There are a number of ways to get a loan for a business. It is important that you know how lenders will structure the loans and what the common variations are.
Small business owners find that this is the most useful type of loan. This type of loan is actually one of the permanent loan arrangements that all businesses should have with their bank as it protects the business in emergencies and when cash flow has been stalled. Line-of-credit loans were created to help business buy inventory and pay all operating costs that the business cycle requires. These loans generally cannot be used for the purchase of real estate or fixed assets.
This type of loan is short-term and will allow a business to extend the funds in the business checking account to the upper limits set out in the loan contract. Each bank will have a different method of funding, but the amount is generally transferred to the business account to cover any checks. The amount that is been advanced is subject to interest from the time the funds have been advanced until it has been paid back in full.
Line-of-credit loans will usually have the lowest interest rates that the bank offers which makes them a low-risk option. However, there are some banks that will include a clause in the loan agreement that allows them to cancel the loan if they believe the business is in trouble. Interest payments will need to be made monthly and the principal amount can be paid off at the businesses convenience. It is recommended that payments on the principal be made regularly.
These loans will generally be for a year and can be renewed automatically for an annual fee. There are some banks that require the credit line to be paid off for 7 to 30 days in the contract year. This period is when you should look at negotiating. If you do not have a credit line you should consider asking your bank about one. To negotiate this loan, the bank will require a copy of current financial statements, projected cash flow and tax returns.
Installment loans are loans that are paid back with equal monthly payments that cover the interest and principal. An installment loan could be written to meet all business needs. Once the contract is signed you will receive the full amount and the interest will be calculated from this date tot eh end of the loan. There is no penalty for repaying an installment loan before the end of the period.
The terms of the loan will always relate to how the business will use it. A business cycle loan could be written into a 4-month installment loan and would have low-interest rates as the risk is for less than a year. Business cycle loans can have terms of 1 to 7 years while renovations and real estate loans can be written for up to 21 years. Occasionally, an installment loan will be written with quarterly, biannual and annual payments when a monthly payment is not appropriate.
These loans will generally be written under a different name, but are easily identifiable from the payment structure. The full amount will be provided once the contract has been signed and interest will be paid through the loan term. The principal amount will be payable on the final day of the loan term.
There are times when a lender will provide a loan where the interest and principal are paid in a balloon payment. Balloon loans are generally used when the business is waiting until a specific date to receive payment from a customer. Other than this, these loans are the same as installment loans.
Interim loans are considered when lenders are worried about who will be paying back the loan and if the commitment made is reliable. Interim loans are often used to make periodic payments to contractors building a new facility. The mortgage for the building will be used to pay off the interim loan.
Secured And Unsecured Loans
There are 2 forms of loans that you can get and they are secured and unsecured. An unsecured loan will be provided if the lender knows your business and is sure that you will be able to repay the loan amount on time. Unsecured loans will not have any collateral pledged should you be unable to pay the loan. Businesses that are considered low risk will be offered unsecured loans, but new businesses are unlikely to be viewed this way as the lender will need a track record of success and profitability – you can learn more if interested.
A secured loan will require some collateral, but will usually have a lower interest rate compared to an unsecured loan. If the loan is being written for more than a year or is being used for fixed asset purchases or does not appear risk-free, the lender will ask for the loan to be secured with collateral. The collateral that is used will need to outlast the term of the loan and will generally be related to the purpose of the loan.
As the collateral will be used to pay off the loan if the business defaults, the lender will have it valued. If the collateral is worth $20,000 it will be able to secure a loan of $15,000. Receivables can be valued for a loan of up to 75% of the amount due and inventory is generally valued at up to 50% of the sale price.