Business Loans

At some point or other, most businesses will need to take out a business loan. Whether it's for start-up cash, financing for inventory or equipment, or simply a loan to get through a lean time, there are various types of loans that are available for those in business.

Types of Business Loans

Short Term Loans: A short-term loan, generally with a term of less than one year, is taken out for things like building inventory or investing in some part of the business. The loan is usually repaid at once at the end of the term, not in monthly installments.

Term Loans: A term loan is the standard type of loan. Term loans can be used to finance things like business start-ups, working capital, acquisitions, and the expansion of a business. They are repaid monthly until the term of the loan is up. Term loans are usually taken out for larger amounts than short-term loans.

Equipment Financing: One of the biggest expenditures for many businesses is equipment. Whether its factory equipment or office equipment, loans usually need to be secured to purchase what is needed. Generally, the equipment that is bought works as collateral for the loan, so equipment loans are easier to obtain than other types of loans. If a business cannot make payments, the equipment is taken for payment.

Lines of Credit: When a cash flow problem occurs, a line of credit is usually the best option for a loan. The financial institution can issue a line of credit for a certain amount, and the business can draw upon the line of credit when needed. The money that is not drawn upon does not accrue interest. There may be a penalty of a rising interest rate if payments are not made on time so lines of credit need to be used very carefully.

Factoring: Factoring is a type of financing that many small businesses can benefit from. The business sells its invoices to a third party who pays them immediately the sum owed, minus a fee. This keeps a small business's cash flowing regularly and may well be worth the loss of the fee.

Preparing to Apply for a Business Loan

Loans can involve a lot of monotonous paperwork. To help the process run smoothly, it is a good idea to have your documents in order before you apply. Most financial institutions require the following when applying for a business loan:

• The company's financial statements, including income statements, balance sheets, tax returns


• The personal financial statements of the company's owners


• A detailed business plan


• A profile on the management of the company


• Cash flow projections.

Since not all financial institutions require the same documents, other documents may be required to obtain a business loan.

By Robin Shreeves