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It takes money to run a business and almost everyone has heard the adage that you have to spend money to make money, but if you are not independently wealthy, or not established then where do you get the money from? Business loans are the answer to most business needs. It doesn’t matter how big the business, almost every business owner has to consider taking out a loan at one point or another. A business loan can help start a business, expand it once it’s more on its way, or get a business through the tough spots it can sometimes be. Deciding on a business loan is an important step, but which loan is right for you and how do you decide between the wide variety of different types?
Quit Debt and Use Plastic
Some business owners opt for a small variation on a business loan and choose to use a credit card to back their startup, expand an existing business, or help their business through tough times. The positives of using credit to fund your business are that personal credit cards are often easy to obtain, or already have, but there are some serious negatives to using this type of business financing. The first downside is that unless your existing credit line is unlimited, you may not have enough funding on your credit card. The other downside to using a personal credit card is that your personal and business cash flow is not separate. This can create havoc if you need to access your credit for critical personal needs and can have a similar impact on business funds if you suddenly have to tap into your credit for personal reasons. Finally, the interest rates on credit cards are generally much higher than on other types of business loans.
A Bridge Between Credit Cards and Business Loans: Line of Credit
A line of credit operates in the same way as a credit card. You apply for a business loan line of credit and depending on your eligibility, you are sanctioned up to a certain amount. You are not charged a fee on the loan until you actually use the funds and 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 which means no assets are used to guarantee the loan such as homes, cars, business. However, unlike the credit card business, credit interest rates are much closer to traditional loan levels.
On the downside, those interest rates are usually variable like personal credit cards and go up or down over the term of the loan. Another downside to a credit line is that, like a credit card, your payments will usually be only slightly higher than the interest rate each month.
This may initially seem like a plus because the monthly payment is much lower. The catch there is that lines of credit don’t extend forever. There is almost always a set number of years for the loan amount to be available. At the end of that time (and sometimes within the last two years of repayment), the money is no longer available. After that period, the payments are higher to ensure that the money is paid back in full 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 may be a good loan. This allows for times when money is tight. You can make the minimum payments at that time without risking default on your loan.
traditional business loans
Even if you don’t have an extensive amount of credit, and even if you don’t think a credit line is right for you, all is not lost. There are several 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, secure and unsecured. Unsecured versions of working capital loans are usually only available to business owners who have stellar credit, a sound business plan and an established business with a proven track record. Startups are generally too risky to be given unsecured working capital business loans. Secured working capital loans are a bit easier to obtain, although the collateral amount required to obtain these loans is often based on the borrower’s credit. These loans make it possible for all types of businesses to conduct their affairs on a day-to-day basis with available cash. Loans are usually secured with homes and other valuable assets.
Accounts Receivable Loans: These are short-term types of financing available when you are in a tight spot and now have money coming to you at a specific time. Your business’s records of accounts receivable serve as security for such loans. The downside is that the interest rates on these short-term loans are usually higher than long-term standard loans, and you can get caught in a vicious cycle of using up your assets (receivables) before you get them and then paying off your next loan. First there is no money left. income period. This type of loan should only be considered in select types of emergency cases such as the need to meet payroll, purchase inventory at value, or other requirements.
Business-only loan: This type of loan is used only to access the capital and assets of the business and not any personal credit or credit history of the owner. It is only available to businesses with a solid record of reliable earnings, long-term potential for liquid operations, and a very strong business credit score.
Other Job Specific Loans
There are times during the course of business operations when you need a loan for a specific type of purchase such as purchasing new or replacing old equipment, purchasing fixed assets for the business, or separately for other dedicated needs. Designed loans are available only for That time.
getting a loan
The best way to ensure success in obtaining your 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 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 more solid footing then it will go a long way in getting you the desired loan. Letters of explanation with your loan package help if there were circumstances such as illness, or caring for a sick loved one that caused problems in the past.
One of the things that holds most people back from trying to get a loan is the fear of rejection. Knowing what to expect can ease some of that fear.
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