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Types of Business Loans
Line of Credit/Overdraft
Business Line of Credit, popularly called an Overdraft, is a loan type where you can negotiate the terms with the lender. This feature gives you the flexibility to access the funds and use it as you see fit. This provides the borrower with the flexibility to use the funds when needed.
The lender and the client negotiate features such as the terms of repayment and credit limit. It is a fact that you will only pay interest on the amount that is used. Companies use the overdraft as a quick fix to fund unexpected business expenses. It has proven to be an effective method of keeping businesses afloat when they face gaps in their cash flow.
Lease financing (Asset finance)
A lease financing agreement empowers a business (known as lessee in this case) to use a particular asset for an agreed period while making payments to the owner (the lessor), which in most cases are a bank. The business owner or company is given the option to either buy or refinance the asset once the agreed period expires. However, the condition to purchase or refinance is considered when there is a residual payment known as Balloon Payment left to be paid. Despite this, most businesses choose to either buy the asset by making a final payment or trade it for a newer version and still keep up with the lease agreement.
The excellent thing about lease financing is that the business gets to choose the contract terms. Thus, allowing them to enjoy the freedom to use the assets. Since it is your asset, you already know all the costs upfront, making it almost impossible for any surprising fees or charges to come up.
The information provided in this article may be too much to digest for some or need clarification. Perhaps you may want to consider using a Business Loan Broker to find a suitable business loan. This is part of what mortgage brokers do. Get in contact with SIF Broking, we are a Business Loan Broker in Melbourne.
Term Loan (secured or unsecured)
A term loan is given to a borrower for the “purpose” of business use, for a pre-determined period, usually between 5 to 30 years. The funds obtained from such loans can be utilised in activities such as equipment purchase, buying of a commercial property, acquiring another business, or handle other business expenses. The business owner or company is expected to remit a certain amount monthly over the pre-agreed loan term. In most cases, this type of loan is secured, which means that it was given on the back of an asset (usually a property) held by the borrower.
The bank or lender can recover its funds by selling the asset if the company defaults on paying the loan. For the unsecured term loan, you don’t need to use an asset as a security. This type of business loan represents more risk to the lender, which means you will be charged a higher interest rate.
The chances of getting an unsecured loan are lower than the secured term loan due to inherently carrying a higher risk. However, it all depends on your application. Unsecured term loans could be beneficial for business owners that don’t own any asset of value, or those that prefer not to risk the company or personal property.