Choosing the right business loan for your company
Running a business takes money, and almost everyone has heard the expression that you have to spend money to make money, but where do you get money from if you’re not independently wealthy or established? A business loan is the answer to most business needs. No matter what the size of the business, almost every business owner has to consider a loan at some point. A business loan can help a business get started, expand once it’s up and running, or get a business through the tough times that happen from time to time. Deciding on a business loan is a key step, but which loan is right for you and how do you choose between the many different types?
Skip the loan and use plastic
Some business owners choose a small variation of the business loan and choose to use credit cards to support their startup, expand an existing business, or help their business through a difficult period. The upside to using credit to finance your business is that it’s often easier to get or already have a personal credit card, but there are a few serious downsides to using this type of business financing. The first downside is that if your existing line of credit isn’t unlimited, you may not have enough funds on your credit cards. The second negative of using personal credit cards is that your personal and business cash flow is not separated. This can wreak havoc if you need to use your credit for important personal needs, and it can have a similar effect on business funds if you suddenly need to use your credit for personal reasons. Finally, the interest rate on credit cards is usually much higher than any of the different types of business loans.
A bridge between credit cards and business loans: Lines of credit
A line of credit works much the same way as a credit card. You apply for a line of credit for a business loan and based on your qualifications, you get approved up to a certain amount. You are not charged for the loan until you actually use the money, and you are only charged for the amount you actually use. Another similarity between lines of credit and credit cards is that the loan is often an unsecured loan, meaning no assets are used to secure the loan such as homes, cars, the business itself. However, unlike business credit cards, lines of credit have interest rates much closer to the traditional loan level.
On the other hand, these interest rates are usually variable like a personal credit card and rise or fall over the term of the loan. Another downside to lines of credit is that, like a credit card, your payments will typically be just a little more than the interest rate each month.
This may seem like a plus at first because the monthly payments are so low. The catch there is that lines of credit don’t have to be extended forever. There is almost always a certain number of years during which the loan amount is available. At the end of that time (and sometimes during the last two years of repayment), the money is no longer available. After this period, payments are higher to ensure that the money is fully paid off by the end of the loan.
If you have the discipline to pay more than the minimum each month to pay off the loan, it can be a good loan. It allows for times when money is tight. You can pay the minimum at these times without risking default on your credit.
Traditional types of business loans
Even if you don’t have great credit and think a line of credit isn’t right for you, all is not lost. There are many more traditional styles of business loans to choose from:
– Working capital loans: These loans are what most people think of when they consider getting a business loan. They come in two types, secured and unsecured. The unsecured versions of working capital loans are generally only available to those business owners with stellar credit, a solid business plan, and an established business with a proven track record. Startups are usually too risky to be granted unsecured business loans for working capital. Secured working capital loans are a bit easier to obtain, although the amount of collateral required to obtain these loans is often based on the borrower’s credit. These loans enable all types of businesses to carry out their day-to-day affairs with available cash. Loans are usually secured by homes and other valuable assets.
– Accounts Receivable Loans: These are short-term types of financing available when you find yourself in a tight spot and now have money coming in at a certain time. Your business’s accounts receivable records act as collateral for such loans. On the other hand, the interest rates on these short-term loans are usually higher than long-term standard loans, and you can find yourself in a vicious cycle of using up your assets (receivables) before you get them, and then running out of money before your next income period. This type of loan should only be considered in a select few types of emergencies, such as the need to cover wages, purchase inventory of a certain value, or other needs.
– Business Only Loans: This type of loan applies only to use the capital and assets of the business and not to the personal credit or credit history of the owner. It is only available to businesses with a solid track record of reliable income, a long-term fluid business outlook and a very strong business credit rating.
Other loans for specific functions
There are times during business activity when you need a loan for a specific type of purchase, such as buying new or replacing old equipment, buying real estate for the business or other special needs, there are loans designed to be separately available only to those times.
Getting the loan
The best way to ensure success in getting your business loan is to be prepared. Walk into your bank with a well-crafted business plan in hand and make sure your credit is up to par. If you know of blemishes on your credit history, be prepared to explain them. Lenders are human too and know that there are situations that are unavoidable, but if you can prove that your problems are in the past and you are on a more stable footing, it will go a long way in getting the loan you want. The explanatory letters that accompany your loan package help if there have been situations such as illness or caring for a sick loved one that have caused problems in the past.
One of the things that stops most people from trying to get a loan is the fear of rejection. Knowing what to expect can ease that fear.
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