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A loan whose sole purpose in for buying and selling goods is called a business loan. It entails the creation of debt for business use and repaid with interest. Different types of business loans include bank loans, asset-based finance, invoice financing, microloans, mezzanine finance, business cash advances and cash flow loans. Some of these types of loans are as discussed below.
Bank business loans are either secured or unsecured loans from a bank. Banks require collateral for secured loans which, are retained if repayments are not made. Business’ plans, accounts, balance sheet and principals’ credit histories are the documents the bank will wish to see before processing a loan. A bank loan is unfriendly to many small businesses. These businesses turn towards other alternative financing methods.
Asset-based finance business loans are lendings against an asset of the company e.g., premises. The quality of the collateral is most important to the lender and not the credit rating. This is why the small businesses with little to show on credit rating resort to this form of borrowing. A business may borrow against a number assets, including stock and even receivables.
Invoice finance business loans are those borrowed by a company against its outstanding invoices. Once the new invoices are created, funds are obtained for the loan. SMEs have found it difficult to borrow traditionally from banks, thus resorting to this form of borrowing. Invoice discounting and factoring are methods applied in this type of borrowing.
Micro business loans are smaller credits offered by financial institutions. When banks lend microloans, a personal credit score of business or business credit score is required for a decision to be made. This type of loan is in most cases, provided by alternative lenders who may not be the banks.
Mezzanine finance business loans are loans given to a company allowing the lender to be a business partner in the company. The business is allowed to borrow without putting up any other collateral, only risking dilution of principals’ equity share in instance of default.
In conclusion, business loans may help a business to succeed. If not, owners of business got it for wrong reasons. The problems that would have been solved end up spiraling out of control when the loan is misappropriated. A company with profits and have remarkable cash flows might need a loan for expansion if the funds available are not enough.
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