This page sets them side by side with invented examples from Lenawee County trades.
Term loans and working capital loans pay a lump sum back in fixed installments. Drawing on a line, paying it back and drawing again is how a credit line is meant to run. Equipment financing is secured by the machine. The merchant cash advance is the exception: no loan, just a provider collecting a cut of card sales.
Merchant cash advances explained through an Adrian, MI auto shop's card sales
With a merchant cash advance, the provider buys card sales the shop has not made yet, so no loan is involved. The provider pays the business a sum now and collects an agreed larger amount by taking a fixed share, the holdback, of each day's card receipts until that amount is reached. Its price comes as a factor such as 1.24 instead of an annual rate.
Illustration only, invented figures. An auto repair shop in Adrian, MI takes a $9,600 advance at a 1.24 factor, so the provider collects $11,904, and the advance costs $2,304. With a 13% holdback and card sales of $1,280 a day, $166.40 goes to the provider each business day, and the $11,904 is collected in about 72 business days. If card sales dip, the daily amount falls and collection takes longer.
An advance can suit a shop with steady card volume and a cost that cannot wait, but its cost per dollar can run high next to a loan, so a funding source's offer is worth comparing against the other five types first.
How long each funding type runs, set against an Adrian, MI sit-down restaurant's costs
Matching the length of the funding to the life of the cost keeps a business from paying for something long after it is used up. A sit-down restaurant in Adrian, MI shows the range.
- A replacement range, oven or dish machine can run for years, so equipment financing can stretch over a matching number of years.
- A wage or supplier gap of a few weeks fits a working capital loan measured in months.
- Recurring gaps, such as a large food order every few weeks, fit a credit line that is drawn and paid down repeatedly.
- A merchant cash advance has no fixed term: it lasts as long as the holdback takes to collect the agreed amount.
The restaurant's kitchen equipment order, worked through below, sits between those: one larger purchase with a life of several years, which a term loan can cover in one sum.
Types of commercial loans in one table for Lenawee County, MI businesses
| Funding type | Fits a cost like | How it is paid |
|---|---|---|
| Working capital loan | Payroll or supplier bills during a short cash gap | Fixed installments over months |
| Term loan | A large one-time business cost | Fixed monthly payments over years |
| Line of credit | Costs that come back again and again | Revolving draws, with interest charged only on the open balance |
| Inventory financing | Stock bought ahead of sales | Paid from stock sales or on fixed dates |
| Equipment financing | A machine, vehicle or tool set | Fixed payments; the equipment secures it |
| Merchant cash advance | A cost that cannot wait, with steady card sales | Holdback from each day of card receipts until the set total is collected |
Commercial real estate loans and building construction loans are not on the list because this site does not arrange them. The first four rows are loans or credit; equipment financing can be a loan or a lease; the last row is a sale of future receivables.
What is a business term loan? A Lenawee County, MI sit-down restaurant's kitchen equipment order
A business term loan pays one amount up front, and the business pays it back in equal monthly payments over a fixed number of months. Part of each payment is interest and part reduces the balance, so the balance reaches zero with the last payment.
Illustration only, invented figures. A sit-down restaurant in Lenawee County, MI replaces its range, combi oven, two fryers and a refrigerated prep table for $34,800. On a 48-month term at 10.85% a year, the payment is $896.89; 48 payments total $43,050.72, which puts the interest at $8,250.72. The range and ovens will be in use well past the fourth year, so the term ends before the purchase wears out. Dining room tables, chairs and the host stand are furniture, and the gas and power hookups are property work; both stay outside this site.
A business line of credit drawn for lumber before an Adrian, MI builder's next draw
With a business line of credit, the funding partner fixes a ceiling and the business takes money below it when a bill comes up. Interest runs only on the amount drawn, and paying it down frees the limit to use again. That fits a residential builder in Adrian, MI who buys lumber for each house before the construction draw for that stage is released.
Illustration only, invented figures: with a $40,000 limit, the builder draws $14,600 for a lumber package and repays it 32 days later when the draw arrives. At 13.15% a year, interest for those 32 days is about $168.32, and the full $40,000 limit is open again for the next house. Any fees the line carries are added on top and appear in the offer.
Equipment financing as a loan secured by the machine: a stand-on mower for a Lenawee County, MI landscaper
Equipment financing can be a loan or a finance agreement in which the equipment serves as collateral; some versions are leases instead. Either way the business gets the machine now and pays for it over time.
Illustration only, invented figures. A landscaping company in Lenawee County, MI finances a $13,900 stand-on mower over 48 months at 11.25% a year. Monthly, that is $360.94; over 48 months the mower costs $17,325.12, with $3,425.12 going to interest. If the company stopped paying, the mower is what the funding partner could take back.
Two articles go further: costs after a shop or restaurant changes hands and what a UCC lien records and how it is released.
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