Types of Business Loans
Businesses, no matter how big or small, are often placed in a situation where they will need to take out a loan of sorts. Whether it is for initial capital, for expansion, for renovation, or for whatever other purpose, there will come a time when a business loan will have to be considered. It is essential then, that you become aware of the different types of business loans and which are the ideal ones to take out in specific situations.
Term Loans are considered as the most common of all types of multi-purpose loans. They are usually taken out to serve as business capital or for business acquisitions, expansions, and refinancing. These loans are paid on a monthly basis for a term that depends on the estimated lifespan of whatever you are using it for. This is the most practical type of loan to take out if you need a considerably large amount.
Short Term Loans are business loans that usually have terms set up for more or less than a year. Instead of monthly payments, this type of loan is paid in full at the end of its term. The amount released in this type of loan is much lower than that of the term loan, which is why it is usually used for small investments that are expected to deliver returns in a very short period.
Equipment Financing is a type of loan wherein the equipment that you are going to buy will serve directly as collateral for the loan that you are taking out. For this reason, it is often easier to take out an equipment financing loan than most business lines of credit. It also involves less risk on your part because in the event that you are unable to repay the loan for whatever reason, then only the equipment itself is compromised and not your entire business.
Lines of Credit are loans that are often taken out as insurance against possible cash flow problems. In this setup a financial institution grants a loan for a specific amount but you can only take out a portion of that amount each year. The amount of increments and the term of the loan is setup depending on your need. You have to be very careful with this type of loan because if you are unable to pay the balance as early as possible then the loan can be several times more costly than other business loan types.
Credit Card Advances are loans that are based on the track record of your business as well as how good your expected future income is. This is an advisable option if your business has been accepting credit card payments for at least three years. Sales from credit card transactions are considered a good way to measure future income so you can expect good rates from this type of loan.
Aside from these types of business loan, business can also take the option of receivables financing, otherwise known as factoring. This scenario involves the sale of your invoices to another company so that instead of waiting for payment from your clients, you will get the invoice amount immediately. The company who bought you invoices usually charges a fee of three to five percent of the invoice amount. Businesses usually turn to this option if they have less than three years in the market and if their prospects for growth are good but the current cash flow is less than remarkable.
Generally, there are strict federal guidelines governing business loans. In spite of these guidelines, however, the terms and conditions of the loans are still largely dependent on the specific circumstances that you are in at the time that you take out the loan. The loan structures often vary from one lending company to another so it is best that you carefully review all the conditions that apply to a specific loan that you are considering.
