There are different types of loan given by banks and as a serious entrepreneur; the first step that is required from you is to know the right loan that is suitable for your business.
Based on your needs and the type of business you want to start, there are basically two major types of personal or small business loan that you will go for.
Types of small business loans
1. Overdraft loan and
2. Term loans
Let’s know what they are, their uses, their benefits and the different between two of them;
1. An overdraft loans:
This is a type of loan that permit you to go and withdraw money from your bank account even when you have little or no money in your account. So, if your bank grants you an overdraft loan of $100,000 for your small business, that means you will have an access to the money even when your account balance is showing zero.
Overdraft loan usually has a short period of time and it last only six months or one year before they are renewed. As a result of it, overdraft loan can only be used as a working capital for business activities that are very short in nature; for example, paying of your staff salaries or buying some goods to be supplied to your customers.
One of the advantages of an overdraft loan is because of its flexibility. In this type, you only pay interest based on the amount of an overdraft loan you use; if you don’t make use of it, there will be no interest to be paid.
In the other hand, its disadvantage is that it is accessible to solve only short term needs.
An overdraft loan cannot be used to buy equipment or lease a property which has a longer term than that of overdraft itself. In this case using a 6 months bank overdraft to pay for a 2 years property lease is putting you in trouble.
2. Term Loans:
This is a kind of loan that sum cash can be released for you by the bank and they will start immediately to accumulate interest from the time you get the money; they don’t care whether you make use of it or not, all they care for is their interest.
This kind of loan is better used for a long term projects and it can for a long period of time (like two, six or even ten years) based on your needs and the terms of the loan. All you have to have at the back of your mind is that the longer the loan stays, the more the interest you will pay for over time.
Term loan is better for projects or purchasing items that have a long life span. This makes it best for buying some equipment, leasing a warehouse, building a factory or purchasing a delivery truck for your business.
No matter the decision you want to take, make sure it is for the growing of your business and making more money for the business.
The advantage of this term loan is that the money will be pay back to the bank in the fixed monthly installments over the term (time) of the loan.
So when you are given 6 years term loan, you’ll have to pay a fixed amount every month for 72 (seventy two) months until the complete amount is paid fully with the interest, fees, and all the charges.