5 Different Types of Business Loans All Entrepreneurs Should Be Aware Of
Are you looking for a business loan to start your business? Do you need additional capital to expand your business? In this post, we will look at five types of business loans you can consider. Weigh each option and click our links for more information.
Taking out a business loan is a big financial commitment, but for some, it may be the only option.
Line of Credit Loans
Line of credit loans give business owners an opportunity to purchase inventory and pay general operating costs for working capital. There are some limits on what you can use it for, and you would need to have enough credit to use it for the purchase of real estate, equipment, or other expensive items.
These same loans are also short-term loans that extend the amount of cash available in your business checking account to the upper limits of the investment. The money is sent to the checking account of the business owner to cover checks written for their business.
These types of loans are good for one year, and can also be approved even if you have poor credit. Then the business owner has a chance to renew them if they choose to do so, for an annual fee. This type of loan is a good idea for companies which are just getting started and need direct lines of credit to establish themselves.
Installment Loans
Installment loans are loans that give you a lump sum to give you immediate capital and interest begins accruing from the date you sign the loan. You can take out a business cycle installment loan that will last from one to seven years or a shorter term installment loan that only lasts about four months. This all depends on the amount you think you need and your ability to pay back the principle. (Entrepreneur Magazine)
Secured and Unsecured Loans
When starting a business or trying to expand your current business, you can apply for either a secured or unsecured loan with a bank. A secured loan is one in which you offer some collateral that will “secure” the loan to the bank’s assurance that they will get their money back. For example, if you offer your car as collateral, the bank will have the legal authority to confiscate your car and sell it to get the money owed them if you fail to follow through on your promises to pay them back.
This kind of loan is easier to obtain than an unsecured loan, which offers no such collateral and the bank is only relying on your good faith to pay back the money. That is why unsecured loans are harder to get and they also often have a much higher interest rate.
During the process of determining the value of collateral with a secured loan, the bank you are dealing with will often place a value on your property which may be somewhat less than the value you place on it. This keeps their investment secure and guarantees them that they can retrieve most of the money they lent you and in some cases, even more than they lent you for security.
Bridge Loans for Businesses
Bridge loans are loans that are short-term loans used until an entrepreneur or business owner is able to secure permanent financing or is able to remove a current financial obligation.
The advantage of a bridge loan is that it allows you to secure much-needed immediate cash flow while meeting current financial obligations. In the world of business and entrepreneurship, bridge loans for restaurants are commonly used to help new or struggling restaurants in times of need. These are short term loans that last only up to one year at a time, and they also come with have high-interest rates. They are usually backed by some collateral such as real estate property or inventory.
Commercial Loans
Commercial loans are loans that are available specifically for small businesses, and they are focused on giving small business startups or small established businesses capital so that they can expand their business. These types of loans come from a traditional bank and offer the basic interest rates that loans in this category usually require.
Personal Loans
If you need a small amount of cash fast, you may want to consider a personal loan. Rather than go through the process of securing a large amount of capital that is associated with business loans, some people opt to secure a smaller amount (such as $5000) to get started. This is about the amount it takes to start a business in most cases. With a personal loan, you may or may not have to put up collateral.
If your credit is in good standing, you may be able to secure a relatively small amount of capital with no cosigner or collateral required. If your credit has some problems or you have had financial difficulties, you may have to offer some form of collateral to secure the loan. This is a case where an unsecured loan would become a guaranteed loan.
Remember that the “guaranteed” part refers to the lender, not the borrower. They are “secure” in the idea that they will get their money back even if you are unable to pay. This is why you should think long and carefully before starting the process of any business loan when you are starting your business.
Should You Get a Business Loan?
Some entrepreneurs take a rather dim view of obtaining a business loan. Mark Cuban, for instance, believes that you should not do it because it makes a startup business go in the negative immediately just as they are getting started.
However, for some startups, when the business owner has no other resources for beginning capital, it is a viable option. When taking out a loan, just vow to yourself and to your lender that you will pay the money back as soon as you start receiving positive cash flow so that you will put your business back in the “black” again.
As entrepreneurs, we must do what we must survive first, and then expand our businesses as we can afford to do so. A credible lending option offers a ray of hope for the struggling entrepreneur.
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