One way in which businesses finance their operations is through loans. Other than loans, some enterprises prefer using equity as a financing option. These loans normally depend on the financial institution approached, nature of collateral required and duration of the loan. Enumerated below are various types of loans that any person should know.
Majorly used to fund colossal capital outlays such as the construction of warehouses and purchasing a fleet of motor vehicles. Commercial loans are generally short-term, and some collateral is required. The collateral required may vary from land ownership documents to personal guarantees by the directors.
The interest rate charged is determined by among others the lender’s prime rate or the interbank rate and the company’s credit interest. The lender also requires the company to properly maintain the property that has been pledged as collateral.
No collateral is required before the borrower is given the loan. All that is needed is his creditworthiness. A very high credit score is needed for one to be given this type of loan. In case of default, the lender will be compensated by the insurer.
This loan is advanced so that the company can purchase some assets that would otherwise have not been acquired using internally generated funds. The financing terms are always favorable since the purchased assets have a value that the lender can sell in case the borrower defaults in repayments.
Acquisition loans are available within a specified period, and for the agreed upon purpose only. The moment the loan is fully repaid, there is no re-borrowing unless another capital acquisition is in the offing.
Popularly known as the gap or interim financing. This short-term form of financing is ideal for companies that have existing loan obligations or has another long-term financing arrangement but needs to cover shortfalls in the short-term.
Bridge loans are normally repayable up to a year with the interest rates being relatively high to compensate for the risk involved. Secondly, financial institutions normally ask for collateral before advancing the funds.
Revolving credit is also called standing or evergreen loan. A maximum amount of loan balance is established within which the company is to maintain. Anytime the company needs money, it is allowed to draw down on balance provided the limit set is not exceeded.
The interest charged will depend on the amount drawn down and not on the entire amount agreed in the agreement. While the borrower has funds on request, the financial institution can demand loan repayment at short notice. At individual levels, credit cards are part of the revolving credit.
In conclusion, the list above is not exhaustive but instead, it tries to give an overview of the various options available. It is highly recommended that companies should approach different financial institutions and compare which ones have the best terms.