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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 if you’re not independently wealthy or established? A business loan is the answer to most business needs. No matter how big the business, almost every business owner has to consider a loan at some point. A business loan can help a business get started, expand while it’s on the road and grow, or get a business through the tough spots that happen from time to time. Deciding on a business loan is a crucial step, but which loan is right for you and how do you decide between the many different types?
Skip the loan and use plastic
Some business owners choose to make a small change to their 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 is often easier to obtain or already exist on a personal credit card, but there are some serious downsides to using this type of business financing. The first disadvantage is that if your existing line of credit is not unlimited, your credit cards may not have enough funds. Another disadvantage of using personal credit cards is that your personal and business cash flow are not separated. This can wreak havoc if you need to use credit for important personal needs, and it can have a similar effect on business assets if you suddenly need to use credit for personal reasons. Finally, the interest rate on credit cards is usually much higher than any of the different types of business loans.
The bridge between credit cards and business loans: lines of credit
A line of credit works much the same as a credit card. Apply for a business line of credit and get approved up to a certain amount based on your qualifications. As long as you don’t actually spend the money, we don’t charge you for the loan and you’re only charged for the amount you actually spend. Another similarity between lines of credit and credit cards is that the loan is often an unsecured loan, meaning no assets such as homes, cars, the business itself are used as collateral for the loan. However, unlike a credit card business, lines of credit have interest rates much closer to the level of a conventional loan.
The downside is that these interest rates are usually variable, like a personal credit card, and go up or down during the term of the loan. Another downside to lines of credit is that, like a credit card, your payments will usually be just a little higher than the interest rate each month.
This may seem like a plus at first because the monthly payments are so low. The catch is that lines of credit don’t extend forever. There is almost always a certain number of years that the loan amount is available. At the end of this 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 repaid by the end of the loan.
If you have enough discipline to pay more than the minimum amount each month to pay off the loan, it can be a good loan. It allows for a time when money is tight. Then you can pay the minimum without risking default on the loan.
Traditional types of business loans
Even if you don’t have a great amount of credit and you don’t think a line of credit is right for you, all is not lost. You can choose from many traditional forms of business loans:
– Working capital loans: Most people think of these loans when they think of a business loan. They come in two types, secured and unsecured. Unsecured versions of working capital loans are usually only available to those business owners with excellent credit, a good business plan and an established business with a proven reference. Startups are usually too risky to be approved for unsecured working capital business loans. Secured working capital loans are somewhat easier to obtain, although the amount of collateral required to obtain these loans is often based on the borrower’s creditworthiness. These loans enable all types of businesses to conduct their day-to-day business with available cash. Loans are usually secured by homes and other valuable assets.
– Accounts Receivable Loans: These are short-term types of financing that are available when you find yourself in a difficult situation and now have money coming at a certain time. Your company’s receivables record serves as collateral for such loans. On the other hand, the interest rates on these short-term loans are usually higher than standard long-term loans, and you can find yourself in a vicious cycle of using your assets (receivables) before you get them, and then have no money left before the next income period. This type of loan should only be considered in a few select types of emergencies, such as the need to make payments, purchase inventory at a certain value, or other needs.
– Business Only Loans: This type of loan is used only for the use of capital and assets of the business and not for the personal creditworthiness or credit history of the owner. It is only available to businesses with a solid record of reliable income, a long-term outlook for ongoing operations and very good business credit ratings.
Loans for other functions
During the course of business, sometimes you need a loan for a certain type of purchase, for example, to buy new or replace old equipment, buy real estate for a business or other specific needs, there are loans that are designed to be available separately for just those times.
Obtaining a loan
The best way to ensure success in getting a business loan is to be prepared. Walk into your bank with a well-crafted business plan and make sure your credit is up to par. If you know of any points in your credit history, be prepared to explain them. Lenders are human too and they know that there are situations that cannot be avoided, but if you can prove that your problems are in the past and that you are on a firmer footing, this will go a long way in helping you get the loan you want. The letters of explanation included with your loan package are helpful if there have been situations in the past such as illness or caring for a sick loved one.
One of the things that deters most people from trying to get a loan is the fear of rejection. Knowing what to expect can help alleviate that fear.
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