Bank Loans for Small Businesses - Five Types and How a Business Lawyer Can Help

SOURCE: HG Legal Resources

Small businesses often need to acquire a temporary or long-term loan to start up the company or to run the standard daily tasks to keep the business interactions flowing. There are five different ways a small business owner can engage a bank and come out with a type of loan that can provide for months or years of financial assistance.

The Line-of-Credit Loans

Small business owners can receive a line of credit provided by the bank as a type of loan. This is often a more permanent type of loan because the line of credit exists as long as the business owner can make the necessary payments. This arrangement also protects the owner in cases of emergency or when there is no cash flowing into the company. These lines of credit can provide the ability to purchase inventory for business products and pay operating costs. However, the line of credit does not have any purpose in large equipment and real estate acquisitions.


The Installment Loans

Installment loans are similar to a standard loan a person would receive from a bank when he or she must pay both the principal and interest. These are for all manner of the small business needs to include inventory and equipment. The owner receives the full loan amount when signing the papers. Interest calculates from the final day of the loan. There are no penalties or as well as an adjustment of interest if the owner pays the installment back before the final date. These have cycles based on what the terms are and how the small business owner will use the money. The installment loan is generally short-term.

The Balloon Loans

A balloon loan usually occurs through using another name written in the paperwork. However, the principle usually remains untouched while the person pays off the interest in the life of the loan. He or she will receive the full amount when signing the contract. The principal amount is due on the final day of the loan. There are rare circumstances when the lender will provide the balloon loan where both interest and the principal amount are due together. These are almost identical to installment loans because of the way the small business owner pays them and receives funds.


The Interim Loans

The bank usually considers the factors of the receiving of the payments to ensure the loan principal and interest are complete and if the commitment to the loan is reliable by the receiving party. These are for small business interactions and will have the owner make periodic payments for such services as contractors building new areas of the company and facilities when the mortgage on this company building can pay off the interim loan. These are generally very short term and only occur in the short gap when the owner needs funds but the mortgage takes longer.

Secured Loans

Most loans occur because of the need for immediate funding. However, the bank usually requires a form of collateral which will lower the interest or ensure a secure way of getting the much-needed money. This type of loan is usually for twelve or more months and used to purchase larger assets such as equipment. It is normally not risk-free because if the owner fails to pay back the loan, he or she will lose the collateral. This item is usually a high-value asset such as a house, inventory or a vehicle. The loss of the asset is serious.


Unsecured Loans

If the lender knows the small business owner well and has proof that the company is both sound and prospering, the loan is often unsecured. The bank has confidence that the owner will pay back the funds on time. There is no collateral even in the event of default on the loan. There is a very low risk of default, and the bank will supply the funds because of this. A new business usually cannot qualify for this type of loan and may need to suffer through a secured loan with the possibility of losing collateral. There must exist a track record of success in the company and recorded profits statements to acquire an unsecured loan.

Legal Support for Bank Loans with a Small Business

The owner of a small business usually has a business lawyer assisting with this process and explaining how to proceed carefully. The lawyer may need to review the paperwork and help understand what the terms mean and say in these situations.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.