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Types of Business Loans: What Happens if You Default in One?

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Every year, entrepreneurs around the country are looking to launch, grow or expand their businesses. In circumstances like these, it is helpful to have access to a convenient mode of financial aid such as a credible business loan. What’s more, with the wide variety of business loans in the market, there is something to meet every entrepreneur’s specific needs.

Here’s everything you need to know about different types of business loans to find the one that best suits your requirement:

What is a Business Loan?

Simply put, a business loan is an agreement between a lender, such as a financial institution, and a borrower, typically the business owner. As per this agreement, the lender grants the borrower a mutually agreed upon sum of money. In return, the borrower pays the amount back to the lender over a period of time known as a tenure, along with accrued interest on the borrowed amount.

What are the Types of Business Loans?

A business loan is a type of loan that is specifically provided to the borrower in order for the sum to be used for business-related expenses. Therefore, there exist multiple types of business loans, each designed for specific forms of businesses and purposes.

  •  Business Loan for Startups
    One of the most common types of business loans disbursed to business owners are startup loans. These loans are usually availed by aspiring entrepreneurs who wish to either launch their own startups or take their fledgling businesses to the next stage.
  • MSME Business Loan
    Another common type of business loan is an MSME business loan, whereby MSME stands for Micro, Small, and Medium Enterprises. Businesses that fall in the MSME category can easily avail this loan for purposes such as investing in their infrastructure and making a variety of essential purchases.
  • Working Capital Loan

Business loans can also be designed to help a business fulfill a specific requirement. One such type of business loan is the working capital loan, which can be provided to businesses of varying sizes. The sole purpose of this form of loan is to help the business meet their day-to-day financial requirements such as fulfilling payroll and helping bridge gaps in cash flow.
Machinery Loan
Another purpose-centric loan that is availed by businesses in specific sectors such as mining, building and construction is the machinery loan. This type of business loan can be availed by any business that wishes to make an investment into either purchasing or upgrading its existing equipment or machinery.

  • Business Loan for Women
    Women face particular challenges in the world of entrepreneurship, particularly when it comes to equity in financial independence. That is why a variety of business loans that are geared specifically at women can be a great boon for aspiring and existing female business owners.

What Happens if You Default on a Business Loan?

As mentioned before, business loans are essentially an agreement between a lender and a borrower, whereby the latter must pay back the borrowed sum within a specified time frame. In the event that the borrower fails to fulfill this part of the agreement, he or she is said to have ‘defaulted’ on the business loan.

In case the business loan is secured, the borrower can stand to lose his or her pledged asset. In case the business loan is unsecured, the borrower might have to pay an increased interest rate as well as penalties. In either case, the credit score of the borrower is severely affected and negatively impacts his or her ability to avail a business loan in the future.

 

We are a team of writers passionate about innovation and entrepreneur lifestyle. We are devoted to providing you the best insight into innovation trends and startups.

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