Just as all businesses are different from each other, so are their needs for financial funding. Whether you want to expand your existing project or kick start a new one, you have a wide variety of loans at your disposal. As an owner of a business or corporation, you should only opt for loans that are catered towards your needs and steer clear from those that will lead to a cycle of arduous debts. Therefore, you must perform some adequate research before opting for business loans so that you may avoid unfavorable circumstances later down the road. This business loan article is going to assist you in selecting the best business loan for your needs.
If you are planning to set up a business, the idea of opting for a business term loan must have crossed your mind. All business owners, at the very least, need some initial capital to kick start their endeavors. It starts after they figure out how he is going to get access to the required funds. Business term loans differ from personal loans in the sense that they are specifically catered towards business purposes by providing many additional business benefits such as low-interest rates and tax deduction.
If you are a small business owner, you must be looking to secure that initial investment or need some extra funding to maintain existing business operations and hire new employees. A business loan will assist you in achieving all this. Business loans come in various forms and aren’t straight forward as you might think. A lot of complex calculation is required to calculate the exact amount. A business term loan calculator can deal with these complex calculations and provide the real cost of the term loan along with various other fees.
What Are Business Loans?
Business loans are a short to long term source of funds provided and financed mainly by various financial institutions and banks. These main purposes of these types of loans are to start or maintain existing business projects, their modernization, and diversification. It can also refer to project financing. Business loans are repayable in predetermined periodic installments. A fixed or floating interest rate accompanies them on their repayment schedule.
Types Of Loans Based On Lifespans
Business term loans come in a variety of forms, mainly based on their respective lifespans.
Business institutions that aren’t eligible for a line of credit prefer short term business loans. More often than not, the duration of this type of loan is less than a year. Although sometimes it can extend up to 18 months.
- Intermediate-Term Loans
The duration for intermediate-term loans usually ranges from one to 3 years. The repayment of a loan is done in monthly installments along with fixed or floating interest rates and is made from the company’s cash flow.
- Long-Term Loans
The duration for long term business loans can exceed 20 years but requires a burrower company’s assets as a form of collateral. The repayment is made on a monthly or quarterly basis from the company’s cash flow or profit. Long term loans have their own set of obligations such as limiting financial commitments for the company etc.
How Business Loans Function?
Business loans function in the same manner as any other conventional borrowing with a few major changes. A business loan is acquired mainly for kick-starting a small business, maintaining or modernizing existing businesses, and can be paid off in one to 25 years. The business owner uses these funds to acquire additional equipment or hire new employees for its business operations. Business loans usually have a fixed or variable (floating) interest rate, a repayment schedule, and a predetermined maturity date. These loans sometimes require the business or company owners to pledge collaterals in case they aren’t able to repay the loans successfully within the due date.
Popular Types Of Business Loans
Discussed below are the most common types of business loans entrepreneurs and business owners acquire to fulfill their financial needs. It’s always better to have a general idea of various types of business loans to understand what the lender tends to offer. So, without any further ado, let’s take a look at some of the most popular business loans that are available in the market.
1. Installment Loans
Installment loans are one of the most feasible types of business loans an entrepreneur or business can acquire. Installment loans can be custom designed to meet all types of business requirements. As a business owner, you will receive the funding once the contract is signed, and an interest rate is negotiated between you and the lender. The biggest upside to installment loans is the equal monthly payment schedule. So, you don’t need to worry about varying interest rates. If the installment is completed before the predetermined final date, no penalty is charged.
2. Line Of Credit Loans
Most small business owners tend to go for a line of credit loans. It should be a permanent loan procedure every entrepreneur and business owner should have with his respective financial institution as it defends the company from unforeseen circumstances and delayed cash-flow issues. Business owners usually acquire a line of credit loans to purchase inventory or payment of operational costs. They are not meant for the purchase of real state property or equipment. Credit lines can be secured and unsecured, meaning they may or may not require the business owner to pledge the business’s assets. In the case of secured lines, if the owner defaults, the assets can be used as collateral by the lender to pay off the remaining debt. You, as a business owner, won’t go bankrupt, and only your business will be liquidated.
3. Secured And Unsecured Loans
Business loans usually come in one of two forms. They can either be secured, which means your lender is fully confident in your ability to repay the loan within due time and is willing to offer a secured loan. Whereas, unsecured, which means you will have you to pledge your company’s assets as collateral in case the business goes default. The lender will only provide an unsecured loan if it considers you low risk. Therefore, it is highly unlikely for new business owners to qualify for unsecured loans as it requires a track record of success and profits. Whereas, a secured loan requires collateral but usually has lower interest rates as compared to its counterpart.
4. Invoice Financing
Invoice financing is an extremely viable option for businesses and companies that are suffering from hindering cash flows due to unpaid invoices. All small businesses suffer from cash flow shortages due to the slow amount of receivables. Invoice financing can easily overcome this issue. These loans aren’t hard to acquire, and unlike other business loans, your credit score isn’t the deciding factor. The invoices act as collateral for this type of loan, so no assets are needed for collateral. Invoice financing can be acquired via different financial institutions and alternative lenders.
5. Merchant Cash Advances
A business that requires financial funds on an urgent basis to purchase stock or inventory may opt for a merchant cash advance. In merchant cash advance, the lender provides the borrower with funds in return for a portion of profit or sales of future credit. These loans can be acquired to quickly get out of emergencies and only requires the borrower to give bank account and sales record access to the lender. The only drawback is that the interest rates can be rather expensive than other business loans.
Running a business is without any doubt a daunting task. Although there are many loan options available to the business owners, you must invest some time in research and evaluation of all the lending options available. If you are smart, you will weigh the merits and demerits of each type of loan and select the option which best suits your business needs.