SME Loans: What are the Different Types?
If you are an entrepreneur who wants to apply for an SME loan, you’d be glad to discover there are lots of options available at your disposal.
There is also no shortage of sources you can turn to such as banks, commercial lenders, and even personal credit cards.
While most lenders will be more than willing to help you decide on the SME loan option best suited for your needs, it is still ideal to get a general feel of the diverse types available.
Below are some of the options available and the basics about each.
In some ways, balloon loans can be likened to installment loans.
With balloon loans, borrower will receive the full amount after the contract has been signed and will be asked to pay only the interest during the duration of the loan.
Borrowers however will have to make a “balloon” payment of the principal amount on the last day of the loan.
Balloon loans are highly recommended for businesses who would need to wait for a specific date before they are paid for a product or service they have provided.
This type of loan is typically repaid in equal monthly payments, already covering both the principal amount and the interest.
If borrowers are able to settle the obligation before the final date, an interest adjustment will be made.
If monthly payments are not feasible, borrowers have the option to repay the loan on a quarterly, half-yearly, or yearly basis.
Ideally, this is one loan arrangement every entrepreneur should have with their banker as it can provide the much needed financial help in the event of stalled cash flows and other emergencies.
Often used as payment for inventory purchases, operating costs, and other business cycle needs, line-of-credit often comes with low interest rates.
However, this low-risk loan type is not intended for equipment or real estate purchases.
While interest payments for line-of-credit loans are usually paid on a monthly basis, the principal amount is often only repaid at the borrower’s convenience.
Of course, consistently making payments on the principal is still considered ideal.
When negotiating a credit line with a bank, you can expect to be required to provide your tax returns, projected cash flow statement, and latest financial statement, among other things.
Unsecured and Secured Loans
Loans come in two forms—secured and unsecured.
In cases where the lender knows the borrower well enough, trusts that they will be able to settle their obligations on time, and convinced that they are running a business that is thriving, there is a huge chance they’d be granted an unsecured loan.
However, it is unfortunate to note that this kind of loan is very rarely extended to new ventures as lenders would often look for a good track record of business profitability and success.
On the other hand, a secured loan will require a collateral.
Secured loans also come with a much lower interest rate compared to unsecured ones.
Oftentimes, loans that are used to buy equipment, are written for more than a year, or are not risk-free are often secured by a collateral.
The collateral that will be provided, regardless if it’s real estate or inventory, is expected to outlast the loan.
Other Loan Types
Accounts Receivable Loans – this type of loan is secured by the outstanding accounts of the company.
Guaranteed Loans – a third party—investor, SBA, or a significant other—will guarantee loan repayment.
Second Mortgages – also known as equity loans, this kind of loan is considered long-term and will be secured by real estate.
Regardless of the type of loan you need, it is crucial that you deal with a trusted financial provider to help you with your needs. Visit www.capitalize.com.sg for expert help today!