Our Operations During the Movement Control Order.
29 December 2020

3 Types of Loan Category Every Business Owner Should Know

As a business owner, making sure that there is sufficient capital for the business to run and eventually expand would be the main priority.

Obtaining a loan from a bank is a common instrument that businesses use to obtain cash. But with the many choices and types of loan products, how can a business know which would be the best option to meet their needs? Among the things to consider are the fees and the interest charges to ensure the overall cost is kept at a minimum. 

Here are the 3 different types of business loans that every business owner should know.

Term Loans

A term loan is any loan that runs for a fixed time period and must be paid back in full. It is often repaid on a monthly basis and may either have a fixed or a floating interest rate.

Technically, home mortgages, student loans and car loans are term loans as well.

Cash obtained from a term loan is often used to purchase fixed assets, such as equipment or a new building.

There are two types of term loans which are collateral and collateral-free term loans. While they are often similar in terms of repayment plan and loan tenure, the collateral term loans offer higher loan amounts compared to the ones without collateral.

Short-Term Loans for Working Capital

To boost cash flow for daily operational activities such as salaries, payables, utilities and such, businesses would generally go for short-term loans or working capital financing.

This is especially helpful for manufacturing or retail companies that have seasonal sales cycles, as well as companies that often face cash flow issues due to payment delays from clients. 

However, these short-term loans for working capital have a higher interest rate as compared to long-term loans and are typically approved in low amounts.

Among the types of loans available in this category:

  • Overdraft
    To help with daily operation needs, this type of loan facility enables businesses to withdraw funds beyond their credit limit and is attached to the business’s current account. However, be mindful that the overdraft will be subjected to a daily interest charge.
  • Revolving credit
    Typically, there is no fixed number of payments for this type of credit facility. It is flexible in nature and allows businesses to withdraw funds as and when it is needed. Full payment can be made at the end of the loan tenure or businesses can choose to pay only the owed interest and roll over the loan amount by renewing the loan tenure.

Trade Financing Facilities

This trade financing facility is normally useful for businesses who are involved in domestic and international trading. Letter of Credit (LOC) is one of the most common trade financing facilities where banks provide a written commitment as a method of payment.

Shipping Guarantee (SG), Bank Guarantee (BG), Trust Receipt (TR) and Banker’s Acceptance (BA) are also some of the facilities under the trade financing. 

Did you know?

Besides providing financial guarantee for bond and Sukuk, Danajamin also provides credit enhancement for financing facilities under the Financing Facilities Guarantee (FFG) to help financially viable Malaysian companies access funding opportunities.

If you’re interested to know more, visit https://www.danajamin.com/business 

Back to Articles & Media

Other Articles

24 November 2020

Funding Options in The Capital Markets

There are a variety of reasons why businesses seek funding. So, what are the options available for these businesses?