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Bank Loans

Common Types of Bank Loans

Bank term loans are the basic vanilla commercial loan. They typically carry fixed interest rates, monthly or quarterly repayment schedules and a set maturity date.
Two of the major characteristics that vary among bank loans: the term of the loan and the security or collateral required to get the loan.

Bankers tend to classify term loans into two categories:

Intermediate-term loans: Usually running less than three years, these loans are generally repaid in monthly installments from a business's cash flow. Repayment is often tied directly to the useful life of the asset being financed.

  • Long-term loans:  Most are between three and 10 years, and some run for as long as 20 years. Long-term loans are collateralized by a business's assets and typically require quarterly or monthly payments derived from profits or cash flow.

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Interest rates on long-term financing tend to be higher than on short-term financing.

Secured or unsecured debt. Debt financing can also be secured or unsecured. A secured loan is a promise to pay a debt, where the promise is "secured" by granting the creditor an interest in specific property (collateral) of the debtor. If the debtor defaults on the loan, the creditor can recoup the money by seizing and liquidating the specific property used for collateral on the debt.

An unsecured loan is also a promise to pay a debt. but unlike a secured loan , the promise is not supported by granting the creditor an interest in any specific property. The lender is relying upon the creditworthiness and reputation of the borrower to repay the obligation.

Specific types of bank loans

In addition to consumer loans and mortgages, the most common types of loans given by banks to startup and emerging small businesses are:

• short-term commercial loans for one to three years

• longer-term commercial loans: generally secured by real estate or other major assets

• equipment leasing for assets you don't want to buy outright

• credit cards: higher-interest, unsecured revolving credit    



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