3 Major Types of Loans to Fund Your Business

There are many loans out there that give you the ability to fund your business. However, the important loans given out by banks or other lenders are traditional, home equity and SBA loans. These loans offer significant dollars and are ideal for many small business owners.

Traditional Loans

Traditional bank loans are loans that most entrepreneurs think of when looking to raise debt capital. These loans are deposited as one lump sum into your account, where you are then required to pay the bank a monthly interest on the amount borrowed. Although traditional loans tend to offer low interest rates, especially when backed by collateral, they are difficult to receive as an early-stage business.

Bankers will often ask for a three year operating history or other financial documents in order to assess the risk of your business. For those businesses with healthy revenue streams this may be good news, but many start-ups do not have the luxury of past financial statements. Furthermore, many banks will restrict the use of funds on traditional loans. Common loans offered are restricted to working capital, purchasing machinery, or modernizing and renovating activities.

Home Equity

The unique thing about home equity loans is that they are secured by your home. This gives banks an insurance policy should you not be able to meet monthly interest and principal payments, and also provides you with lower interest rates.

Moreover, by placing your home as collateral, the banks are less reliant on your business' ability to generate revenues. Thus, home equity can be a valuable method of raising capital for early stage businesses that currently do not have strong revenue streams.

SBA Loans

The Small Business Administration was essentially created to fill the obvious conflict of interest when it comes to loans and early stage businesses. Start up businesses cannot provide a lot of the financial documents that traditional lenders require, and thus they have difficulty in securing a loan.

The government however, realizes the importance of small businesses and offers loans to entrepreneurs like yourself through the SBA. What makes these loans unique is that they are partially backed by the government. In other words, it takes some of the risk away from the private lender, giving you access to competitive interest rates and a better chance at acquiring a loan.

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Types of Business Loans

A business loan relates to the expansion, start up or enhancement of a business. It also implies the periodical redistribution of financial assets between the borrower and the lender. The process of acquiring business loans can be very tedious. It can also have some tricky conditions and limitations. To avoid that, all those who wish to apply for a loan, must have a concrete business plan.

Getting a business loan is difficult. But, if one follows the three Cs of credit, then it would be a smooth process. The three Cs are Character, Credit and Collateral.

Character pertains to your integrity and your credit worthiness as a person. The banker usually checks whether you have a criminal record. The banker may also scrutinize your accountability to the community through your family ties, home ownership and duration of residing at a particular place.

The banker also checks the applicant's credit history. The banker can excuse a late credit card payment. But, if the applicant is under heavy debt or mortgage and has skipped the payments, it can create problems.

The last, but not the least is Collateral. The bankers favor good credit as well as clean character. However, the factor that creates better chances of getting through the loan procedure is the property owned by the applicant. That means it could be anything from trucks to machines to buildings or any other equipment. Basically, the collateral is the solid property or instrumentation which could get a good price, even if the business fails. Collateral is a major point of consideration for the bankers. These days there are many who opt for business loans.

Common Business Loans

Secured Loans
In secured loans, the borrower promises his assets as collateral against the loan. In return, the creditor grants the loan. The assets he or she pledges, then become a 'secured loan' or 'secured debt'. In case of a default, the creditor gets the possession of the collateral. As a result, the creditor can recover or regain the amount of the money loaned by selling the collateral.

Types of Secured Loans
Mortgage Loans: Mortgage loans are taken against a collateral, which is the applicant's property, for instance, a house.
Non-recourse loan: It is a secured loan wherein the only security or claim the creditor has against the borrower is the collateral. It is known as a non-recourse loan because, here, the creditor has no option or provision against the borrower other than the collateral, in case of a failure in payment by the borrower. However, this is only after 'foreclosure' by the borrower.
Foreclosure: This is where the mortgaged property is sold by the defaulting borrower to repay his debt to the creditor. This is an entirely legal procedure.
Unsecured Loans
Unsecured loans are the exact opposite of secured ones. It is a kind of a loan or debt, which is not supported by a collateral. It is difficult to get an unsecured loan; however, it is cheaper at the same time. Here, the credit rating of the business matters. It is basically an assessment of the repayment capabilities of the business.

Start-up Loans
These are very basic loans, where the loan is applied for a new business venture. Meticulous planning is advisable, before applying for a start-up loan. Here, the credit and collateral can have a deep impact.

Business Only Loans
These loans are availed only for business sans the usage of personal credit, till the time the business is capable of returning the amount payable.

Business Acquisition Loans
If a company wants to go through a takeover process, or wants a loan to acquire another business, there are loans to complete that procedure. These are acquisitions financed through debt. Such acquisitions are called 'leveraged buyouts'. This is very common, even if in many instances, the company has enough finances to carry out the takeover or the acquisition. Apart from these, there are professional loans, where loans are applied by a professional from a specific field. For example, loans availed by doctors or lawyers and so on.

On the whole, obtaining loans can be a very cumbersome and lengthy process. But with increasing popularity, loans, be it a business loan, a home loan or a personal loan, are the order of the day.

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Tag: types of business loans, business loan
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