Know what’s available so you know what’s best for your business
There are many different types of small business loans, which is a good thing, since businesses of all types and sizes need funding at one time or another. Whether it is money for a new startup, or a loan to expand a business that has been around a long time, there is a loan out there for you.
Traditional lenders and others provide basically two types of loans: secured and unsecured. A secured loan is when you back up what you borrow with collateral. In other words, in order to obtain the loan, you agree to put your property or assets on the line - if you can’t pay, the lender takes possession of the collateral. With an unsecured loan, there is no collateral required, but this means there will be a higher interest rate - in some cases, much higher. This is to make up for the risk the lender takes in lending with no guarantee if you can’t pay.
The most common type of business loan is a term loan. This type of loans is the go-to when a business needs a large amount of money. The loans are called “term” because the borrower agrees to repay the loan in a designated amount of time, or term. Term loans can be long or short term. A short-term loan is usually repaid in one payment rather than in monthly amounts, and is for smaller amounts. A long-term loan is the opposite - it’s for a large amount and is repaid in monthly installments.
Another type of business loan is a line of credit, and are often used by business owners wishing to protect themselves from cash flow issues. The loan works like this: the loan is issued for a certain amount, and the business owner can draw from it as required. Then payments are made, with interest, on a monthly basis. Lines of credit are much better suited for short-term needs, since the interest can accrue rather quickly.
A business loan can also be in the form of an equipment loan, which is when a business owner puts up his business equipment as collateral. The loan must then be repaid according to terms, or the lender takes possession of the equipment. This type of loan is usually purposed for very large loans, sometimes in the millions, because for most businesses, equipment accounts for a large portion of the business’ assets.
The last type of business loan is a seasonal or capital loan, which are repaid at the end of the borrowing cycle, when inventory or accounts receivable are converted into cash. This is normally an unsecured loan, but can also be secured, and is a loan typically favored in the manufacturing, distribution, retail and service fields.