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SME Loans: What are the Diverse Types?

If you are a business owner looking for an SME loan, you’d be delighted to know there are plenty of options to choose from.

You also have different sources you can turn to like commercial lenders, banks, and even personal credit cards.

While some lenders will help you decide on the SME loan that will best suit your needs, it is still highly recommended that you get a general idea of the different types available at your disposal.

Below are some of the SME loan options and the essentials you need to know about each:

Installment Loans

Installment loans are often repaid in equal monthly payments, with both the principal and the interest already covered.

An interest adjustment will be done if you are able to repay the loan before the final date.

Occasionally, installment loans are repaid half-yearly, quarterly, or annually when monthly payments are not feasible.

Secured and Unsecured Loans

Loans come in two forms—secured or unsecured.

When the lender knows you well enough, convinced that you are running a thriving business, and trusts that you can repay your obligations on time, you have a higher chance of being granted an unsecured loan.

Unfortunately, this type of loan is rarely given to new businesses as it would require a robust track record of business success and profitability.

A secured loan on the other hand, will require collateral.

However, it also comes with a lower interest rate compared to unsecured loans.

In most cases, loans that are not risk-free, are used to purchase equipment, or are written for more than 12 months is secured by a collateral.

The collateral used (regardless if it’s inventory or real estate), is expected to outlast the loan.

Line-Of-Credit Loans

Ideally, this is one type of loan arrangement every business owner should have with their banker as it will give them peace of mind in the event of stalled cash flows and emergencies.

Line-of-credit loans are often used as payment of operating costs, business cycle needs, and inventory purchases. They are not intended for real estate or equipment purchases.

Since considered low-risk, line-of-credit loans typically come with low interest rates.

While interest payments are to be settled on a monthly basis, the principal is often settled at the borrower’s convenience. Of course, making payments on the principal consistently is considered ideal.

If you want to negotiate a credit line with the bank, you will most likely be required to present your latest financial statements, tax returns, and projected cash flow statement.

Balloon Loans

Balloon loans share a lot of similarities with installment loans.

With balloon loans, you will receive the full amount you would like to borrow once the contract is signed and pay only the interest during the loan’s duration.

A “balloon” payment of the principal will be repaid on the loan’s final day.

Balloon loans are ideal if you have to wait for a specific date before receiving payment for a product or service you have provided.

Other Loan Types

Second Mortgages – otherwise known as equity loans, this type is secured by real estate and is usually long-term.

Equipment and Inventory Loans – as the name implies, this loan is used for the purchase (and secured by) either inventory or equipment.

Accounts Receivable Loans – this loan type is secured by the company’s outstanding accounts.

Personal Loans – you, as the business owner, will have to use your signature and personal collateral to guarantee the loan. You will then lend the amount you have borrowed to your business.

Guaranteed Loans – a third party—a significant other, investor, or the SBA—will guarantee the repayment of the loan.

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