Seven Types of Loans You Can Apply for Your Business
You can get different types of loans for your business from a variety of lenders. While applying for a loan, the lenders will themselves guide you to select the most suitable loan for your business. But the knowledge of the various types of loans can help you in making the right choice.
So following are the most commonly used loan types:
1. Line-of-credit loan
Line-of-credit loan is most suitable for small-scale businesses since it covers the damages caused by emergencies or sudden monetary losses. However, this loan can only be used for purchasing inventory or covering operating costs of your business.
This loan increases the cash in your business account up to the decided loan limit. The funding method of each bank varies but usually, business’s accounts are credited with the decided amount. Now you have to pay interest on the advanced amount throughout the loan tenure.
This loan carries the least risk and hence the lowest interest rate. Some banks can cancel your loan as per the decided terms, in case your business becomes vulnerable. You have to pay interest payments each month however you can choose a payment schedule of your own choice for the principal.
These loans are generally short-term and are renewed annually. Each year you have to fully pay your credit line for seven to thirty days, in the case of some banks. You can preferably negotiate your credit line within this time by showing your statements and records. So you should know the procedure of getting this loan even if you don’t need it right now.
2. Installment loan
An installment loan can be used for any sort of business need. You get full amount after signing the contract and to return it, you have to pay an equal monthly installment including both interest and principal. If you want to pay the loan amount before it’s decided tenure then your interest is reduced.
However, the terms of this loan mainly depend on its usage. For example, business cycle loans can be obtained for 1-7 years while property or renovation loans can last for 21 years. The rate of interest significantly varies with loan tenure. Installments can be paid in any interval like a 3-month, 6-month or even a 12-month interval.
3. Balloon loan
In a balloon loan, you get the full amount after signing the contract but you only have to pay the interest during the loan tenure. The principal is paid on the end of tenure in a single “balloon” payment.
Some lenders even allow you to pay both interest and principal in a single payment, after some specific time. These loans provide a solution to those businesses who are expecting the payments from their clients at a specific date.
4. Interim loan
The interim loan is paid by a mortgage on the building hence lenders make sure whether the committed party is reliable or not. This loan is often used to periodically pay builders and contractors.
5. Secured & Unsecured loan
Loans are of two types, secured and unsecured. In an unsecured loan, the lender does not require a secondary source to pay the loan, in case you fail to return it. You can get it if you have a good reputation and a well-established business. New businesses can’t qualify for such loan because they lack a reputable past record.
In a secured loan, lenders require a guarantee who pledges to pay the loan in case you default. Lenders prefer secured loan when there is more risk, or tenure is longer than a year. Mostly real estate or inventory collaterals, having comparable value as that of a loan, are used as a secondary payment source. For example, a $20k object can secure a loan of up to $15k.
6. Letter of credit
Letter of credit guarantees payment of a client to his contractor present in another country. This document is, in fact, the bank credit of client, valid only for a certain amount of time.
7. Other loans
Various banks offer installment and balloon loans in slightly different forms and names, which are as follows:
- Term loans can be short- or long-term depending on the tenure of loan
- Equity loans or second mortgages can be secured on the basis of real estate
- Secured inventory and equipment loan for buying inventory or equipment
- Accounts receivable loans, secured by active accounts
- Personal loans, for any sort of use, guaranteed by collateral
- Guaranteed loans, secured by the guarantee of a third party like an investor or spouse
- Commercial loans offered for small-scale businesses
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