Short-Term Borrowing for Unsecured & Secured Loans

Short-Term Borrowing for Unsecured & Secured Loans
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  • 0:03 Definition of Business Loans
  • 0:51 Short-Term Vs.…
  • 1:39 Secured Vs. Unsecured Loans
  • 3:04 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Sometimes businesses need to borrow money to grow, but there are many different types of business loans available. In this lesson, we'll examine different types of business loans, including short-term, long-term, unsecured, and secured.

Definition of Business Loans

Gerald owns a business that sells software to schools and libraries. In general, it's a good business, but Gerald has run into a conundrum. In order to compete with the larger educational software companies and make more money, he needs to expand his business. But he can't expand his business without more money. What can he do?

Gerald might want to consider a business loan, or money lent to a business in order to fund its start-up, expansion, or other needs. If Gerald gets a business loan, he'll have the money he needs to expand, and then he'll be able to compete with the larger companies and possibly make more money.

Business loans, like personal loans, come in different types. To help Gerald pick the best loan for his company, let's look at the different types of business loans in detail.

Short-Term vs. Long-Term Business Loan

Gerald knows that he needs a loan to help him expand his business. But how long should the loan term be for? A year? Five years? Ten?

The term of a loan is how long it takes to pay back the loan and its interest. A short-term loan is for a few months or a year. A loan that takes longer than a year to pay back is called a long-term loan. If the amount of the loan is the same, a long-term loan will have lower monthly payments, but it will end up costing the company more in interest. For this reason, it's usually better to choose the shortest repayment period that the company can support. Gerald thinks that he needs $50,000 to expand his business, and he estimates that they can pay that loan back in seven months. Thus, for his company, short-term borrowing is the best option.

Secured vs. Unsecured Loans

Even though Gerald has chosen the loan term, he still has another choice to make. There are two different types of short-term loans: secured and unsecured.

Secured loans have some sort of collateral attached to them. In his personal life, Gerald has a car and a mortgage. Both of those are secured loans because if he doesn't pay the loans, the bank can take his car or house. In business, short-term secured loans may involve collateral, like property, that the business owns or even patents on its inventions.

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