Business Loans: What You Need To Know

There are various types of business loans so you have to be familiar with the options at your discretion in order to come up with an appropriate financial plan. Most businesses require loans, right from the start-up phase through growth and expansion to diversification in the near or distant future. According to the type of loan you can choose will depend on various factors, including the nature of your business, its size and scope of growth, the specific purpose and the financial strength of your company, which could be the estimated revenue and the subsequent profit. Here is a brief classification of the different types of business loans you may have to contemplate.

Secured vs. Unsecured Business Loans

This classification is similar to how personal loans can be obtained with or without collateral. Secured business loans need an asset or some kind of guarantor. The asset could be a property, some equipment or a co-signer. Unsecured business loans do not require any guarantor but a co-signer may be needed in some cases. Very few lenders will offer both secured and unsecured business loans. Banks are usually averse to unsecured business loans. Private lenders are more likely to offer unsecured business loans.

Short Term vs. Long Term Business Loans

Business loans can have as short a term as a few weeks and as long as ten years. The term actually depends on the type of loan, the purpose and the amount. Small business loans are usually short term propositions. Long term business loans are almost always secured. They are usually a large sum of money and that is not approvable if you do not have a worthwhile asset or security to offer. Short term business loans are mostly for smaller sums of money and they can be unsecured.

Traditional vs. Unconventional Business Loans

Traditional business loans are of two types, excluding personal financing or raising money from family and friends. The more common of the two traditional business loans is available from banks. There are many financial institutions that are essentially nonbanking corporations with different types of business loans. They can be coalesced with the banks in the same category. The other traditional option is small business financing from governments. There are various schemes available from time to time, be it grants or business loans that are aimed at assisting entrepreneurship. Certain industries need help from governments from time to time. A few industries are considered sustainable and beneficial for the society and for the world so they are provided a boost with special financing from city, state and federal governments. For instance, the renewable energy sector was provided substantial help by most governments of the world.

Unconventional business loans are not really uncommon. They are just beyond the traditional concept of borrowing money from banks and nonbanking financial institutions. These options include private lenders, peer to peer networks and even crowd-funding. Private lenders, such as Kapitus are more flexible than banks, they do not have stringent policies pertaining to credit history of a business, they are more likely to offer unsecured business loans and would be somewhat willing to alter their terms of lending from one case to another. Large corporations such as banks are unable to do this, albeit there are exceptions.

Private lenders are not individuals. These are not the same as payday loans for personal purposes or for individuals. Private lenders for business loans are companies with a substantial presence in a city or state. Many have a nationwide presence. Private lenders are often considered to be better than banks by small businesses owing to their flexible approach. Chances of getting a loan approved are also greater. Banks are usually quite rigid when it comes to business loans. However, it is essential that a business owner explores all possibilities before deciding one over others. At times, private lenders charge a much heftier interest than banks. The contrary is rarely the case.

Significance of the Financial Statement and Purpose

The two major factors that would influence your application for a business loan are the financial statement and the purpose of borrowing a particular sum. These two factors would matter regardless of lender, loan amount, term, interest and the security or the lack of it.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.