What are Small Business Loans?
One result of the competition in business finance is the full range of loan types that commercial banks and finance companies offer to small businesses. Each one meets a specific need: short term, medium term and long term. Well-run businesses can almost pick and choose from the many credit products available. Lenders nearly always want guarantees from the owners of closely held private companies.
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Revolving Credit
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If you and the rest of your team are creditworthy and your business plan portrays a well-planned enterprise with good chances for success, you may qualify for revolving credit from a commercial bank. The revolving credit is a firm commitment of the bank, as evidenced by a formal agreement. The credit is valuable because it is there to supplement working capital. You can borrow when revenues drop off and repay when income returns to normal. Typical revolving credits are reviewed annually and extended year by year.
Factoring
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Factoring is another useful short-term credit product. A specialist finance company called a factor will buy a company's high-quality accounts receivable and charge a discount fee for the service. It will advance to the company 70 percent to 90 percent of the face amount of the invoices and then pay the remainder after the accounts are repaid in full, less certain fees. Factoring can be expensive, but companies using it have the benefit of receiving cash for sales as soon as they ship the products.
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Medium Term
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Your small business may need to purchase equipment or vehicles and finance the purchase with bank or commercial finance company financing over three to five years. Term loans will require monthly or quarterly payments of principal and interest. Equipment manufacturers often provide introductions to lenders in order to facilitate a sale.
Long Term
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Normal long-term loans for a small business include mortgage financing for building or expanding the business' office location or manufacturing facility. Banks offer certain long-term loans to small businesses that are guaranteed by the Small Business Association. Purposes for these loans include real estate purchases, refinancing, business acquisition, business expansion and construction.
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References
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