Tuesday, August 20, 2019 | Updated at 2:59 PM ET

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The 7 Different Loans You Can Get as a Business Owner

First Posted: Aug 09, 2019 10:42 AM EDT
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When it comes to business financing, entrepreneurs don't slack, and they are never scared to take advantage of the opportunities around them. Many of them turn to commercial lenders, banks, and even personal credit cards whenever they need cash to fund their start-up or promote their existing business.

That said, entrepreneurs don't even need to know the type of loans they need before approaching a lender; because many of these lenders will help you determine what kind of financing is right for your business. But, even at that, it is still crucial for you to have a general knowledge about the different types of loans available, so you'll better understand what your lender is offering you. Here is a broad look at how lenders structure their loans.

Installment Loans

These are loans that you pay back with equal monthly payments to cover both the principal and interests. It is one of the most popular loans out there. As a business owner, you can get installment loans from lenders, banks, or any other financial institution, as they all offer this type of loanin various forms. When you choose an installment loan, you will receive the full disbursement when the contract is signed. From that day, interest is calculated until the final day of the loan. However, if you are able to repay an installment loan before its closing date, you will receive an appropriate adjustment of interest, and you will not be penalized in any way.

Line-of-Credit Loans

A line-of-credit loan is the perfect type of loan for a small business owner. In fact, many experts suggest that every business owner should have a permanent arrangement of a line-of-credit loan with their bankers as it protects the business from stalled cash flow and emergencies. It is a short-term loan that increases the cash available in your business's checking account to the upper limit of the loan contract. These types of loans carry an ultra-low interest charge as banks consider them low-risk loans.

Inheritance Advance

This is perhaps the loan you never expected to enjoy because some people don't even understand how it works. Did you know that you can borrow a loan against the money you are set to inherit? In what is called an inheritance loan or probate loan, a loan provider offers loan to people who are scheduled to inherit money and other assets from a friend or family member. As a business owner, you can take advantage of this opportunity if you find out that you are qualified and use it to finance your business. These types of loans can come in the forms of:

An advance loan on the asset you are scheduled to inherit OR

A loan that uses the asset you are scheduled to inherit as a collateral repayment of the loan in regular monthly payments.

Balloon loans

Although some banks call this type of loan by several other names, you can still identify it by the following features:

Full amount is disbursed once the contract is signed

Only interest is paid off during the life of the loan

The principal is then paid off at once on the final day of the loan term (which is the balloon payment).

This type of loan is quite similar to an installment loan in every other way other than the principal balloon payment it involves. Balloon loans are usually provided when a business has to wait until a specific date to receive payments from a client for its products or services.

Secured and unsecured loans

A loan can either come in a secured form or an unsecured form. An unsecured loan is often provided when a lender knows a business owner so well and is convinced that their business is sound. An unsecured loan as no collateral pledge as the loan is provided based on the lender's trust in the business owner. As a new business, it is very unlikely that any lender would be willing to offer you an unsecured loan. A secured loan, on the other hand, involves a collateral pledge but generally involves a lower interest rate.

Letter of Credit

This is mostly used in international trades. It is a document that allows entrepreneurs to guarantee payment to suppliers in other countries. A letter of credit replaces the bank's credit for the business owner's up to a set amount for a given period.

Other loan types

Banks all over the world provide loans, using a myriad of names. They include:

  • Term loans: it can be either short-term or long-term. It is based on the number of years they are written for.

  • Second mortgages where properties are used to secure a loan. They are also known as equity loans and are usually long-term.

  • Inventory loans: they are usually offered for the purchase of inventory and equipment.

Commercial loans: lenders offer their standard loans for small business owners. 

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