A Complete Guide To Lending — Different Types of Commercial Loans And Lenders
Of course, who does not know about lending? Also known as “financing”, in general terms, it is the act of giving money or property to another person on a temporary basis with an expectation to be repaid by the borrower with an interest amount.
If we talk in the business and financial context, the term lending includes different types of commercial loans. But first, we should know that in these money borrowing transactions, there are two parties involved mainly ie. Lender and the borrower. Let’s read about them in detail:
What Is A Lender?
You may all know that a lender is a person who provides money to another person and often, they are financial institutions in the business of making loans but they can also be an individual, or any organization willing to provide money. For a small business, banks, credit unions, and savings and loans are the lenders. They all provide money with an expectation to get repaid with interest. If you are borrowing money from a lender, it is important to know about their background and build a suitable plan to repay them on time. In simple words, you must know about the terms and conditions of your loan agreement, the procedure of loan, payment terms as well as how you are going to pay them.
What Are The Different Types Of Lenders?
As we know that the most common lenders are banks, credit unions, and other financial institutions but the term “Lener” is not all about it. Now it includes the less traditional sources of funds for small business loans. What are they? Let’s have a look:
- Direct Lenders — This is the type of lender who provides money directly to the borrower. You can take Banks and other credit unions as direct lenders. Talking about the brokers, they are licensed to operate in just a few states while most of the direct lenders can operate in all 50 states. It is also important to keep in mind that mortgage brokers and direct lenders often offer the same rates. However, you may have to pay a little extra for the services of a broker.
- Building Societies And Credit Unions — The building societies serve their services to a local geographical area while the credit unions provide their services to a group of people who have common characteristics such as employer, occupation, or local geographic area. You should keep one thing in mind that they are non-profit organizations and therefore, their interest rates and fees can be competitive.
- Crowdfunding — The other type of lender is crowdfunding and the interesting thing is that they do not require interest payments. It is a useful way for people, businesses, and charities to raise money by making individuals or organizations investing or donating into these projects in return for a potential profit or reward.
- Mortgage Bankers And Brokers — They can provide loans to many different lenders and have access to several types of loans. However, they go for the best and competitive mortgage rates and terms & conditions to cater to the needs of borrowers. You should keep one thing in mind some of these brokers charge processing or origination fee.
- Retail Lenders — They are the small lenders who lend money from their own sources under their own brand by using the fund from the wholesale bank or non-bank. The benefit of this type of lending is that the retailer gets access to wholesale rates and can bring savings to you.
- Money From Family And Friends — If you do not want to get involved in the tricky procedures of financial institutions or banks, you can consider borrowing money from your family and friends. There are many organizations that can help you in sorting out these difficult financial and personal issues for you. You must create a loan agreement with them and these types of agreements are often called private party loans.
What is a Commercial Loan?
Commercial loans are those loans that are offered to businesses or business owners to finance the growth of their businesses under Trade Finance. It is debt-based financing that can help businesses with expenses like working capital, equipment, and real-estate. Both banks and private financial institutions offer commercial loans to businesses and there are various types of commercial loans that we all should be aware of from traditional term loans to SBA loans and online loans. Each type of loan has different qualification requirements, interest rates, and terms. Here are its types. Let’s have a look:
Know About The Different Types of Commercial Loans
- Letter of Credit — This type of loan is typically used in international trade. It is issued by a financial institution with a guarantee to pay the seller on the behalf of the buyer in case the buyer is unable to pay the loan on time and necessary documents are presented to the bank by the seller. This ensures that the payment will be made to the seller as long as the services are performed.
- Term Loans — This is a very suitable type of loan for those business owners who want to make investments in their specific business areas. In this, you can borrow a set amount of money from the lender to grow the business which you will have to pay back with the interest rates. It includes long-term loans with 10, 20 or 25 year repayment periods and medium-term loans that are versatile.
- Business Lines of Credit — This is good for those business owners who want smooth cash flows for their business emergencies. This is a more flexible type of commercial loan issued by banks and online lenders as a powerful credit card. In this, you get access to a pool of money you can use whenever you want to but required to pay the interest.
- Equipment Loans — If you are in an Import or Export services and need to purchase or lease any business equipment, machinery or vehicle, this is the most suitable type of loan for you. The lender will finance the equipment for you with monthly payments and the vendor will supply you the necessary equipment to use in your business.
Summing Up
If you are also in need of Trade Credit, Trade Finance or Business Banking or Offshore Banking, you must consider the type of loan you need and make sure how you are going to pay it back after considering all the terms and conditions of the loan agreement. You can prepare a personal financial statement or business plan or financial statements for your business.
