The options available to you when it comes to taking a loan to start the business are many. In fact the same kind of business loan can be written under another name in different banks. The same kind of business loan can differ from one bank to the other in terms of the conditions that apply. For example, a commercial loan in one bank might require you to pay equal installments of principal and interest every month whereas in another bank it may be shaped as a balloon loan where only the interest is payable monthly and the entire amount gets payable in the form of a balloon payment on the last day of the loan.
Here are some of the common kinds of business loans that banks and lenders extend to entrepreneurs. Having a general idea and information regarding the kind of finance that is available to you from these institutions a good idea before you start exploring your options.
Line of Credit Account for A Business
A line of credit account is an extremely useful account that every business owner should have with his or her bank. Even if you do not require this account to provide you with capital to start and operate the business, it is still an arrangement that you should work towards having with your bank. A line of credit helps protect a business from emergencies such as stalled cash flow. A line of credit account is meant for purposes like purchase of inventory and payment of operation cost as per the business cycle meet. They are not intended for purchase of equipment or real estate. Line of credit loan is usually short-term loan that extends cash to the checking account of the business. Every bank has a different method of funding the business but the basic idea is that it covers the checks written by the business by transferring the money to a business account. The business pays interest on the money that is actually used from the time that it is paid back.
A line of credit account usually has the lowest rate interest as it poses the least risk to the lender. The lender has the right to cancel the account if it feels that the business is at risk. The interest payment is usually done on a monthly basis and the principal is paid at your convenience. This kind of an account is also referred to as a revolving line of credit. The tenure of this kind of loan is usually one year but it can easily be renewed with the bank provided your payment history has been regular and good. Many banks require that the account be completely paid off for at least 7 to 30 days in each contract year.
Even if you do not need a line of credit account right now, it is a very useful arrangement to have your bank. You do not have to pay anything till the time that you actually use it. Start talking to your banker today to see what arrangements you can make to have this account activated for your business. The bank will probably want to see your current financial statement, the latest tax returns and a projected cash flow statement to consider your application.
Installment Business Loans
These are fairly regular kind of loans where the amount borrowed is given in a lump sum to the business. The loan is repaid back in equal monthly installments which covers both the principal and the interest. Different kinds of loans are written according to different business needs. You can get a installment loan to serve any business requirement. The interest and the payment on the loan is usually amortized from the date of loan inception to the final day of the loan. You can usually pay off the installment loan before its final date without any prepayment penalty as well. The interest that you saved is appropriated accordingly. The term of the installment loan is usually correlated to the use. A business cycle loan may be written for a four-month installment loan and will carry a low rate of interest since the risk to the lender is for a very short duration of time. Business cycle loans can be written from one year to 7 years whereas real estate and equipment purchase loans may be written for 21 years. An installment loan is also occasionally given with quarterly, half yearly or annual payments where monthly payments are not appropriate to the nature of the business.
Balloon Business Loans
Although these loans can be found under many different names, the one feature that distinguishes the balloon business loan is that only the interest is payable on a monthly basis whereas the rest of the loan becomes due in the form of a lump sum large payment on the last day of the loan. The full amount of the loan is given to the business when the contract is signed. In certain circumstances, both interest and principal can be paid off on the last day of the loan with a single balloon payment. These Loans are usually given to businesses who need to wait for a specific date before receiving payment from a client at which point they will be able to pay back the entire amount borrowed along with interest. In all other regards, balloon business loans are similar to installment business loans.
Interim Business Loans
Interim loans are usually used to make periodic payments to contractors building new facilities and a mortgage on the building is used to pay off the interim loan. The main consideration for the lender is who is going to pay off the loan and how reliable is the security and commitment of the borrower.
Secured and Unsecured Business Loans
There are mostly 2 major forms of loans that you can be for your business, secured and unsecured. If the lender knows you very well and is well aware of your business along with having faith in its integrity and stability, he may be willing to write you an unsecured loan. An unsecured business loan does not use any asset of the business or personally of the business owner as a collateral. The lender gives this loan to business owner because it considers the business a low-risk. However, as a new business owner it is highly unlikely that you will qualify for an unsecured loan since you will not have a performance history or a record of profit and cash flow for your business based on which the lender can be sure of your ability to pay the loan back without the need of a 2nd payment method which usually comes from a collateral. It may still be possible to get an unsecured loan when you are starting a new business if you have long-term personal relationship with a particular bank.
A secured business loan is what most of the business owners will qualify for, specially if they are a startup. A secured loan is given to a business by getting some sort of collateral as the secondary method of payment in case the business happens to default. A secured loan usually comes with a lower rate of interest than an unsecured business loan. If the loan is for a longer duration of time such as moment 12 months or is used for the purchase of real estate or equipment and does not seem 3 of risk, the lender will usually require that the loan be secured by using an asset of the business or that of the business owner such as the real estate or inventory. Most of the circumstances, the a set that is used as a collateral for a secured business loan is expected to last the loan itself. This means that the value of the asset should be intact or have even increased during the life of the loan so that it can be used to recover the money lended to the business.
Since the lender expects the collateral to pay off the loan in case the borrower defaults, it is valued appropriately. For example a 20,000 piece of new equipment can probably secure a loan up to $15,000. Receivables are valued for up to 75% of the amount due and inventory is usually valued at up to 15% of its sales price.
Letters of Credit
Letters of credit are typically used to make payments to the foreign countries and guarantee payment to suppliers by substituting the banks credit. Letters of credit are given up to a set amount of time for specific period of time.
Other Kinds of Business Loans
There are a large number of loans that are written by banks and finance companies all across the country for the purpose of lending to businesses. These loans can be in different forms and, under different names. Some of the common loans that can be used for the purpose of starting the business are as follows.
- Term loans, both short and long term according to number of years there for.
- Second mortgages where a 2nd mortgage on the real estate is used to secure a loan, usually long-term. 2nd mortgages are also known as equity loans.
- Inventory loans and equipment loans for the purchase of new equipment and inventory and secured by the same.
- Accounts receivable loans secured by outstanding amount due to the business.
- Personal loans where your personal collateral guarantees the loan which you in turn lend to the business.
- Guaranteed loans in which a third-party such as an investor, spouse or the small business Association guarantees the payment of the money to the business loan lender.
- Commercial loans which is a standard loan that a bank offers to small businesses.
Once you have understood the different business loans and the major features of each, you are in a better position to negotiate with the lender and promote your business in a favorable light to secure the business loan that you require.