Introduction To Types Of Business Loans
It’s a fact of life that any company, big or small, will eventually end up having to contend with business loans. For those new to it, the bewildering array of available choices and differing terms offered by different lenders are likely to create more than a little confusion. The descriptions of the various types below should help clear the confusion.
Term, Collateral & Source: The basic categorization of the financing requirement has to be into two types. First, whether it is a short term or long term need. Secondly, whether it can be secured or has to be unsecured.
Making these basic decisions will help with the other choices. So a short term and unsecured loan required for working capital could possibly be arranged for from family/friends. The company could also apply for a line of credit, or a loan based on credit card sales advance or accounts receivable.
On the other hand, a secured, long-term loan could be for a start up, real estate purchases and capital investments such as equipment purchase or leasing. It could also be funding required for expansion or acquiring another company. These types of business loans are provided by banks and other well established lenders.
Equipment Financing: Equipment purchases or leasing is quite easy since the equipment itself is collateral. This calls for a long term loan with monthly repayments. If the borrower is unable to make the payments, only the equipment in question is in danger of being seized by the lender. This ensures that the company and its owner won’t lose anything else.
Lines of Credit: For short-term requirements, a lender can make specific amounts available to businesses that can use it as and when required. Interest gets charged only on amounts that are in use, instead of on the total value of the LoC. The funds can be used for temporary needs such as working capital, inventory, etc.
Credit Card Advances: This is not about a company paying suppliers or bills using credit cards, although that’s possible too. The credit card advance being considered here is a loan offered by a lender against expected future card sales. Approval and amounts lent will be based on the past record of the same.
Factoring: This is a more solid arrangement than the above card advance. In this case, lenders provide amounts by purchasing unpaid invoices at discounts. The business gets cash for bills even if the customer hasn’t settled yet, so working capital doesn’t get blocked up.
All of the above information is no doubt a broad classification of business loans. There are many more varieties and possibilities open to businesses. For instance, small businesses may prefer to make it easier with government supported proposals, or take a cash advance. Others may fore go a loan entirely and try for a grant or find an investor for partnership.
None of this changes the basic elements of financing terms and requirements. An unsecured, short-term loan will always have a higher interest charge associated with it, as compared to a long-term, secured loan. Also, go over the figures once again to make sure the company won’t be harmed by an increase in the debt level.
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