Business loans are unarguably the most widely utilized method for financing a business. Small business owners and large-cap companies alike routinely take out loans to meet specific short-term obligations. As a business owner, a loan can make a world of difference for your company. You may decide to take out a loan to finance a specific business need or top up your business’s working capital. Continue reading for the basics of business loans below.
Types of Business Loans
Lenders offer diverse types of business loans. Here are some common types of loans.
Unsecured Loan
An unsecured loan doesn’t require collateral. As a result, business owners can leverage this type of loan to finance or generate working capital for their businesses. An unsecured loan is also a viable option for small businesses to scale their operations or finance a capital-intensive purchase.
Lenders who offer unsecured loans typically assess the business’ cash flows, creditworthiness, and business history, amongst other things. One significant advantage of unsecured loans is the speed with which applications are processed. The downside is that interest rates are usually higher, given that the loans are not secured with collateral. Additionally, the loan term and value are relatively smaller compared to other loan types.
Secured Loan
You need to provide a physical asset to serve as security or collateral to get a secured loan. Nine times out of ten, lenders require residential or commercial properties, vehicles, and machinery as collateral. Secured loans are lower risk because they are secured against a physical asset. Failure to repay the loan may result in the liquidation of the secured asset to recover the loan.
Unlike unsecured loans, the loan terms of a secured loan are low due to the reduced risk. Another significant benefit is that businesses can apply for bigger loan amounts for more extended periods.
Equipment Loans
Business owners looking to finance the purchase of a specific tool or piece of equipment can leverage an equipment loan to do so. Equipment financing is of different types, including chattel mortgages, hire-purchase agreements, equipment rentals, and equipment leases. The different types of equipment financing work differently. For example, any equipment you buy using a chattel mortgage serves as a security for the loan. Make sure you read and understand the terms of each type before taking out anyone.
SBA Loan
Contrary to popular belief, the Small Business Administration (SBA) doesn’t give out loans. Instead, they partner with traditional banks and credit unions to secure loans for small businesses. Consider contacting a Small Business Administration (SBA) to help you facilitate a loan facility or line of credit for your business. Essentially, they assume some of the risks of the loan to make securing a loan easier for small businesses.
Benefits of Business Loans
Here are a few common benefits that come with taking out a loan for your business.
1. Control
You have absolute control over the borrowed funds. Unlike equity financing, the lender doesn’t have a say in the ownership or management of the business. Your relationship with the lending institution ends as soon as the loan is paid back.
2. Business Financing
This is unarguably the most significant benefit of a loan. Business owners can borrow a considerable amount of money to finance a substantial business project. That way, you don’t have to wait for years to raise enough capital or find investors to fund your business’s unique needs.
3. Tax Deduction
Loan interest on loans is generally tax-deductible. Interest on debt financing is considered a business expense. Ensure your books are kept in good shape to claim your tax deductions once the fiscal year is complete.
