How to Choose the Business Loan That’s Right for You

Not All Businesses are Created Equally

Running an automotive repair shop definitely has its own unique challenges. That said, no one would feel comfortable handing over the daily operations of a repair shop, with its hydraulic lifts, sensitive tools, and critical operations, to an untrained owner of a bagel shop. Having an intimate working knowledge of how these businesses perform is critical to the safe operation of any shop. Understanding that different businesses have different needs is a key insight when choosing the right business loan. The following information will help you determine which type of business loan will meet whatever financial needs your business has – either short or long term.

Understanding the Different Loans That Are Available Today

Loans come in two basic formats – either open ended or closed ended.

Open Ended Loans

An open-ended loan means that you can borrow against it whenever you desire (provided that you have a portion of the loan limit available to borrow against) and make payments on it as you see fit. A normal payment for these types of loans is anywhere from interest only to 2% of the loan amount. For flexibility, these types of loans are commendable, but can require substantial documentation to obtain. For a secured, revolving line of credit, the typical bank loan may take weeks, even months to accomplish. For some, this may be adequate. For others, this may be too much processing time and could delay fixing the financial problem.

Closed Ended Loans

A closed ended loan means that a lump sum amount is given to the borrower up front and then equal payments are made on this amount until the loan is paid off. An automobile loan is an example of a closed ended loan. This may be a more predictable loan for some, as the payments are always going to be the same, but it makes it difficult to make those payments when business is slow.

Secured vs. Unsecured Loans

An additional consideration to make is whether to apply for a secured or an unsecured loan. A secured loan can typically use general business assets, real estate, inventory, or actual physical equipment as collateral. An unsecured loan requires simply a signature. The basic differences are that you’ll typically see a lower interest rate with a secured loan, and tougher qualifications for an unsecured loan. These loans, when processed by a traditional lender like a bank or credit union, can typically take weeks or months to process and require substantial paperwork.

Asset Based Loans Can Simplify the Loan Process

An asset-based loan is essentially a closed ended, secured loan that utilizes the future earnings of a business as collateral. At the end of each night, the total of the merchant’s credit card batches are analyzed and a pre-determined amount of this total is taken as the daily payment on the loan. Because the payment is based on the amount of the daily sales, the payback amount is tailored to the revenue generated by the business. This type of loan allows the merchant to match the payment to the short-term business results.

No matter the specific loan requirements, it makes sense to truly analyze the reason for taking out the loan, the amount that you’ll need, and the way that you’ll want to repay the loan.