Conventional loans are the most common type of lending for small businesses. They provide short-term, intermediate and long-term funding for businesses. Rates differ between each lender and depend on the overall credit risk of the business applying for the loan. The interest rates charged can either be fixed for the term of the loan at the time of closing, floating (for example the rate may fluctuate with the “prime rate”) or perhaps the loan will be fixed for a period of time and then float. A higher perceived risk will generally result in a higher interest rate. The monthly payment of conventional loans will generally include both interest and a principal reduction payment (commonly referred to as amortization). The amount of the payment is determined by the rate and term of the loan. Some loans are structured so that the monthly payments will completely repay the loan by the end of the term (also referred to as a self-amortizing loan) while other loans may be structured so that there is a balance remaining due at the end of the term (called a balloon payment). The latter will require the borrower to either refinance the loan at the end of the term or repay it from other available funds. Payment schedules, which are normally monthly, can be changed to quarterly and even annually if needed and agreed upon by both parties. Some entities looking for startup, transitional or construction financing can even enjoy interest-only payment structures.
These loan options differ from the programs provided by the U.S. Small Business Administration (SBA), which are guaranteed by the federal government. Conventional loans are not guaranteed by the government. For this reason, banks tend to make conventional loans to businesses that are considered lower risk and use the SBA and other government programs for loans they consider higher risk.
If you have questions about conventional bank loans, call LVRG at (855) 998-5874 to discuss your funding options.