Commercial & Residential Business Loan Definition
Many businesses use bank financing to begin or expand their operations. Approximately 6.2 million commercial loans were made to small businesses in 2009, with a total value of $206 billion, says the Federal Financial Institutions Examination Council. Not all business loans are the same, however. Commercial loans can be either secured or unsecured, and some types of business loans are collateralized by residential property.
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Secured Commercial Loans
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Secured commercial loans provide money to a business, and are guaranteed by a legal agreement called a lien. A lien grants ownership of a tangible asset to the bank if the borrower fails to repay the loan. Many different types of valuable property can be used to secure a commercial loan, such as vehicles, equipment, or commercial buildings. Because secured loans are guaranteed by assets, the interest rates are often lower compared to unsecured business loans.
Residential Business Loans
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Residential business loans are secured by assets, just like ordinary secured commercial loans. With this type of loan, however, a residential house is used as security. Because the home does not need to be owned by the business, residential business loans are often used by new companies that do not have established credit or valuable tangible assets. However, if the businesses fails to repay the loan, the residential property can be seized by the bank.
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Business Line of Credit
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A business line of credit is a type of commercial loan that is designed to prevent cash-flow shortages. While other kinds of commercial loans are provided as a lump-sum dispersal from the bank, business lines of credit can be used in small increments over time. For instance, if a business needs to pay its employees during the month but a large client check has not yet cleared, the line of credit can be used to cover the payroll expense. This credit is intended to be used for temporary cash shortages, and must be repaid quickly to avoid high interest rates and finance charges.
Unsecured Commercial Loans
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Unsecured commercial loans provide financing to companies and can be used for everyday business expenses such as marketing and advertising, or for one-time expenses such as equipment purchases. Unsecured commercial loans do not require a lien on an asset. However, because the loan is not secured, businesses generally need a very good credit history in order to show that they are financially responsible. Typically, unsecured commercial loans are not used by new companies that do not have an established financial record.
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References
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