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Types of Loan — Part VI
Once you have evaluated your goals and realize your credit standing, you are ready to think about which loan best suits your needs. There are many different kinds you can consider for your small business. In this section we’ll cover:
Let’s look at each more closely now.
1. Interim or short-term loans
Short-term financing is generally used to support working capital, operating expenses, and immediate cash flow problems. Short-term loans obtained for business purposes are usually appropriate only until a source of longer-term funding is possible.
- For example, consider a short-term construction loan to build a warehouse. When the building is complete, a long-term commercial mortgage is used to repay it. The mortgage, similar to a home mortgage, is paid back over a number of years. This timeline is usually preferable for larger dollar obligations.
2. Long-term loans
Long-term financing is normally used for equipment, including vehicles, computer hardware, software, and machinery.
3. Production loans
Many banks provide short-term loans for production. These production loans are typically done under a line of credit for established small businesses.
4. Commercial loans
Commercial loans are used to finance working capital, accounts receivable, purchase orders, or inventory. Typically assets are needed to secure this type of loan.
5. Asset-based loans
As the name suggests, with an asset-based loan, you pledge assets to your loan from the bank. Although technically you still own your assets, if you fail to make your payments, the lending institution has the right to seize them.
Continue to: Part VII: Applying for a bank loan