When you’re looking for financing for your business, there are many options available. In addition to banks, you may also make use of commercial lenders or even credit cards to fund your business. Unless you are a financial expert, it is unlikely that you know everything there is to know about business loans. Therefore, your lender will be able to advise you of the best course of action for your circumstances. That being said, it is always a good idea to have a basic understanding of the type of business loans available so that you can make an informed decision.
Here we look at the various business loans available.
Line of credit loans
Line of credit loans is one of the most useful small business loans available and should be on the radar of all business owners. In fact, this is an arrangement that every business owner should have with their banker as it protects the business in case of emergencies. Line of credit loans are used for the purchase of inventory and operation costs and not for equipment or real estate. This type of loan is usually a short-term loan, and every bank or lender has its own method of funding. The approved amount will be transferred to the business checking account to cover checks, and the business pays interest on the actual amount from the time it’s transferred until it’s paid. This type of loan usually carries the lowest interest rate of any other business loan since they are considered fairly low-risk. Interest payments are made monthly, and the balance is paid at your convenience, although it is always best to pay if off as soon as possible.
These loans are paid to the lender with equal monthly payments covering both the interest and principal. These loans may cover any type of business needs, including equipment, overheads and property. Business owners will receive the full amount once the loan is approved and the interest is calculated from the day the contract is signed until the final day. There is no penalty for early repayment, and the interest rate will be adjusted appropriately. These loans all come with different terms, ranging from a couple of months to up to seven years, while bigger loans can carry a term of up to 21 years.
This loan can be identified by the fact that, while the full amount is received when you sign the contract, the interest is paid off in monthly instalments while the principal is due on the final day of the loan as a balloon payment. These are usually reserved for situations where a business is awaiting payment from a client on a specific date and can, therefore, pay the balloon amount. Other than that factor, balloon loans work in the same way as instalment loans.
Secured and unsecured loans
Secured and unsecured loans are popular options for businesses facing financial difficulties. The amount of the loan varies between lenders, with a Merchant Money business loans offer borrowers up to £150,000. Secured loans are loans that are backed up by collateral, while unsecured loans are not. Should you default on your secured loan, you risk your collateral, usually in the form of property. If you are considered a low-risk client, the lender may consider an unsecured loan as they believe that your business is sound and you can afford the monthly repayments. New businesses are less likely to qualify for an unsecured loan as lenders will usually require a track record of sales, success and profitability.
There are plenty of other types of loans available for business owners, and many depend on the lender approach. It is important to visit a trusted lender and find out about the best options to suit your business and circumstances before choosing any type of business loan.