Types of Business Loans: It’s the normal nature of business to utilized loans for a wide variety of purposes. For some businesses the need may be for capital to expand services, purchase new equipment or hire additional employees. For others, cash may be required to see the company through a temporary slowdown in business which can be seasonal or due to a general economic downturn. When those needs arise, there are a couple of ways to go about acquiring the additional funding. Two of the most usual avenues include secured business loans and unsecured business loans. There are major differences in the two and a number of reasons why one type of loan might be a better choice than the other.
Secured -vs- Unsecured: Of the two basic loan types, secured loans are easier to get because credit is not as much of a factor since the loan is secured with an asset of some kind. The asset or assets used to provide the security can be any one or combination of things. Depending upon the lending institution you are dealing with, suitable assets may include real property, inventory, equipment, accounts receivable and even intellectual property or trademarks. Credit ratings for the business, as well as personal ratings for this type of loan, are not nearly as much of a factor as with an unsecured loan. The unsecured variety will normally require an excellent credit rating and a profitable business history backed up by tax returns and audited financial statements. Additional requirements may include a formal business plan outlining how and when the loan will be repaid. Even if you are able to meet all the requirements, unsecured loans carry higher interest rates and less advantageous terms and conditions. It should come as no surprise that even large, financially strong, companies often choose to go with a secured loan.
Shop for Rates: With a secured loan you should do some interest rate shopping before settling on a lender. Since the lenders are well protected in this type of loan and there little or no risk involved for them, you will have a better chance of getting the best interest rate by having several lenders compete for your business.
If you are new to the loan market, it may seem a bit daunting but you’ll get the hang of it very quickly. Most loan officers will be very helpful and walk you through all the details. Since you’ll have a pretty good idea of the value of the security they are asking you to put up as collateral, the only thing to watch for is to not let the loan become over secured. Simply put; do not let a lender take too much in property or assets as security. Not often, but sometimes they can get a bit over protective and want to encumber more of your assets than is required to secure the loan.
Especially with your first loan, don’t be so anxious to get the loan that you rush into a situation that is not in your best interest. It is a good practice to look for a loan officer that is experienced enough to understand how your particular type of business works. In that way he/she can help you by putting together a loan package that is beneficial for your business as well as secure for the lending institution.