The best approach to understanding bank business loans is to consider them in two ways – secured or unsecured. As it is easy to imagine, the secured loans tend to offer the best interest rates and terms. Of course that doesn’t mean that unsecured loans are a bad choice, but they may be the only option for a newer business, or one without a great deal of collateral or assets.
Secured and unsecured loans differ from one another. Generally secured loans are made to an existing business that is seeking to expand or cover a gap in income. Loans can be short or long term loans and some are available as immediate loans or lines of credit
For example, an older, well-established business may need to invest in a newer and costly piece of equipment. The owner could approach their bank or another lender and use all current assets, such as the buildings and other properties owned by the business as collateral for the loan. By doing this they are securing the best interest rates and loan terms possible.
If, however, the same business owner did not own the building and had previously only leased equipment, they may not have adequate collateral for the loan and the bank would issue them an unsecured loan based on the company’s history of success and reliability. Such bank business loans come with an interest rate significantly higher than the one made available to the secured borrower, and it may have more restrictive terms. This could mean that no further credit will be extended while the unsecured loan is outstanding.
For businesses that are just beginning there are may be loans called “startup” loans available. These are quite similar to personal loans and are based primarily on the personal credit history of the primary borrower. Until a business has a proven track record and some assets these are usually the only loans available from the bank.