Quiz: Can you name all the business loans that are available in the market?
Choosing the right business loan for your business can be tricky, especially when there are different types out there, each with their own characteristics. As an aspiring entrepreneur, dreaming of starting your own business, it is important to get a general understanding of what a business loan is, so that you can decide on the best one for your business’ unique needs. Let us look at several options out there together and let’s discuss a few common business loans you can consider applying for.
One side note, before looking into different types of loans, it might be good to calculate your start-up costs first if you haven’t done that yet.
Term Loans
Term loans are one of the more popular loans accessible to entrepreneurs. Just like most loans, you’re required to repay the bank within a certain period of time with an interest rate being charged. Term loans are often best suited for established small businesses with a solid financial background and are typically used to buy fixed assets, such as equipment or a new property. Term loans usually allow you to pay at a fixed interest rate throughout your tenure. Hence, you don’t have to worry about paying a higher interest rate than what you’ve agreed to.
Depending on the loan amount, you can also choose between a collateral or collateral-free term loan. Banks in Cambodia typically only offer secured business loans, which requires collateral. If you have a collateral term loan, it will require you to provide an asset, such as your home, to act as collateral in the event you are unable to repay. As such, you typically get a greater loan amount or a longer repayment schedule. On the contrary, collateral-free loans do not require any form of security. However, the loan amount is generally smaller with a higher interest rate.
Business Line of Credit
Another loan option to consider is a business line of credit. This type of loan gives you access to a ready pool of money that you can gradually draw as per your business needs. From there, you can use and repay funds at your convenience, as long as you remain within your credit limit. For instance, the bank approved you a business line of credit of $100,000, you can take an initial amount of $20,000 from that pool of money to purchase an equipment and repay that amount with interest. You can then take out another $10,000 in the future to purchase a second equipment, and repay that amount with interest, this can go on until you’ve reached your credit limit. It is a very flexible form allowing companies to only utilize what they need.
As such, a business line of credit is generally considered to be more flexible than a regular business loan. Most companies would apply for a loan like this in case they need immediate funds for unexpected growth or expansion opportunities. However, keep in mind that the business line of credit loan has a high late-payment penalty. Missing a payment may mean having to pay back as much as two or three times the repayment amount. Depending on the bank, late-payment penalties could be charged as a flat fee that will increase as you miss more payments, or as a percentage of your loan principal. Hence, it’s best practice to ask the issuer what the exact terms are before applying for this loan.
Trade Finance Facilities
The trade financing facility is a relatively popular loan. This loan is an umbrella term that covers a few different financial instruments, such as the letter of credit (LOC), shipping guarantee (SG), bank guarantee (BG), trust receipt (TR), and banker’s acceptance (BA). Despite the differences in names, these instruments essentially work the same way; they act as a written commitment given by one bank to another bank – usually overseas – to serve as a guarantee for a loan. In short, your bank is becoming your guarantor.
For example, if you are dealing with an international bank and the bank is unsure if you are able to pay for your transactions in time, they can request for you to provide a LOC, SG, BG, TR, or BA from your local bank. In the event that you fail to make your payments, then your bank will have to cover the full amount on your behalf.
Keep in mind that trade finance facilities also require collateral during application. The type of collateral needed would depend on a bank assessment on your profile, credit score, and cash flow.
**Disclaimer: This loan is mostly suitable for businesses which involve overseas trading activities.
Do your research and always complete your own due diligence before choosing a loan. Seek good advice to really understand which loan suits you and your company best. For instance, if your business needs immediate emergency cash, then the business line of credit may be the right one for you. Alternatively, if your company dabbles in international import and export, trade financing facilities may be a better alternative. Ultimately, a business loan should help your business solve a problem or achieve a new goal instead of adding to your financial burden. Think it through before you commit!
