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.

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.

              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.

Bank Loans

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