is securing the needed capital. The capital amount for startup or business expansion depends on the type of the business and its operation dynamics.

One of the easiest ways to raise capital is by securing a business loan from financial lenders.

Types of business loans

There exist several types of business loans depending on the type of business and the entrepreneur’s situation.

Short-term loans

As the term states, these are loans offered for a short period of time, usually less than one year repayment period. It takes up to two to three days for borrowers to receive funding after applying and meeting other legal requirements as needed by the lender. They are usually offered by online lenders, microfinance agencies, and banks. Shlocks also offer the same services but at an extremely high interest with a lesser payment period. Short-term loans usually range from Ksh.100,000 to Ksh. 5,000,000.

Long-term loans

These are loans offered for a longer period of more than one year. They’re not offered for startups but usually offered to boost the operation and growth of the already existing business entity. Their monthly interests may be a little cheaper compared to short-term loans. The amount secure can be up to Ksh. 50,000,000.

Secured loans

are loans that require collateral from the borrower. the collateral may be a property like vehicles, equipment, stocks, or other assets of value. Secure loans from banks and creditors are often easier for new businesses to get and have lower interest rates than unsecured loans. The loan amounts may range from Ksh. 200,000 to Ksh.1,000,000.

Unsecured loans

They are loans that don’t require collateral, hence making the loan riskier for the lender. they also possess high-interest rates, and borrowers must have reasonably high credit scores to qualify. They are usually offered by online lenders – including peer-to-peer (p2p) lenders – and by credit unions and banks as personal loans. The amounts can go up to Ksh.250,000.

Asset/Equipment financing

Asset financing is a loan offered by banks, microfinance institutions, and equipment dealers, to purchase tools or other equipment for your business. It may or may not require a down payment, which may help you preserve your capital and maintain cash flow. The equipment acquired is considered the collateral for this loan, hence, if you default on the loan payment, that equipment is repossessed. Loan terms range from six months to ten years, depending on the borrowed amount and borrower’s financial record. The amounts range from Ksh. 50,000 to Ksh. 10,000,000.

Bad-credit loans

Online or direct alternative lenders(i.e shylocks) are often willing to provide financing options for borrowers with bad credit. These types of lenders don’t consider your credit score for loan approval, instead, they consider your cash flow and recent bank statements to determine your eligibility for the loan. You can typically be approved quickly for the loan, however, you are likely to face a risk of high-interest rates, accompanied by brief payback periods.