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A Guide to Comparing Business Loans

Business Loan Articles > Article: A Guide to Comparing Business Loans

Business owners seeking financing for their companies have a lot of options to choose from. There are many different types of business loans available to business owners including secured and unsecured loans and business lines of credit. With so many options available, business owners must understand the different aspects of each type of business loan in order to make the best decision for their business' financial needs.

Secured or Unsecured?
Most lenders offer both secured and unsecured loans, as well as business lines of credit to business owners. A secured loan requires collateral as security for the debt, whereas an unsecure loan has no collateral or security requirements. Secured loans generally carry lower interest rates than unsecured loans. Because an unsecured loan is not secured by property, land, or other assets, an unsecured loan is a bigger risk to the lender and usually carries a higher interest rate to compensate for the increased risk.

The biggest benefit of an unsecured loan for a borrower is the risk. Unsecured business loans carry less risk for the borrower. Because no collateral is necessary, the loan is secured only by the borrower's signature and promise to pay.

Business Line of Credit
A business line of credit is similar to a credit card. The lender will grant the borrower a credit limit. When the borrower needs money, he or she can draw cash against the credit limit by writing a cheque or using a special debit card issued by the lender. With an unsecured line of credit, the borrower does not have to draw the entire line of credit at once, but can instead withdraw only the money he or she needs at any given time. A line of credit home loan is a revolving account, which means that as you pay the balance down, the money is then available for use again.

Interest savings is a definite benefit of an unsecured line of credit. Businesses pay interest only on the amount of money being used at any given time, not on the entire line of credit. This reduces the amount of money being assessed interest at any given time, without limiting the amount of money available for use. This is especially beneficial because unsecured loans generally carry higher interest rates.

What types of financing are available?
Although specific financing offers will vary, most lenders offer a variety of financing options for business owners. Below are a few of the most common financing options:

  1. Start up financing (new companies or companies less than two years old)
  2. Business growth financing (established businesses)
  3. Inventory financing (for business inventory)
  4. Motor vehicle financing (for company cars)
  5. Equipment and plant tools financing (for necessary equipment and machinery)
  6. Business property financing (for business real estate)
  7. Trade financing (for international trade and sales)

Comparing Loan Offers

Clearly, loans come in a variety of forms. So how can you pick the best loan for your unique business financing needs? The following questions can help you assess each type of loan product.

Is the interest rate fixed or variable?
Both fixed rate and variable rate loans are available for business borrowers. The type of interest rate assigned to your business loan will depend on the type of loan being applied for. Keep in mind that while variable rates frequently have a lower rate for an introductory term, the rate could rise later in the loan term due to fluctuations in the market or a scheduled rate adjustment.

Is collateral required?
Whether or not a lender will require collateral to secure a loan depends on several criteria:

  • How much money are you borrowing?
  • What is your credit rating?
  • How long have you been in business?

Unsecured loans that require no collateral carry less risk for the borrower, but also frequently have higher interest rates. Secured loans, on the other hand, have lower interest rates but higher risk for borrowers?

What is the loan term?
The length of the loan term will depend on the amount of money being borrowed. Generally, unsecured business loans are set for a term of two to ten years; however, this can vary from lender to lender.

What is the lender's length of time in business requirement?
Some loans, such as start-up loans, are available only to borrowers who have been in business for less than two years. These loans generally have more stringent criteria and frequently require collateral because the business has less history for the lender to evaluate before making a decision.

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