When it comes to starting up a business or making improvements to the company you own, a business loan is one of the most popular methods to raise the capital. The loan itself can vary in size from a few thousand to make improvements or purchase new equipment up to considerably more if the purpose is to startup a new company, organization, restaurant, or the like. As long as the purpose of the loan is business related, it may qualify as a business loan.
Before rushing off to your local lender to get a loan for your business, you should look over your current situation to see if it is right for your needs.
Specific Need: You should never take out a loan in general unless you have a specific area that needs to be addressed. For example, your business may need more space to operate, but that will mean filling the space with new equipment, supplies, and personnel. Are you ready for that type of expansion? If not, then you may want to hold back until the need is present.
Lack of Liquid Assets: Of course, if you already have the cash on hand to expand your business, then you shouldn’t take out a loan. It might be advisable to consider a loan if that will improve your standing with the bank, but in most cases you should only take out a loan if you do not have the liquid assets available for such an endeavor.
Minimal Risk: Taking out a loan is taking a risk, so you want to minimize that risk as much as possible. This means only taking out exactly what you need to cover the expenses. The less you borrow, the less you will have to pay back which means a shorter duration of interest rates.
You may want to have an accountant look over your income, assets, and expenditures before making a decision about whether to take out a loan.
Within the field of business loans are other sub-divisions that provide different options for the borrower. Generally speaking, this allows for people with different credit scores, collateral, or standing to receive the type of loan that is best for their particular needs.
Bank: The standard bank loan for businesses comes in two forms, secured and unsecured. An unsecured loan will be based on the credit score or rating of the borrower or company while a secured loan is based on the collateral that is provided. Most business-oriented loans are based on traditional bank loans, but there are alternatives.
Asset: This is generally the type of loan that is only pursued if there are no other options available. This is the type of loan that is made with the assets of the company being used as collateral. In this case, the lender is more likely to make the loan as the assets provide something tangible. There are different types of assets that can be borrowed against, but the risk is fairly high for the borrower if they cannot pay back the loan.
Equity: Sometimes called mezzanine financing, this is a loan that is based on the equity that has been build up by the company. The downside of the loan is that the lender can claim part ownership of the business if it is not paid back on schedule. Basically, this puts the company up as collateral in order to secure the loan itself.
Invoice: A unique way to finance a loan is by borrowing against the outstanding invoices so that the company can obtain funds as soon as new invoices are created. This is not the most stable way to borrow money and there are many pitfalls starting with the interest that will be charged on the invoices themselves which become that much harder to pay off. However, if the new invoices will be significantly larger than the ones used to secure the loan, then this is a viable option.
Thanks to having at least four options, your business can get the loan it needs in order to finance new space, equipment, or supplies. Of course, getting the loan is only part of the process as you will need to fashion the right repayment policy in order to maximize the effect of the loan itself.
Remember that you have some flexibility when it comes to getting a business loan. So, you should negotiate the right type of repayment plan to help you save money.
No Early Repayment Penalty: This means that if you pay off your loan early, you can avoid some of the interest charges that would otherwise be tacked on. This is a point that you will want to have in your repayment plan unless you can add extra payments without penalty.
Variable Sum: This means that you can add more to your monthly payment in order to pay off the loan sooner. For example, if you owe $1000 per month and you add $100 to that, you are in effect making an extra payment every 10 months. This approach can save you a considerable amount over time if you are smart in making payments.
However, keep in mind that you may have other, better options. One of the biggest mistakes that many business owners make is believing that a traditional loan is the only option for getting the capital to expand their business. Remember that there are other options, particularly if you have some time before a decision needs to be made. Still, getting a business loan is relatively quick and allows you to make your expansions in a timely manner.
By taking out the right type of business loan and getting a favorable repayment structure, you can help boost your company by adding new space, equipment, or material needed for expansion. A business loan may be your best option when it comes to getting quick financial assistance in helping your company grow.
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