A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. There are a number of different types of business loans, including bank loans, mezzanine financing, asset-based financing, invoice financing, microloans, business cash advances and cash flow loans.
A bank loan may be obtained from a bank and may be either secured or unsecured. For secured loans, banks will require collateral, which may be lost if repayments are not made. The bank will probably wish to see the businesss accounts, balance sheet and business plan, as well as studying the principals' credit histories. Many smaller businesses are now however turning towards Alternative Finance Providers, especially in the case of smaller firms.Loans from credit unions may be referred to as bank loans as well. Business loans from credit unions received the second highest level of satisfaction from borrowers after loans from small banks.
Mezzanine finance effectively secures a companys debt on its equity, allowing the lender to claim part-ownership of the business if the loan is not paid back on time and in full.This allows the business to borrow without putting up other collateral, but risks diluting the principals equity share in case of default.Once considered the finance option of last resort, asset-based lending has become a popular choice for small businesses lacking the credit rating or track record to qualify for other forms of finance. In simple terms, it involves borrowing against one of the companys assets, with the lender focusing on the quality of the collateral rather than the credit rating and prospects of the company. A business may borrow against several different types of asset, including premises, plant, stock or receivables.
Invoice finance
In recent years, it has become increasingly difficult for SMEs to obtain traditional finance from banks. Alternative options are invoice discounting or factoring, whereby the company borrows against its outstanding invoices, with the ability to obtain funds as soon as new invoices are created. It is often questioned which option is best for your business factoring or discounting and the answer depends on how the business wants to be perceived by customers.[citation needed] With factoring, the finance company charges interest on the loan until the invoice is paid, as well as fees, and the finance company takes ownership of the debtor ledger and uses its own credit control team to secure payment. With invoice discounting, the business maintains control of its own ledger and chases debts itself.
Microloans
Need cash? Now might be a good time to apply for a small-business loan.
It's a notoriously time-consuming and headache-inducing process, but it's gotten better since the recession: Banks are gradually lending more, a crop of online lenders are offering much more credit--at a price--and regulators have been looking for ways to make it easier for you to get a loan. Which is not to say it's completely easy or risk-free, especially if you're applying to one of the newer fintech lenders.
Figure out how much money you really need. Businesses too often seek more money than they really need and, the more you seek, the more likely you will be rejected.
Learn from your mistakes. If one lender rejects you, figure out why. When you go to the next small business lender, address that deficiency.
Those with poor credit in a business-to-business environment that have receivables can use them as collateral. Alternative lenders, such as so-called Internet lenders, will charge higher interest rates, but generally have more relaxed standards.
Always consider--in most cases it should be your first consideration--working with Small Business Administration-backed (SBA) lenders. Many businesses incorrectly assume they aren't eligible. SBA loans often feature low interest rates and generous repayment terms. Also note that just because one SBA lender turns you down, not all lenders will do likewise.
Know what you're getting into. That means learning the annual percentage rate (APR) of the loan. Know what the fees will be, as well as any prepayment penalties. Be an informed shopper.
As mentioned earlier, online lenders may provide funding (and quickly) if other alternatives fail, especially for those with bad credit. Aside from higher interest rates, Internet lenders are known for onerous terms and poor transparency, so be sure you really need the money--and can pay it back--if you go this route.
Business loans may be either secured or unsecured. With a secured loan, the borrower pledges an asset (such as plant, equipment, stock or vehicles) against the debt. If the debt is not repaid, the lender may claim the secured asset. Unsecured loans do not have collateral, though the lender will have a general claim on the borrowers assets if repayment is not made. Should the borrower become bankrupt, unsecured creditors will usually realise a smaller proportion of their claims than secured creditors. As a consequence, secured loans will generally attract a lower rate of interest.
Lenders that make business loans often use a UCC filing to alert other creditors of their security interest in the property of the business. UCC filings may be placed against specific assets, or a blanket UCC filing secures interest in all property. UCC filings may affect the business credit score and may make it more difficult to obtain subsequent financing.
Personal guarantees
The second largest market is in Euro denominated corporate bonds. Other markets tend to be small by comparison and are usually not well developed, with low trading volumes. Many corporations from other countries issue in either US Dollars or Euros. Foreign corporates issuing bonds in the US Dollar market are called Yankees and their bonds are Yankee bonds.
The coupon (i.e. interest payment) is usually taxable for the investor. It is tax deductible for the corporation paying it. For US Dollar corporates, the coupon is almost always semi annual, while Euro denominated corporates pay coupon quarterly.
High Grade corporate bonds usually trade on credit spread. Credit spread is the difference in yield between the bond and an underlying US Treasury bond (for US Dollar corporates) of similar maturity. Credit spread is the extra yield an investor earns over a risk free instrument (US Treasury) as a compensation for the extra risk.
Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends on the particular corporation issuing the bond, the current market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds. The difference in yield (called credit spread) reflects the higher probability of default, the expected loss in the event of default, and may also reflect liquidity and risk premia.
Credit Spread Risk: The risk that the credit spread of a bond (extra yield to compensate investors for taking default risk), which is inherent in the fixed coupon, becomes insufficient compensation for default risk that has later deteriorated. As the coupon is fixed the only way the credit spread can readjust to new circumstances is by the market price of the bond falling and the yield rising to such a level that an appropriate credit spread is offered.
Interest Rate Risk: The level of Yields generally in a bond market, as expressed by Government Bond Yields, may change and thus bring about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate levels.
Liquidity Risk: There may not be a continuous secondary market for a bond, thus leaving an investor with difficulty in selling at, or even near to, a fair price. This particular risk could become more severe in developing markets, where a large amount of junk bonds belong, such as India, Vietnam, Indonesia, etc.
Supply Risk: Heavy issuance of new bonds similar to the one held may depress their prices.
Inflation Risk: Inflation reduces the real value of future fixed cash flows. An anticipation of inflation, or higher inflation, may depress prices immediately.
Tax Change Risk: Unanticipated changes in taxation may adversely impact the value of a bond to investors and consequently its immediate market value.
