Loans

Financing is the process of funding business activities and making purchases or investments. The two types are equity financing and debt financing.

This preset borrowing limit provides funding a borrower can draw on at any time. Its main advantage is flexibility, and potential risks include high-interest rates, penalties for late payments, and the risk of overspending.

Collateral minimizes risks to lenders by providing an asset to act as security for a loan. Mortgages and car loans are two common types.

These loans are not secured by collateral and usually come with higher interest rates. Most borrowers of unsecured loans need a higher credit score than for a collateralized loan.

Used to “bridge” the gap until a person or company secures permanent financing or removes an obligation, these loans are often used in real estate. For example, a buyer can use one to purchase a new home while waiting for their current home to sell.

Established small businesses with sound financials may use these loans to provide cash according to specific terms, with either a fixed or floating interest rate.

This (there are 3 AFRs) is the minimum interest rate that the Internal Revenue Service allows for short-, mid-, and long-term personal loans. Charging rates lower than the appropriate AFR may have tax consequences.