Under US law, limited companies are regarded as a separate legal entity. Companies have shareholders, whose liability in the event of the organisation being wound up, is limited to the amount of share capital they have invested in it. Therefore, with regard to a loan to limited companies, the lender will try to secure it on the assets of the company rather than on any person running the company.
In the case of sole traders and partnerships, the business is entirely dependent on the individuals owning and running the organisation.
They effectively are the organisation. So when it comes to acquiring a loan, the lender may well request personal guarantees as the liabilities of the commercial operation are not limited to the assets of the organisation. In case of default, the lender will be able to claim personal assets from the individual owner to cover losses. So, when looking to raise finance, it is better to first understand the personal risks involved and then make your decision to proceed. In any event, if there are not sufficient assets owned by the company, which may include commercial property, plant and equipment or even inventory, the trader may need to provide a guarantor, which in many instances, may be one or more of the directors of the company.
Many types of loans are available in the Us for companies and small businesses. For instance companies can avail of secured loans, that is, against a collateral such as real estate or fixed deposits. Secured loans have two advantages over unsecured ones. Firstly, secured loans are easier to obtain as the lender is exposed to less risk. Secured loans are also cheaper than unsecured loans, that is, they charge a lower rate of interest.
Unsecured loans can be obtained based on the credit history of the company as well as its balance sheet. Such loans are, however, costly compared to secured loans and are available only to those companies that already have a strong credit history. To build a credit history first, the company must first go in for a secured loan.
Another type of loan that companies need and use are business credit card loans. Business credit cards help the employee by keeping personal and business credit card use separate. The company can set different limits for different users. Such cards typically require payment at the end of a month, that is, there is no long-term credit offered.
Companies availing of loans have to choose between fixed and floating interest rates. Though floating interest rates can be lower, they increase uncertainty and make planning more difficult because of their volatility. Since businesses need to plan well in advance to be successful, it is better for companies to opt for fixed rates. The EMIs in this case are fixed and business planning is much easier.