Unlike consumer loans, if you need to buy a house, you will just go for a property loan and similarly, for a car, businesses have an array of loan types to ease their cash flow, and it can be at times confusing to know which loan to go for.
Here are a few questions that may help you decide.
- How much do you need and how long do I need it for?
For example, most of the time, while a term loan is cheaper than an unsecured overdraft or invoice financing on a per year basis, if you only need the cash flow for a quick inventory purchase which your customer will then repay in a few weeks, there might not be the need to get a term loan and getting locked in for a few months and paying interest.
- How frequently do you need it?
If you foresee business to be strong and there will be a need for constantly cash flow, a term loan where you can use for any purpose might be better than having to keep applying for invoice financing every few months.
For example, while a property gears up loan may offer you a longer tenure and cheaper interest rate, meaning the monthly installment is lower, the long processing time may mean you may have to consider a term loan for the time being.
Broadly speaking loans can be classified in to secured and unsecured
Secured loans like the name suggest are loans that are backed by an asset or securitized with collateral such as property, reducing the risk for the funder as in the event of default, they will have an asset which they can sell-off in the event of defaults, to recover some of the loan amounts. Examples of other secured loans are equipment or property gear up, merchant cash advance etc. You can read more about each loan type in our glossary. Secured loans involving properties usually have lower interest rates, larger quantum and longer tenure as they are strong assets.
Examples of unsecured loans are working capital loans (also called a term loan), unsecured overdrafts, credit cards, personal loans, renovation loans etc.
If you have decided which loan type to go and want to know how to compare between the loans offers you have received, please refer to this How to compare loans and understanding your dashboard.