PERSONAL FINANCE BLOG

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Types of Loans
14 Jun 2018

7 Types of Loans You Can Apply for as a Business Owner

If you’re a business owner, then the pressure of having adequate cash flow can be overwhelming at times.

This is especially true when you consider that 25% of all small businesses fail because they don’t have enough money to get them through.

If you’re feeling the heat yourself, you should consider whether it’s time to take out some additional business finance to help.

We’ve got 7 different types of loans for you to consider, depending on your circumstances.

1. Installment Loans

When you’re planning your business finances, it’s helpful to have the security of knowing exactly what your outgoings are. If you’re looking for additional business credit, an installment loan could give you security and consistency.

How? Well, your monthly repayments are equal throughout the course of your loan, repaying the interest and the principal amount of the loan throughout the entire term. The interest rate is fixed, too, so your repayments won’t change.

Check with your lender, but usually, you won’t have any penalties for offering early repayment. You can plan your finances around equal repayments, ensuring there are no surprises one month!

2. Line of Credit

Some people might find the fixed nature of an installment loan more appealing, but other business owners might need to respond to changes and developments quickly. This is where a line of credit can be appealing.

It’s a short-term cash advance that can be used to pay for inventory or running costs, so if cash flow is a problem one month, you’ll be covered. Interest rates are typically low, and you can use and repay the amount again and again for a period of a year before having to apply again.

If you’ve ever used a credit card, the principle is similar. Speaking of credit cards, if you’re looking for a new personal credit card, why not see if we can help you find one from our list of best credit cards here?

3. Secured Loans

If you have capital assets available to you already – for instance, if you own a property – you could use this to get you a very low-interest rate on a secured loan. It’s ‘secured’ because you offer your existing assets as collateral.

With an untested or unproven business, you may struggle to get other types of loans, so by offering collateral to secure it, a secured loan could be a good choice.

However, remember the obvious pitfall here. If you default on your loan, you put your collateral at risk, and the lender is likely to choose to sell off your assets to secure repayment.

4. Unsecured Loans

If a secured loan sounds unappealing to you, but you already have a proven business, a typical unsecured loan might be a better option. This is as typical a loan as you can get.

You offer no collateral for securing it, but you’ll likely pay a higher interest rate for the privilege of it being ‘unsecured’. These types of loans can be short or long term, depending on how healthy your business finances currently are.

You may find it easier to obtain an unsecured loan than a secured one, as it won’t require the lender to make a valuation of your assets before they approve any application.

5. SBA Loans

SBA or Small Business Administration loans are federally-guaranteed loans from lenders that offer low-interest rates to new or struggling existing businesses.

The SBA doesn’t offer the loans themselves. They act as a guarantor towards a portion of the loan so if you fall on hard times and default, the lender can reclaim some of the cost from them. This lowers the risk for the lender and guarantees you a healthy rate.

There are a variety of different SBA loans on offer, offering help for business purchases, equipment and recovery loans for businesses that suffer destructive loss due to national disasters.

You can find out more information about SBA loans from the Small Business Administration.

6. Balloon Loans

Balloon loans are the opposite of an installment loan, in some ways, and yet similar in others. Instead of paying off the principal and interest of your loan equally over time, with most balloon loans, you’ll only pay off the interest until the final payment.

The repayments, generally, will be lower, but your final payment will be much bigger as it’ll include the ‘balloon’ payment of the full principal amount of the loan.

Some balloon loans will allow you to pay off some of the principal during these repayments, but you will still have the majority of the repayment to make at the end.

You’ll be able to spread the interest payments equally, however. This kind of loan can typically be found in a specialist commercial mortgage, but unlike a typical mortgage, these will have short terms (around 5 to 10 years in length).

7. Equipment Financing Loans

Does your business require equipment? An equipment financing loan can help a new or expanding business purchase vital equipment over a typical period of 1 to 5 years.

You can use the loan to purchase any equipment your business needs. It could be retail point-of-sale machines, or if you’re a manufacturer, it could be expensive production equipment.

The equipment acts as collateral in their own right. If you fail to make repayments, the lender can seize the equipment and sell it to recoup some of the costs.

Most lenders will offer these loans with fixed rates and set lengths, allowing you a similar sort of stable repayment schedule that an installment loan provides, but unlike those loans, you can only use this type of loan for equipment purchases.

Varied Types of Loans for Varied Circumstances

With a solid business plan and the potential for profitability, you don’t want to give up your business just because you don’t have enough of a cash flow this month.

Taking out one of the types of loans described above could change all that. Depending on your circumstances, you could secure credit that could help you develop and secure your business for the future.

Looking at personal loans, too? Why not apply online and see if one of our preferred lenders could help.