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Thursday, March 31, 2011

Different kinds of bank loans for small U.S. businesses

Small Businesses obtain financing for various aspects of business operations through specialized bank loan products. This article illustrates the various types of loans available to business owners through banks in addition to indicating how such loans can be approved. A discussion of a few banks and their loan products will also be provided for the purpose of further illustrating the types of loans available.

Types of bank loan products

• Lines of credit

A line of credit may be either a secured or unsecured account i.e. collateralized loan or un-collateralized loan. Lines of credit are similar to credit cards but usually have interest rates based on the prime rate and are thus lower. Lines of credit are more flexible than credit cards because they also act like accounts and checks can be written against them.

• Cash flow loans

Cash flow loans are used to finance periods of time within the cash conversion cycle. In other words, the time between providing a service, invoicing, and receiving the payment and then paying creditors. The shorter the cash conversion cycle is the more money a business can save in cash flow expenses such as interest on the cash flow loan or other source of credit. Companies that operate on a cash basis may not have the same requirements for cash flow as a business using the accrual method of accounting.

• Business credit card

Business Credit Cards have higher interest rates but can be used for solid bookkeeping. The reason credit card loans are good for bookkeeping is all the transactions are recorded electronically, immediately or soon after the expense has been charged. This can lower accounting expenses as some of the financial reporting is included as a service of the loan.

• Debt refinancing loan

Banks also offer debt refinancing loans that can consolidate other business debt at a lower interest rate. For example, if company A has 3 credit cards with other banks at an average interest rate of 14%, Bank B may be able to provide a loan refinancing all 3 credit card's debt at a lower interest rate. This allows the bank to acquire new business and the business owner to obtain a lower monthly payment.

• Equipment and machinery loans

Equipment and machinery loans can include vehicles, tractors, conveyor belts, irrigation systems etc. Many types of businesses have unique equipment and/or machinery needs for which these loans are designed for.

• Start up loans/seed capital

Seed capital is a loan used to financing the opening and initial operation of a business. In this case, small business seed loans are applied for and either approved or rejected by the bank. These types of loans can have rigorous application requirements that can be subject to significant scrutiny by the bank. Depending on the type of bank and their specialization, seed capital loans may be easier or 
harder to find.

How to qualify for bank loan products

Qualifying for bank loans depends on several factors including the interest rate of the loan, the type of loan product and the financial and professional credentials of the applicant. The more secure i.e. collateralized, high interest rate loans to clients with good to excellent credit histories and strong business fundamentals are the bank's ideal loan and customer because this provides a low risk of default and high rate of return.

Banks can't always have it there way however, and sometimes competition for loan products can cause interest rates to drop and loan application incentives to be introduced. For example, free services through the bank if a loan is approved. Depending on the type of loan the following criteria may be used when considering a loan application. Naturally, the better an applicant meets the criteria, the more likely the loan will be approved.

• Business Credit Rating
• Balance Sheet Information 
• Financial Ratios ex. Current ratio, profit margin on sales, debt to assets ratio.
• Professionalism and Quality of Application
• Collateralization
• Banking relationship

Banks and bank loan products

There are many banks to choose from with varying loan products. Some banks have specialized loans such as vehicle loans while others may have more general loans. Larger banks have more capital to lend and so obtaining a loan may be easier through a large bank if the loan is for a large amount. A few of the larger U.S. banks that either specialize or write a significant amount of business loans are listed below.

1. Bank Of America: This large U.S. bank has a wide array of business loan products.
2. CIT Corporation: A business friendly bank specializing in business loans.
3. CitiGroup: Another of the larger U.S. banks with large asset resources and loan products

Local banks may not be able to provide the same liquidity and financing as larger banks but they may have better customer service and loan products that suit one's business better. For example a local rural bank may have loans specifically for farming equipment and machinery. Depending on the type of loan, different smaller banks may specialize in or more types.

Small business loans are in plentiful supply within the United States. The variety and terms of U.S. business loans can be quite diverse and the application requirements depend on the type of loan in addition to other factors such as risk to the bank, rate of return etc. When researching a small business loan, the information contained in this article may be useful as reference and/or starting point for obtaining the right loan for a small business.