What Is a Small Business Loans?
A small business loan is a type of funding that is intended for businesses of a certain size. Depending on your industry, your company may be considered a small business if it employs somewhere between 1 and 500 people. Small business loans are not investor financing; the money that you receive through the loan must be repaid. The financial institution or lender that grants the loan will also charge you interest that you will be responsible for paying along with the money that you owe.
Secured Vs. Unsecured Small Business Loans
There are two main types of small business loans: secured and unsecured. With a secured loan, you pledge an item or piece of property with value as collateral. If for some reason you default on the loan and fail to pay it bank, the lender can seize that item and sell it. Most often, secured small business loans are used to purchase real estate, vehicles or equipment.
Unsecured small business loans do not involve pledging collateral. The loan is granted on the basis of the business' credit worthiness, and in many cases, the business owner or owners' credit is considered, too. Unsecured loans are typically more difficult to qualify for because there is more risk involved, as there is no collateral to sell in the event of a default.
Installment Loans Vs. Lines of Credit
Small business loans may be structured in many different ways, but there are two main kinds of loans available: installment loans and lines of credit. With an installment loan, you receive the money that you've requested as a lump sum when the papers are signed. Then, you make a set number of payments, usually on a monthly basis for a predefined number of years. Each payment includes some of the principle that you borrowed as well as interest. At the end of the loan, you have repaid the debt and would have to borrow again in the future if you ever need more money. Normally, installment small business loans are used for funding start-ups and for major purchases. You will need to tell the lender what you intend to use the loan proceeds for when you apply.
Business lines of credit work differently. With a line of credit, the lender approves you for a credit line of a certain amount. When you need funds, you can draw from the line, and then you'll receive a monthly bill requesting a minimum payment amount. As you repay the loan, the money becomes available for you to borrow again. Business lines of credit are often used to improve cash flow and to cover emergency costs rather than for major purchases or funding a start-up; however, you can usually use the proceeds from the line of credit in any way you desire.