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Understanding 5 different types of bank loans

If you are thinking of starting a business or have recently incorporated one, you may be looking into sources of funding. You are not alone. Millions of business owners apply for bank loans each year. Bank loans can be used for everything from starting a business to financing a one-time project. If you are a landlord or small business owner seeking financial resources, it is important to know what types of loans are available and what each is used for.

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Term loans

Term loans can be short, long or intermediate in length. Long-term loans may be up to 20 years or more, while short-term loans can be as short as three months. Longer loans are normally paid each month and have lower interest rates. Long-term loans for businesses are often only approved for those with an established business or a proven track record of success.

Short-term loans are sometimes for individuals that have a one-time need for quick cash or need the loan as quickly as possible. These loans are often for business owners or landlords who need cash for building renovations or small projects. Shorter loans are usually not paid in monthly installments. They are due in full at the end of the term.

Secured and unsecured loans

Secured loans generally provide several benefits. These include longer repayment periods and lower interest rates. Secured loans, however, do require collateral to receive the loan. Collateral could include a savings account, car, home or some other type of property. Often the collateral required is greater than the amount of the loan.

An unsecured loan doesn’t require any collateral. These types of loans, however, are usually more difficult to obtain and often have higher interest rates. An unsecured loan is based on an individual’s credit history. The most common type of unsecured loan is a credit card.

Commercial real estate mortgages

A commercial real estate mortgage is similar to a home mortgage loan in that it’s a loan for a building or property. Commercial real estate, however, is property used for business. Commercial real estate loans generally have higher interest rates. There may also be restrictions on prepayment.

When someone owns property or a building but doesn’t occupy it, the income from third parties (renters) is an asset that a lender would want to secure. This is often the case when a landlord is involved. A Lease Assignment, or what is also referred to as an Assignment of Rent, is a document that would be drawn up when the property is rented. This allows the lender to collect rent from the third parties if the mortgage is in default.

Business lines of credit

A business line of credit is a little different from other types of loans in that it is more like a credit card than a loan. It’s flexible capital that can be borrowed from. For example, if the line of credit is $50,000, the borrower can use $30,000 and just pay interest on the amount borrowed.
Qualifications for a business line of credit will vary, with banks normally having stricter qualification standards than online lenders. There are several types of people who may be interested in business lines of credit. A landlord needing repairs for a building may apply for this type of loan. A business owner may use it to meet payroll or purchase supplies.

SBA financing

According to the U.S. Small Business Administration (SBA), there are several types of loans business owners can apply for. A few include the following:

  • General business loans
  • Real estate & equipment loans
  • Microloans
  • Disaster loans

Banks, community organizations and credit unions are still the institutions lending money. One of the primary differences between Small Business Administration financing and a traditional bank loan is that the SBA will guarantee a portion of the repayment.

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Incorporating your business might make it easier for you to get access to capital. When it comes to applying for a loan, formally establishing your company as a separate legal entity can add a sense of legitimacy to your business. You will also be able to open up a bank account and start building a line of credit (which is a necessity for many small business owners)

Before applying for a loan it’s important to do plenty of research. It’s necessary for individuals to find out what type of loan will best meet their needs.

If you have questions about starting your business, you can check out our legal center or you can ask a lawyer.

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