Business owners will find it beneficial to become informed with the different types of commercial loans available to them. This will help them determine the best type of loan to apply for.
Business loans, more popularly known as commercial loans, are types of mortgages ideal to support short-term projects such as purchasing machineries, payrolls, and community projects. These loans are easier to repay compared to loans approved by lending companies because the interest rates are relatively lower. Approval of loan application is also subject to credit investigation based on satisfactory FICO rating and if the company is able to prove constant and stable cash flow. Before deciding whether or not to apply for a particular loan, you must become familiar with the different types of business loans available today.
Even if the borrower is able to prove his capacity to repay the loan through stable cash flow and high credit score, the lender s not 100% assured that his investment will be returned. Thus, the lender and the borrower can enter into an agreement wherein the latter will use his assets as collateral for the amount borrowed. This type is called a secured loan. In the event that the borrower is unable to settle the amount on the agreed date, the lender has the right of possession of the declared collaterals. This can also happen in case of declaration of bankruptcy. The following are the types of secured loans:
- Mortgage loan – the collaterals declared here are the borrower’s properties which can be a house, car, or lot.
- Non-recourse loan – the collateral declared by the borrower is the only assurance of the lender. However, the lender has the right to issue a “foreclosure” against the borrower.
- Foreclosure – the collateral given by the borrower is sold by the lender to repay for the debt.
Here, the lender is not secured by collaterals because he only relies on credit ratings and the ability of the borrower to repay the debt. It is more difficult to apply for an unsecured loan because most financial institutions offering this require a co-borrower to sign up for an application.
This type of loan is granted to starting businesses. Before the approval, the lender may ask the borrower to present proofs that the debt can be repaid through documents detailing all the monetary source of income of the company.
This type of loan uses a personal credit to apply for a financial assistance for the business entity. The personal credit will be used to repay the amount until the business is capable of doing the payment.
Business Acquisition Loans
If for example a business is tantamount to closure, the owner can sell that business to a lending company in return of an approved commercial loan application. The subsequent loan shall be used to put up another business and will be responsible to repay the remainder of the debt to the lender.
After identifying the types of loan suitable to your needs, carefully assess the terms of payment because as it goes longer, the interest rates pile up giving you a disadvantage of higher monthly payments.