A business loan is a type of financial product that allows small and medium-sized businesses to receive funding. It can be a credit line or a lump-sum payment. In exchange for this, your company agrees to pay back the money over time. Depending on the type of loan, your lender may require monthly or daily payments.
Business loans are categorized into two types: secured and unsecured. The former requires collateral, which is something of value that the lender can seize if the borrower fails to make the payments. An unsecured loan doesn’t require collateral. It usually requires a personal guarantee to avoid being held liable if the business fails to make its payments.
Important Loan Terms
Assets – The assets of a business are typically something that the company or the borrower owns. Usually, lenders require collateral when it comes to granting a business loan. Aside from the company’s assets, other factors, such as inventory and equipment, can also be considered when determining if a business loan is appropriate for the company.
Collateral – To secure a business loan, the borrower must provide the lender with collateral. This type of asset can include the assets that the borrower offers to the lender. These assets are seized if the borrower fails to pay back the loan.
Down Payment – A down payment is the amount of money a borrower will contribute to a project during the initial stage, known as the down payment. Usually, this amount is around 10 to 30 percent of the total loan amount.
Interest Rate – The interest rate is the percentage the lender charges for the borrowed loan amount to be paid back over time. Many factors affect the interest rate of a business loan. Some of these include the type of financing you’re looking for, the length of time you’ve been in business, the market interest rate, and the credit and financial condition of the owner.
Importance of Business Loans
Small and medium-sized businesses have long been able to rely on business loans to fund their operations. These types of loans are typically used to cover the cost of equipment or to boost the company’s cash flow. They can also be used to consolidate debt.