Types of Loans

This category of credit is the most traditional and widely used among businesses. Listed below are the most common forms of business loans used by small businesses:

TERM LOANS

These are simply installment loans that are paid back at regular intervals over a specified length of time. These loans are granted for a specific purpose, such as startup costs or working capital. The term of the loan will depend on the use of the funds, but it can range from short term (less than one year) to long term (more than five years).

DEMAND NOTES

A demand note is a single-payment loan that is intended for very specific short-term needs. Although the contract will usually call for payment in full within 90 to 180 days, the lender can call for (or demand) repayment of the note at any time. You may be asked to make periodic interest payments during the life of the note.

LINES OF CREDIT

A line of credit, like a credit card, establishes a credit limit and specific terms for repaying money that is borrowed. Lines of credit are easy to access and offer flexibility in managing the cash flow needs of a small business. Many small business owners establish a line of credit as a precaution, before they have a real need for the money. Lines of credit are usually linked to short-term assets such as accounts receivable, inventory, materials, etc.

GOVERNMENT ASSISTED LOANS

There are several loan programs in which the government provides a guarantee of repayment for other small business lenders. Government-assisted small business loans are offered by federal agencies such as the Small Business Administration (SBA), the Economic Development Administration (EDA) and the Rural Economic and Community Development (previously known as the Farmers Home Administration or FHA), as well as by state and local agencies. Government-assisted loans, like bank loans, usually require that the small business owner have their own money invested in the business in order to share the risk with the lender.