It takes money to run a business and almost everyone has heard the expression that you have to spend to make money, but where can you get money if you are not wealthy or independently established? A business loan is the answer to most business needs. No matter the size of the business, almost every business owner at some point has to consider obtaining a loan. A business loan can help a business get started, expand once it’s on the go and grow, or get a business through the tough situations that sometimes happen. Deciding on a business loan is an essential step, but which loan is right for you and how can you choose between the many different types?
Skip the loan and use the plastic
Some business owners opt for a slightly different variation of a business loan and choose to use credit cards to support a startup, expand an existing venture, or help their business through a difficult period. The positive reason for using credit to finance your business is that it is often easier to obtain or already exists on a personal credit card, but there are several serious downsides to using this type of business financing. The first negative is that unless your current credit limit is unlimited, there may not be enough financing for your credit cards. The second negative of using personal credit cards is that personal and business cash flow are not separate. This can get messy if you need to use your credit for important personal needs and it can have a similar impact on business finances if you suddenly have to tap into your credit for personal reasons. Finally, the rate of interest 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 like a credit card. You are applying for a line of credit for a business loan and based on your qualifications you are approved for a certain amount. You are not charged on the loan until you actually use the money and you are only charged for the amount that you actually use. Another similarity between lines of credit and credit cards is that the loan is often an unsecured loan meaning that there are no assets used to guarantee the loan such as the homes, cars, and businesses themselves. However, unlike credit card business lines of credit, interest rates are much closer to the level of a conventional loan.
On the downside, these interest rates are usually variable like a personal credit card and go up or down over the life of the loan. Another downside to lines of credit is that like a credit card, your payments are usually 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 extend forever. There is always a set number of years until the loan amount is available. At the end of that time (and sometimes during the last two years of redemption) the money is no longer available. After this period, the payments are higher to make sure the money is paid in full by the end of the loan.
If you have the discipline to make yourself paying more than the minimum each month to pay off the loan then this could be a good loan to get. Allows for times when money is tight. You can pay the minimum at those times without the risk of defaulting on the loan.
Traditional types of business loans
Even if you don’t have a great 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 approaches to business loans to choose from:
Working capital loans: These loans are what most people think of 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 business owners who have excellent credit, a sound business plan, and an established business with a proven track record. Startups are usually too risky to be given unsecured working capital business loans. Secured working capital loans are a bit easier to get though the amount of collateral needed to get these loans often depends on the credit of the borrower. These loans allow all types of business to be able to manage their affairs on a daily basis with the available cash. The loans are usually secured by homes and other valuable assets.
Accounts Receivable Loans: These are the short-term types of financing available when you are in difficulty and now you have money coming in at a certain point in time. Your business records of accounts receivable act as collateral for such loans. On the downside, the interest rates on these short-term loans are usually higher than on a standard long-term loan, and you can end up in a vicious cycle of using up your assets (receivables) before you get them and then not having money left before your next. . income period. This type of loan should only be considered for a select few types of emergencies such as the need to meet payroll, purchase a value of inventory, or other necessities.
– Business loans only: This type of loan is applied for the use of the capital and assets of the company alone and not any personal credit or credit history of the owner. It is only available to businesses with a solid track record of reliable income, long-term liquid operation prospects, and very strong business credit scores.
Loans for other jobs
There are times during business operations when you need a loan for a certain type of purchase, such as buying new equipment or replacing old equipment, buying real estate for a business, or other ad hoc needs, there are loans designed to be available only separately. these times.
Get the loan
The best way to ensure success in obtaining your business loan is to be prepared. Enter your bank with a well-crafted business plan in hand 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 beings too, and they know that there are unavoidable situations but if you can prove that your problem is in the past and that you are on a more solid footing, it will help you a lot in getting the loan you want. The letters of explanation that go with your loan package help if situations such as illness or caring for a sick person 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 this fear.