There are various types of lenders and loans available to business owners. Lenders generally provide two basic types of loans:
- Term Loans
- Lines of Credit
Term Loans
This type of loan is provided when you purchase assets with a useful life that extends beyond 1 year.
Common examples of these assets:
- Equipment used in manufacturing
- Office furniture and equipment
- Automobiles
- Vans, trucks, forklifts and other automotive related equipment
- Computers
- Leasehold improvements
Banks will typically provide you with 2 to 5 years to repay these loans, and you will generally have a monthly repayment plan, which includes a combination of interest and principal. Lenders often provide you with a letter, which outlines how much money they will lend you and the terms and conditions associated with the loan. This item is called a TERM SHEET.
Lines of Credit
Most businesses require a line of credit to provide them with some cash flow to bridge the gap between the timing of having to pay for the costs of operating your business (such as rent, wages and purchases) and the actual receipt of cash from payment by their customers. Most businesses sell their goods on credit and many customers will take a long time to pay.
These are typically revolving lines, so if you repay them, you can continue to reuse them. The lines of credit are unlike the Term Loans, which are repaid over time.