Business equity loans represent external financing a company will receive for use in its operations. Most of these equity loans require collateral in lieu of the funds. For example, business mortgages are common business equity loans because the bank secures the property listed in the loan as security in case of default. Small businesses may find it difficult to secure an equity loan, as these companies have few assets to offer as collateral. Many times, business owners place their personal assets up for collateral in the small business loan.
Several types of business equity loans exist in the business environment. Additionally, these loans will have negotiable terms for interest rates, payment schedules, and balloon payments, among other things. These terms allow companies to tailor equity loans for a specific purpose to ensure they receive the best terms and options for loans according to the needs of the business.
Banks and other lenders typically use a loan-to-value ratio when deciding on the value for business equity loans. For example, a company looking to purchase a facility for $800,000 US Dollars (USD) may only be able to secure a loan for 85 percent of the property’s total value. This means the company must place a down payment on the property of $120,000 USD. This ensures the company has a financial investment in the property and will repay the equity loan. If the business defaults on the loan, it not only loses the loan payments, but also the down payment made from current operational capital.
Many banks and lenders have different requirements for the various types of business equity loans. For example, loans made for inventory may be similar to a credit line rather than mortgage. This allows the company to actively draw from the credit line on a continual basis when purchasing inventory. If the company fails to maintain the payments for the credit line, the bank or lender may come after the company’s inventory in lieu of the cash payments. The lender may also consider restricting access to the credit line or lowering the total credit extended prior to taking severe actions.
External financing typically results in a company leveraging its assets when making profits. Large organizations or publicly held companies are often scrutinized closely for their use of debt in normal business operations. Using too much debt indicates the company has more responsibility to repay the bank or lender rather than investors. If the company must liquidate its business assets, the banks and lenders are often ahead of other creditors in the liquidation process, giving them first right to capital for paying off business loans.