What Are the Types of Commercial Loans Available to Businesses?

What Is a Commercial Loan?

A commercial loan, also known as a business loan or industrial loan, is an arrangement between a financial institution and a business. Financial institutions, such as commercial banks and mortgage companies, offer this type of debt-based funding to companies across a wide array of industry sectors for a wide range of business purposes, such as:

  • For the funding of major capital expenditures
  • For inventory financing
  • To cover operational costs that the company is having trouble to afford
  • For investments in equipment

Types of Commercial Business Loans

There are several sorts of commercial business loans available to businessmen. These include accounts receivable loans, real estate loans, vehicle loans, lines of credit and construction loans. All these different types of commercial business loans can be split into two major categories: short-term loans and long-term loans. We’ll start by looking at the short-term ones first as there are fewer loans in that category.

1. Short-Term Loans:

A short-term loan is a type of credit that is obtained to support a temporary business capital. Just as with any other loan, the borrowed capital and the accrued interests have to be paid back within a certain amount of time (typically within a year).

1.1. Lines of Credit

A line of credit resembles using a business credit card. It allows you to draw money as you need but has a limit – just like a credit card has a credit limit.

1.2. Merchant Cash Advances

Merchant cash advances are also a type of loan. However, the payment for this loan is a bit different: the lender gets a percentage from every sale the borrower makes.

1.3. Accounts Receivable Loan

This type of loan comes in handy when your customers have not yet made their payments. Borrowers are typically eligible for this type of loan if they have creditworthy customers.

2. Long-Term Loans:

Funded all at once, long-term loans are perfect for providing a set amount of capital for specific needs. Unlike short-term loans, long-term loans are paid off over an extended time frame. This time frame generally exceeds one year in duration and entails making smaller monthly payments with higher interest rates. Moreover, long-term loans can be secured and unsecured. Cash, inventory, and equipment can be used to secure the loan.

2.1. Equipment and Vehicle Loans

Equipment and vehicle loans are commonly taken by companies for financing the purchase of equipment and vehicles. The equipment may include computers, printers, air conditioning systems, and other heavy equipment. The vehicles, on the other hand, can range from new to used and include cars, vans, trucks or other machinery. In the case of this type of loan, the repayment terms will vary depending on the type and age of collateral.

2.2. Real Estate Loans

Compared to a home loan, the real estate loan is a commercial real estate loan is a mortgage secured by a lien on a commercial property rather than on a residential property. The loan is interim or permanent financing taken for the purchase, refinancing, or construction of commercial buildings, such as apartments, office buildings, retail buildings, industrial buildings, medical/dental offices, and warehouses.

2.3. Construction Loan

A construction loan, also known as a “self-build loan”, is a short-term or interim loan. This type of loan is used to help pay for construction costs, such as materials and labor, until the retail, commercial, or residential development project can be refinanced. In simple terms, it covers the costs of the project until the owner or developer can obtain long-term funding.

2.4. Land and Subdivision Development

The Land and Subdivision Development loan is a type of loan that allows the borrower to do two things: 1) purchase a lot to build something on it or, 2) buy a piece of land to be subdivided. While subdivision loans usually allow up to 18 months to subdivide, develop and begin selling off the lots, lot loans usually allow up to five years for building.

2.5. Commercial Fishing Loan

As you can deduce from the name, this type of commercial loan is mostly concerned with vessels and all types of fishing and processing gear. Commercial fishing loans are structured to fit the seasonal nature of the business and, essentially, cover or finance for the purchase of Individual Fishing Quotas.

2.6. Letters of Credit

Letters of credit, also known documentary and standby letters of credit, are arrangements most often used by:
• import/export businesses
• contractors
• travel agencies
A letter of credit is meant to serve as an assurance of payment and are usually for less than six months (although it can be renewed annually). Once your application for a letter of credit is approved, your lender will send an official letter of credit to the vendor. The letter will guarantee a specific dollar amount.

Getting a Personal Loan in Australia – Part 1 of 2

If financial constraints are the only thing standing in the way of your dream or an important, we may have the perfect solution for you. Below is everything you need to know about getting the right type of loan for your needs:

Why Get a Personal Loan?

There are some instances in life that can prove to be very tough on your budget. Those instances can include sudden medical emergencies or urgent home repair and can completely drain your entire savings.

Or there might be a once in a lifetime event or opportunity that you don’t want to miss at all cost, but don’t have the funding for it. Since banks will not ask for the purpose of the personal loan, you can use that loan to assist you financially or save you from a tight spot. Personal loans can help you with:

  • Easing financial stress
  • Converting several loans into a single one (called debt consolidation)
  • Home renovations
  • Buying household goods and furniture
  • Buying a computer, laptop or other electronic equipment
  • Going on an exotic vacation
  • Supporting home loan repayments
  • Help with school fees
  • For the balloon payment on your lease

Five Advantages to Taking a Personal Loan

  1. If you choose to take an unsecured loan, you can bypass tangible collateral like mortgages and car loans.
  2. Repayment options are generally small and cover a relatively short period of time.
  3. Sometimes the interest rate is negotiable.
  4. Certain banks or financial institutions offer better interests on personal loans than on credit cards.
  5. It is possible to get a loan with a fixed interest rate repayments throughout the life of the loan.

7 Types of Personal Loans

Depending on your needs and financial situation, you can choose from a number of personal loan options. The most common types of personal loans are as follows:

1. Variable Personal Loan

Since variable personal loans levy adjustable interest rates, they are perfect for people who want to benefit from lower interest rates. The most considerable advantage of this type of loan is that it offers borrowers the possibility of making higher payments. The overpaying can lead to you paying back your debt earlier. This occurs because on some months the interest rate may be lower than others, hence making your monthly repayment higher than what it should be.

