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Bank
Loans
Bank loans can be used
for variety of reasons. From buying
a new car, to remodeling of your
old house, to pay your debts,
marriage of child or to plan a vacation.
Get one bank loan from us to fulfil
your dreams.
Common
Types of Bank Loans
Before we get into the specific
categories of loans that banks
offer, let's look at two of the
major characteristics that vary
among bank loans: the term of
the loan and the security or collateral
required to get the loan.
Loan term: The
"term" of the loan refers
to the length of time you have to
repay the debt. Debt financing can
be either long-term or short-term.
Long-term debt financing is
commonly used to purchase, improve,
or expand fixed assets such as your
plant, facilities, major equipment,
and real estate. If you are
acquiring an asset with the loan
proceeds, you (and your lender)
will ordinarily want to match the
length of the loan with the useful
life of the asset. Short-term debt
is often used to raise cash for
cyclical inventory needs, accounts
payable, and working capital.
In the current lending climate,
interest rates on long-term
financing tend to be higher than on
short-term borrowing, and long-term
financing usually requires more
substantial collateral as security
against the extended duration of
the lender's risk.
Secured or
unsecured debt:
Debt financing can also
be secured or unsecured. A secured
loan is a promise to pay a debt,
where the promise is
"secured" by granting the
creditor an interest in specific
property (collateral) of the
debtor. If the debtor defaults on
the loan, the creditor can recoup
the money by seizing and
liquidating the specific property
used for collateral on the debt.
For startup small businesses,
lenders will usually require that
both long- and short-term loans be
secured with adequate collateral.
If the borrower defaults on an
unsecured loan, the creditor has no
priority claim against any
particular property of the
borrower. The creditor can try to
obtain just a money judgment
against the borrower. Until a small
business has an established credit
history, it cannot usually get
unsecured loans because of the
business's risk.
An unsecured creditor is often the
last in line to collect if the
debtor encounters financial
difficulties. If a small-business
debtor files for bankruptcy, an
unsecured loan in the bankruptcy
estate will usually be "wiped
out" by the bankruptcy, but no
assets typically remain to pay
these low priority creditors.
Because the value of pledged
collateral is critical to a secured
lender, loan conditions and
covenants, such as insurance
coverage, are always required of a
borrower. You can also expect a
lender to minimize its risk by
conservatively valuing your
collateral and by loaning only a
percentage of its appraised value.
The maximum loan amount, compared
to the value of the collateral, is
known as the loan-to-value ratio.
A lender might be willing to loan
only 75 percent of the value of new
commercial equipment. If the
equipment was valued at $100,000,
it could serve as collateral for a
loan of approximately $75,000.
An unsecured loan is also a promise
to pay a debt. Unlike a secured
loan, the promise is not supported
by granting the creditor an
interest in any specific property.
The lender is relying upon the
creditworthiness and reputation of
the borrower to repay the
obligation. An example of an
unsecured loan is a revolving
consumer credit card. Sometimes,
working capital lines of credit are
also unsecured.
Specific
types of bank loans
In addition to consumer loans and
mortgages, the most common types of
loans given by banks to startup and
emerging small businesses are:
• short-term commercial loans for
one to three years
• longer-term commercial loans:
generally secured by real estate or
other major assets
• equipment leasing for assets
you don't want to buy outright
• letters of credit for
businesses engaged in international
trade
• working capital lines of credit
for the ongoing cash needs of the
business
• credit cards: higher-interest,
unsecured revolving credit.
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