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On Loans and Business Capital

by: johnlair on Date: Mon, 13 Dec 2010 Time: 2:19 PM

Loans have always been helpful to start-up businesses. In fact, more start-up businesses acquire initial capital by seeking loans given the unavailability of ready cash that can be used for such purpose. Even existing business continue to apply for loans to sustain their current operations and have the necessary funds for additional investment such as equipment acquisition and business expansion.

There are several types of loans that an entrepreneur can apply for depending on his needs. The first type of loans is secured loans, which are usually being extended by banks and leasing firms. They are called secured loans for the simple reason that they offer security on the part of the lender through collaterals and other forms of protection from borrower default.

Secured loans are highly specific in a sense that the borrower cannot use it for any other purpose. It also takes time to approve a secured loan because the lenders will first have to do background checks on the loan applicant prior to the approval and release of the loan. The requirements for secured loan applications are also very strict and will have to be satisfied in full before the lender pushes through with the succeeding steps.

On the other hand, there is another type of loan called unsecured financing. Unsecured financing is a type of loan that requires no collateral, has less stringent requirements, and can be approved and released faster than secured loans. The funds coming from this type of loan can be used by the borrower for any purpose that he desires.

Although unsecured financing is a top choice by businesspeople due to its convenience, it is more expensive when compared to secured loans. Unlike in secured loans wherein lenders hold collateral and other forms of protection from borrower default, lenders extending unsecured loans are risking much. This is the reason why lenders doing unsecured financing tend to impose higher rates, causing the loans to be more expensive.

Whether they came from secured loans or unsecured financing, funds will always be precious to businesses. Businesses cannot run without much needed capital. A lot of times, the success of an entrepreneurial venture depends on how well capitalized it is regardless of whether the funds came from a businessperson’s savings account or from loans.

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