There are many different types of business loans, but every borrower should understand whether their loan is secured or unsecured and how their loan is structured.
Every business owner should understand whether their loan is a secured or an unsecured loan. Unsecured loans are not secured by collateral. Collateral can be a borrower’s personal property, real estate or equipment. Most business owners won’t qualify for an unsecured loan. Unsecured loans require exceptional credit and an extensive track record of financial success. Therefore most business loans will be secured by collateral. The borrower must pledge some property up front in order to cover the cost of the loan in case of default. Secured loans are common when a lender perceives risk, when a loan is made on a long term basis or if a loan is used for new investments like equipment or real estate.
Every business owner should also understand how their loan is structured. Most commercial loans are issued as “balloon loans.” During the course of these loans a degree of principle may or may not be paid down, but once the loan matures the remaining balance in terms of principle and interest must be paid back. Some lenders will even allow borrowers to offset interest payments, but that means a higher amount of money will be needed once the loan expires. Prior to taking on a business loan, the borrower should understand to what extent their monthly payments will apply to the principle of the loan and whether these payments will pay for the full loan amount once it matures.
The most common type of business loan is a business line of credit. These loans don’t usually require collateral and are rarely structured around balloon payments.
Credit lines are flexible short term loans and help many business owners cover their expenses should their cash flow stall. With a business line of credit a lender extends a fixed amount to the borrower. The borrower then makes withdraws from these funds in order to cover unforeseen expenses or routine costs. The advantage with a business line of credit is that the borrower only pays interest on the amount of money they actually withdraw instead of paying interest on the full loan amount. Interest is usually paid every month and the principle is paid off at the borrower’s convenience. While a line of credit is a flexible arrangement, these loans are intended to purchase inventory or to help a business cover basic expenses. A line of credit should not be used to make a long term investment.
If a business owner is worried about the risk of a balloon payment type business loan, they may seek an installment loan in order to make long term investments.
An installment loan can take on many forms. However an installment loan always entails a fixed monthly payment that covers both the principle and interest of the loan. This helps borrowers avoid the looming deadline of a massive balloon payment. The terms of an installment loan always correlate to its use. A short term installment loan (or a business cycle loan); can have terms of four months to seven years. Installment loans for longer term investments, like equipment or real estate, usually can come with terms up to 21 years. Most importantly installment loans are fully amortizing, making less risky for most business owners.
Business owners should be aware of the differences between a secured and unsecured loan and know whether or not their loan is fully amortizing. To avoid the risk of balloon payment business owners should seek out a line of credit or a simple installment loan in order to cover routine costs or make long term investments.
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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