Loans are an important means for businesses to obtain the funds they need to expand their business and launch new projects. However, many entrepreneurs find it difficult to find financing due to difficulty obtaining credit.
In this article we will explore the different types of loans available to businesses, their characteristics and how to request them.
- short term loan
A short-term loan is a loan with a limited term (usually less than a year). These loans are typically used for cash needs, such as closing a balance sheet or paying bills.
Banks, credit unions, finance companies and even private investors can provide short-term loans.
In general, short-term loans are cheaper than long-term loans, but interest rates can be higher due to the lender's greater uncertainty about the company's ability to repay.
- Long term loan
Long-term loans, as the name suggests, are loans with a longer loan term (usually one to ten years).
These loans can be used to finance long-term projects such as the purchase of buildings, equipment and machinery. Long-term loans typically carry lower interest rates than short-term loans, but require better long-term planning and risk management skills.
- Secured and unsecured loans
A secured loan is one where a business provides collateral for the loan, such as real estate, vehicles or equipment. This type of loan is usually easier to obtain because the collateral reduces the risk for the lender. If the loan is not paid, the collateral can be forfeited.
As the name suggests, unsecured loans do not require any collateral. In this case, assessing the borrower's repayment capacity and credit history is essential for the lender to decide whether to grant the loan.
- state loan
Many companies are turning to government loans to finance their operations. Government loans are granted by government agencies and offer more favorable terms than regular bank loans.
Access to state loans is often conditional on meeting specific requirements, such as specific production targets or the signing of supply contracts.
- loan to start a business
Startup loans are essential for incubating new businesses. These loans are usually given to businesses that don't have an established credit history and have difficulty obtaining traditional bank loans.
In that case, the loans are usually provided by business incubators and accelerators or local economic development agencies.
The process of obtaining an initial loan can be complicated, but the main goal is to demonstrate clear planning and the ability to use funds correctly to grow the business.
How to apply for a business loan
To apply for a business loan, businesses must submit complete documentation regarding their financial and credit status.
To better manage their business, companies need financial resources.
The financing techniques they employ vary in form, depending on their legal status.
Business loans can take the form of owner-provided financial instruments or third-party financing.
The factors that influence the type of financing that a company can use vary according to its size: for example, a joint-stock company can resort to the issue of bonds, while a smaller company is wholly owned or lent to a bank.
It is possible to request the credit institution to lease movable or immovable property to the company upon payment of periodic fees. It is a form of long-term financing.
It is a financing instrument that is often used by companies as an alternative to the outright purchase of fixed assets useful for production activities.
Ownership of the asset remains with the lender: the company, in fact, cannot treat the asset as its own in the financial statements.
After expiry, the company that owns the asset can decide whether to acquire ownership by paying a redemption price.
Information about prior year revenues, earnings trends, plans for using loan funds, and business structure are critical to evaluating loan application documents.