2. Fixed Personal Loan

The one risk that comes with variable personal loans is that the interest rate can rise, leading to higher monthly repayments. You can skirt this whole issue by choosing to get a fixed personal loan. Since it has a fixed interest rate, the repayments will remain constant for the entire term of the loan. Hence, this type of loan not only offers stability but can also simplify budgeting all because the monthly repayment amount stays unchanged. However, you will not be able to clear this loan as early as you would with a variable personal loan because you cannot make extra repayments towards your fixed loan.

3. Secured Loan

Loans are called ‘secured’ when the borrower offers some assets to be kept as collateral with the lender or financial institutions. Personal vehicles, personal real estate, a plot of land, investment accounts, savings account, and even jewelry and fine arts can be put up as security to borrow a certain amount of money. If the agreed repayments are not made, the lender will acquire the asset and can sell it to cover the cost of the loan. The advantages of getting a secured personal loan are that you can get a lower interest rate and borrow more money.

4. Unsecured Loan

Once you know what a secured loan means, it’s easy to understand what an unsecured loan is. Essentially, you will not be providing any asset as collateral for the amount you’ll be borrowing. However, if you want to apply for an unsecured loan, you’ll have to be able to prove that you have a regular income. The lender needs this evident to ensure that the borrower will indeed be able to repay the debt. However, you’ll probably get less than you would have you offered an asset.

5. Overdraft

Overdrafts, also known as a line of credit, are attached to checking accounts. If you’ve been approved for this type of add-on, the overdraft will help you in case you face an emergency and require urgent cash. It not only allows you to withdraw an amount, but it also protects you from missing payments. Interest payable on this type of loan is only on the amount borrowed.

6. Student Loan

If you are a student or a parent looking for a loan that will cover the course fees, living expenses, textbooks and laptop fees of your child, fear not! Many financial institutions in Australia offer student loans to help ease the financial burden of university goers. Instead of working part-time to earn minimum wage, you can sit back, focus on your studies and worry about your repayments once you’re done with your degree.

7. Debt Consolidation

Debt consolidation involves taking out a loan to repay and combine all other loans you already have. It is a type of refinancing that will not only simplify monthly repayments but also decrease the amount you have to pay thanks to the lower interest rate. Hence, debt consolidation can help you save money and reducing the loan term.

This post is Part 1 of a 2-part series. Part 2 can be found here.

What You Have to Know Before Applying for Business Loans in Melbourne

Getting a business loan is not an easy process. From finding out which options are available for your business to which of these packages best suits your needs and have the best interest rates, applying for a loan can be quite challenging. That’s why every loan lending entity has an in-house expert to guide you through every step along the way.

There are various reasons for which businesses need to seek loans. Whether it is for purchasing stock, for opening a new store, for a new marketing campaign or due to unexpected expenses, the business will need to prepare a detailed business plan. This will tell the lender everything they need to know about your proposed venture, making it easier for them to advise you about the type of financing that is best suited to your needs. But sitting down with that adviser for the first time and having them lob complex jargon terms at you can make it even more confusing and you might just end up not getting the deal you really wanted. So, this post is designed to ease you in and help you go to that first appointment on a better footing.

Once you’ve come to the decision that your business needs a loan, you’ll need to determine the amount you’ll need to borrow, the type of loan you need and for how long will you will need it. You then have to determine if your business can afford to repay the amount borrowed, including interest and any other additional fees, such as application fees, exit or discharge fees and early termination fees. Try using the online repayment calculators lenders offer on their website to assess your monthly repayments. Consider looking into the type of security you can offer for the loan because most lenders will expect that. In some cases, if the type of security you are offering is satisfactory, the interest rate may even go down.

Depending on the number of times you’ll need to access the borrowed funds, you can choose to go for either an ‘at call’ loan or an upfront loan. ‘At call’ loans are overdrafts or line of credit that you can access to withdraw money even if your account is below zero. It will help keep your business running while waiting for your clients to settle their debts. This type of loan has no fixed terms and the higher the amount borrowed, the higher the fees will be. Additionally, unless otherwise stated in your contract, the lender can demand at any time that you pay back the whole amount borrowed.

For upfront loans, on the other hand, the entire loan amount is made available to the borrower all at once. This is generally the option you’ll want to pick if you are planning on buying a new business or buying equipment for your business. Unlike ‘at call’ loans, upfront loans will require that repayments are made regularly. However, the longer the loan term, the more interest you’ll end up paying. It would be advisable to calculate the repayment amount your business can afford to service so you can determine the amount you can borrow and for how long.

The next thing you might want to consider is the interest rate that will best suit your business. Rates can affect the repayment amount and the total amount paid at the end of the term. Unlike with variable rate loans, with fixed-rate loans, the lender bears the majority of the risks. If you believe your company will be able to pay back the loan even if the rates climb, a variable rate loan may suit you. However, if your business has a low-profit level, you might want to stick with a fixed-rate loan as the predictability of the monthly repayment will help you better manage your cash flow.  

Lenders also offer you the possibility of securing your loan. While you may choose to take an unsecured loan because you don’t have an asset that you can offer as security, these types of financing usually have higher interest rates and are more difficult to get approved. However, secured loans involves offering an asset for the loan. The asset can be a property, such as residential or commercial. In most cases, the more security you provide, the less the interest rates will be and the higher the chances are of getting your request approved.

So essentially, it burns down to:

  • deciding how much you need for your project,
  • calculating what you can actually afford to pay back,
  • choosing between fixed or unfixed rates,
  • and choosing the type of loan security you will take.

You just need to ensure that you will be able to repay your loan on time, so that the lender does not seize the property or asset you offered as security and sell it.