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Knowing Types of Loan Arrangements



Good news for you who are attempting to get some loans to finance your business, here I am posting types of loans that you can arrange. Several types of loans are possible. Some of these are:



Commercial Loans

The terms of a commercial loan are designed to repay the loan on the basis of specific assets or business-cycle activities. These loans may take the form of either short-term or long-term commitments.



Many lending institutions offer a choice between debt and a lease. Leases are obligations for the specific assets, and are generally fixed as to rate and payment. In addition, most offer a purchase option. Some caution must be exercised in selecting between leasing and outright purchase with a mortgage. Very often, under the terms of the lease, significantly higher costs are incurred over the costs of the outright purchase of the item.



A mortgage secures a loan by pledging an asset as collateral, with an associated repayment schedule. Amortization schedules of repayment show the principal and interest payments over the life of the mortgage.


Balloon Loans

Balloon loans are very similar to mortgages except that an unpaid balance or balloon payment is due and payable after a specified time. A typical example of a balloon payment is a 20-year mortgage with a requirement that after 5 years of payment on the mortgage, the unpaid balance of the principal is due. The advantage to a lender of a balloon mortgage is that it obtains significant interest payments during the early years of the mortgage. It is during this period that the interest constitutes the bulk of the payment. The benefit to borrowers is that they expect to pay off the principal without incurring further interest liabilities after a few years of operation. In addition, these interest payments represent significant deductions for tax purposes. Remember that if the firm is paying taxes at the rate of 46 percent on profits, the federal government is returning $.46 on each dollar of interest paid. Very often, these loans provide for refinancing in the event that the balloon payment cannot be met.


Leverage-financed Loans

These loans are used to acquire businesses. The largest percentage of funds used to acquire a business is supplied by a lender, who secures all assets. These loans ostensibly are attractive to borrowers because if a firm is heavily leveraged, a smaller increment of profit yields a much higher percentage return on equity.



Bonds represent debt sold to lenders either privately or through public underwriting. Usually a business needs to be fairly substantial in size to float a bond issue. Bonds typically are not available to small businesses except in some special cases, where they are backed by local governmental units.


Commercial Paper

Commercial paper is offered by large, stable company intent on raising working capital for short periods of time. Commercial paper generally is sold in a public market and is in the form of short-term, unsecured promissory notes. The usual denominations are $25,000 and over.


Small Business Administration (SBA) Loans

The SBA generally guarantees a bank loan, thereby lowering the risk and interest cost for the borrower. These loans are intended for businesspeople who can qualify based on certain profiles. These loans may be based on needs such as a business in a hardship area or areas where unemployment is high. Occasionally these loans are extended for areas in which a natural disaster has occurred.


Economic Development Authority (EDA) Loans

EDA loans generally relate to social goals promoted by the authority, such as increasing minority employment or employment in depressed areas. These loans are made and administered through state agencies. The nature of these loans is to obtain working capital allowances and not generally to purchase specific assets.


Industrial Revenue Bonds (IRB)

IRBs are issued through governmental agencies and are intended for use in the acquisition of real estate and equipment. The governmental agency issues the bonds, which are then purchased by investors, often banks. Because they are governmental bonds, they are tax exempt. As such, the prevailing interest rate on IRBs is lower than the prevailing market rate. A great deal of criticism has been leveled against IRBs because some businesses, which compete with others that get IRBs, complain they are unable to acquire similar low-interest money and thus are less able to compete.


Research and Development (R&D) Financing Arrangements

Often companies and private investors have entered into creative financing arrangements in order to raise necessary funds to pay for research and development. In recent years these have taken the shape of limited partnerships. Typically, the sponsoring company contributes the right to a product in a limited partnership, in exchange for an interest in the partnership, often as the general partner. Capital contributions by limited partners usually provide funds for R&D that may be subcontracted to the sponsoring company or even to other entities. The limited partners expect to receive income in the form of royalties from the sale and development of the product. They may also receive income tax breaks in the form of capital gains rates. The major advantage to the sponsor is that if the project fails, no repayment of the loan is required and there is no liability for interest cost.

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