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If you have a business idea, or feel that following the entrepreneurial path is your true calling, but you’re all set to start your own business, the only way to make that dream come true is to make your dreams come true. Capital loan is to be taken to finance the Business Yes, you can have different sources for seeking a business loan. But all are different. Some may not even allow you to make a loan.
Here, we are listing down some of the sources from where you can seek a loan and their qualifications so that you can narrow down your possibilities.
equity investment
Equity means ownership. Therefore, only those people who have built their own business are allowed this type of loan. If you opt for equity investment, you should be prepared to let go of some part of your startup. Because, once you sell your 51 per cent shares, you lose control of the company. This type of loan is like putting a ‘business for sale’ sign on your business.
However, if you are the type of owner who prefers complete control over your business, you can take out loans from other companies in your business – if you have a company. Or take loans from your friends, business partners, stockholders or other people you trust and enter into an agreement with them in return. It will be valid as long as you have mutual consent with these people. Also, be sure to know the law for your protection before taking this type of loan.
personal savings
Personal savings are the most common form of equity investment. This means that the funds you are likely to get to start your business will come through personal savings, inheritance, friends and family. Most people resort to this type of investment when starting their own business. And this is actually a good thing for investors and moneylenders as it shows that you are highly committed to the business as you are willing to put your personal savings at risk.
During your trading, it is advisable to keep your personal investments to at least 25% to increase the equity position and leverage. Remember, the more equity you have in your business, the more attractive your business is to banks who may loan you up to three times your business equity.
commercial credit
It is the second most used form of financing by business owners for their companies. According to Business Week, small business lending declined by 18 percent due to the financial crisis. However, this does not mean that your loan will be rejected as commercial loans are on a case to case basis. And the only way to get your loan approved is by following the 4Cs of lending. They are here:
cash flow: This is the amount of money you spend in your business or your liquid assets. While applying for the loan, you need to strengthen your cash flow as it indicates that you are capable of repaying the borrowed cash.
Collateral: This is the value of the asset that you wish to pledge as security for the repayment of your loan. This is to assure the lender of your commitment to make payments because if not, the collateral will be forfeited in case of default.
commitment: This is the amount of money you are devoting to your business. However, this is not as important as the other two above as your loan can still be sanctioned without disclosing your share.
Character: This includes your personal credit score and the history of the financial institution as a whole. If you are planning to give loan then this is the thing that you need to focus on. All your loans, no matter how small, must be repaid and you must maintain a good credit rating to enhance your prospects significantly.
Actually, there are various institutions where you can apply for the loan. It all depends on how creative you are in designing your capital mix to start the business of your dreams.
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