An Overview Of Commercial Loan Types That Can Be Modified
There are several aspects to running a business that require money
. The idea of borrowing money to start or maintain a business is an idea that is as old as business itself. There are several loan options that exist for just about every aspect of running a business. Every type of loan will fall into one of two categories, secured or unsecured. A secured loan is one that is backed by some kind of collateral that can be repossessed by the lender in the event the loan defaults. Property loans are considered secured loans because the property in question serves as its own capital. Unsecured loans are not backed by any collateral or property and are fairly more common. Most people go through life being issued more unsecured loans than secured loans. Unsecured loans hold more risk for the lender since they allow no property to be repossessed in the event the loan defaults. Legal action may be taken against the borrower for failure to pay the unsecured loan, and a credit score can lowered by failure to pay, but there is never a guarantee that a profit will be made from an unsecured loan when it is issued. Due to the increased risk, unsecured loans often carry with them higher interest rates. Credit cards are the most common examples of unsecured loans.
Secured and unsecured commercial loan types can further be divided by the length of the loan, either long term or short term. The amount in question will often determine the length of the loan. Smaller loans are issued as short term loans and are generally issued for a specific need, such as a repair to a piece of machinery or for a down payment on a new delivery truck. Long term loans are used for more major types of purchases, like entirely new equipment or to hire a new employee.
Equipment loans are used by businesses solely for the purpose of buying or repairing equipment necessary to maintain and grow the business. Equipment loans are usually secured loans, which works well for the borrower and the lender. In the event the borrower defaults, only the specific piece of equipment is at risk of being repossessed. Depending on the value of the equipment, if the loan were unsecured, failure to repay the loan could result in the bankruptcy of the entire business if the lender wanted to pursue the matter that far.
Working capital loans allow businesses a line of credit that can be dipped into at any time for any reason. These types of loans are typically used for seasonal expenses or to purchase inventory. The nice thing about these loans is that interest is usually only paid on the balance, or the amount that has been taken from the loan to make a purchase. So, a business with a working capital loan of $100,000 that spends $5,000 to buy new computer software would only be required to pay interest on the $5,000, not on the entire $100,000 loan. This loan represents s the max amount of money that a lender is willing to lend to a company. These loans are also popular because they allow the business owner to establish a working capital line of credit that can be set aside and used only when needed, which cuts down on the time needed to fix a problem since the money is already available and the business owner does not have to rush to the bank to apply for a loan when an unforeseen even occurs.
These are just some examples of commercial loan types that business can apply for, they are also the types of loans that can be modified should the borrower default on their loan or becomes worried that they will default. Any type of loan can be modified, since a modification is nothing more than an agreement with a lender to change the terms of an original contract in order to lower borrower monthly payments.
by: Timothy McFarlin
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