Key Differences between Business Loan Products
As a business owner, you probably need financing every now and then. Looking for extra money does not imply that your operation is at risk. It’s very common for business owners to borrow cash when they haven’t been able to collect what they are owed by their debtors, this affects their day-to-day operations such as having instant cash to pay the wages of employees or the money required to get more materials to keep their business running. If you run a clean shop with strong numbers you can get help to solve this issue from any bank or lending agency.
There is also a basic set of knowledge that every business owner needs in order to secure the right type of loan according to their situation. There are a number of business loan products out there and every single one is suited to a specific situation. Your business agent will likely recommend the best option for you, but you also should hear the opinion of your accountant to access the best deal in accordance with your company’s finances. Let’s take a little rundown on these financial products and how you can tell them apart:
- Secure and Unsecured Business loans
When it comes to business loans this is the first key difference that comes forward front and center. A secured business loan is the most basic deal offered by banks and the one usually offered to people with small operations. The client asks for money and offers an asset as collateral to secure the loan. If he fails to make payments or goes into a default the asset will be used by the lender to collect their money back.
An unsecured business loan is a deal that most established business operators are able to get after having a long-standing business relationship with their bank or loan agency. The service provider offers cash up front and does not ask for collateral assets to cover the cost of the loan. If the client fails to pay back the loaned money the agency or bank are within their rights to use the legal system of the nation to secure their money back.
These type of loans are managed with a little more precision since they usually reserved for large amounts of money on very specific emergencies or special situations that require additional funding on your behalf. They are mostly offered by banks since you require a transaction account tied to your business operations. After meeting with your business agent and working out the details of the deal, you’ll be able to overdraw funds within a set limit previously agreed on with your bank.
The product comes with a lot of paperwork and red tape, but if handled correctly it can solve the cash flow problem to make a big deal on behalf of your business operation. The only concern about this type of loan is that it comes with high-interest rates and additional fees for each time you overdraw funds. The pay quotes can be negotiated, but since you are using bank funds directly the terms can be reworked by the bank to make the overdraft payment on demand and it is very little we can do about it.
After having an established relationship with your bank or loan agency you can set a credit line to secure instant funding for your business operation. Depending on the service provider you are dealing with, you’ll face different terms and conditions to secure the credit line but once you have it, you’ll get access to the amounts of money you need on a needed basis. The debt generated by credit lines are handled with set deadlines and no slump payments.
While the treatment sounds like a royal deal for most business owners, the facts are that credit lines come with a lot of restrictions, since neither banks nor loan agencies are fond of offering a blank check to even their most trusted customers. The great advantage offered by credit lines for a business is that the interest rates are calculated on the amount of money borrowed instead of the extension of the credit line itself.
- Fixed Rates and Variable Rates Loans
The “fixed” and “variable” aspects of these loans refer to the type of interest that the service provider is able to charge for them. A fixed rate is the one set by the lender for a short-term loan that can be covered by the borrower for a time period no longer than five years. They are usually reserved for short amounts of money that don’t go over $50,000.
A Variable rate loan, as the names imply, is the one whose interest rate is calculated by the lender at their discretion. These are usually reserved for larger amounts of money that will be paid in the long run. The extension of these loans come are set from $100,000 to $500,000 and they are only recommended if your business operation has relative financial health.