There are various types of business loans that a business can obtain. The business loan types include term loans, short-term loans, lines of credit, equipment financing and factoring.
Term loan is the common type of commercial lending. It can be used for financing different business activities and undertakings. Businesses can obtain this loan for business expansion and for use in everyday operation of the business. It can also be obtained when the businesses decide to acquire another business venture or would want to refinance existing liabilities.
Term loan is normally accompanied with a floating interest rate. Businesses settle this type of loan by making repayments on specified periodic dates. This loan often has maturity period between one and ten years.
In contrast to term loan, short-term loans have a maturity period of one year or less than a year. They are often repaid in lump sum at the end of their terms instead of periodic repayment. A type of short-term loan is a working capital loan which is used for financing the acquisition of income-generating assets, mostly building up of inventories.
A type of loan for acquiring a major business equipment is equipment financing. This type can be obtained more easily for the collateral used is the equipment itself. It is also deemed to be less risky for no other properties have been secured for the repayment of the loan. The equipment acquired can be repossessed by the institution that provides the loan when there is a default of payment.
Another option for a business to get business financing is through selling invoices to the third party. This method is called factoring. This can be employed when there are active accounts of slow-paying customers. Typically, businesses can exchange the invoices to the factoring company for cash. But normally, businesses can receive 80% of the value of the invoice and may also have to pay a certain fee. Nevertheless, the remaining percentage of the invoice value can be received once the clients pay.
Businesses can obtain lines of credit when they experience temporary cash shortfalls. They may also apply for credit card advances when they accept credit card sales. Banks and other financial institutions can offer certain types of business loans for a particular industry.
Obtaining a business loan may seem not that easy. Banks and other lending institutions would have to check different factors before they grant business loans to qualified candidates. The financial institutions normally check and evaluate the credit history of the business as well its assets, operations, management and financial statements. A business plan is one of the primary requirements in obtaining a business loan. It is an important material for would-be business owners in applying for a business loan for financing the start-up of their businesses.
For businesses, it is important to opt for the right size loan. It is more advisable to obtain a loan that is sufficient for financing a business undertaking.
Finding the right lender is also significant. Although it is likely that a would-be business owner may be rejected by a lender, he can look for another business lender. Establishing trust to a lender can also help a business owner from obtaining subsequent business loans.