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Choosing the Right Business Loan For Your Company
Almost everyone has heard the expression that it takes money to run a business and you have to spend money to make money, but where do you get the money if you are not independently wealthy or established? Business loans are the answer to most business needs. No matter the size of the business, almost every business owner has to consider debt at some point. A business loan can help start a business, expand it once it’s on track, or get a business through the occasional tough spot. Deciding on a business loan is an important step, but which loan is right for you and how do you decide between the different types?
Skip the debt and use plastic
Some business owners opt for a little variation on business loans and choose to use a credit card to back their startup, expand an existing business, or help their business through a tough time. While the positives of using credit to fund your business are that it is often easy to obtain or already exist with a personal credit card, there are some serious negatives to using this type of business financing. The first negative is that unless your current line of credit is unlimited, your credit cards will not have enough funds available. Another downside to using a personal credit card is that your personal and business cash flow is not separate. This can spell trouble if you need to use your credit for important personal needs, and it can have a similar impact on business funding if you suddenly have to tap into your credit for personal reasons. Finally, the interest rate on credit cards is usually much higher than any other type of business loan.
The Bridge Between Credit Cards and Business Loans: Lines of Credit
A line of credit works just like a credit card. You apply for a business loan line of credit and are approved up to a certain amount based on your eligibility. You are not charged on 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 usually an unsecured loan, meaning no assets are used to guarantee the loan, such as a home, car, or business. However, unlike the credit card business, interest rates on credit are much closer to conventional loan levels.
On the downside, those interest rates are usually variable like personal credit cards and go up or down over the course of the loan. Another drawback of lines of credit is that your payments will usually be slightly higher than the interest rate each month, just like with a credit card.
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 number of years before the loan amount is available. At the end of that time (and sometimes in the last two years of repayment) the money is no longer available. After that period, payments are higher to ensure that the money is fully repaid at the end of the loan.
If you have the discipline to pay more than the minimum every month to pay off the loan, this may be a good loan to get. This allows time when money is tight. You can make minimum payments at that time without risking default on your loan.
Traditional types of business loans
Even if you don’t have an extensive amount of credit, and if you don’t think a line of credit is right for you, all is not lost. There are several traditional styles of business loans to choose from:
– Working capital loans: These loans are what most people think of when they think of taking out a business loan. They come in two types, secure and insecure. Unsecured versions of working capital loans are generally only available to business owners with established businesses with stellar credit, a good business plan, and a proven track record. Granting unsecured working capital business loans to startups is usually very risky. Secured working capital loans are a little easier to get, although the amount of collateral required to get these loans is often based on the borrower’s credit. These loans make day-to-day transactions possible for all types of businesses with available cash. Loans are usually secured with houses and other valuable assets.
– Accounts Receivable Loans: These are short-term types of financing available when you hit a hard spot and now have money coming in at a specific time. Your business’s accounting records serve as security for such loans. These short-term loans usually have higher interest rates than standard long-term loans, and you can get stuck in a vicious circle of using up your assets (receivables) before you get them, and then not having the money left before your next loan. Income period. This type of loan should be considered only for certain types of emergencies such as meeting salary, purchasing inventory or other needs.
– Only Business Loan: This type of loan is applied only to use the capital and assets of the business and the owner has no personal credit or credit history. It is only available to businesses with reliable income, long-term prospects for liquid operations and very strong business credit scores.
Other work specific loans
There are times during business operations when you need a loan for certain types of purchases such as buying new or replacing old equipment, purchasing real estate for business or other dedicated needs. those times
Getting a loan
The best way to succeed in getting your business loan is to prepare. Enter a well-structured business plan with your bank and make sure your credit is up to par. If you know of spots 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 troubles are in the past and that you are on a stronger footing, it will go a long way in getting the loan you want. Explanation letters to accompany your loan package help if there are circumstances such as illness, or caring for a sick loved one that have caused problems in the past.
One thing that keeps most people from trying to get a loan is the fear of rejection. Knowing what to expect can alleviate that fear.
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