Every company, no matter how big or small, will at one time or the other be in need of business loans. At first, it can be extremely confusing to sort through the range of available financing options, not to mention the different terms offered by many lenders. Here’s a short primer that may help clarify things a bit.
Term, Collateral & Source: Financing of all sorts is essentially divided into two categories, or types. One is whether the need is for the long term or short term. The other one is if it is secured or unsecured.
Making these basic decisions will help with the other choices. So a short term and unsecured loan required for working capital could possibly be arranged for from family/friends. The company could also apply for a line of credit, or a loan based on credit card sales advance or accounts receivable.
A long term secured loan, on the other hand, is used for heavy capital investments and for starting up a company. This includes things like real estate, equipment finance and acquisition of the assets of another company. This kind of business loans can be availed of from banks or other large lenders.
Equipment Financing: Purchase or lease of equipment can be financed as a long term loan with the equipment as collateral. Repayment is in the form of monthly payments. In case the loan goes into default, only the equipment concerned is at stake. So the company and the owner won’t be liable for anything else.
Lines of Credit: This is short term financing where a specific amount is available. It can be used for immediate needs like inventory and working capital, but not for capital investments. Interest is charged only for the amount actually used up by the borrower, and not the amount approved.
Credit Card Advances: While it’s possible to pay the bills using credit cards, the arrangement under consideration here is a bit different. If a lender provides a loan expecting repayment from future card sales, that’s a credit card advance. Needless to say, the lender will need to see the past card sales record in order to approve a loan and decide on the amount.
Factoring: This is a variation on the aforementioned card advance. Factoring is where businesses sell invoices to a lender at a certain percentage discount. This means the businesses get paid even when their customers haven’t settled the bills as yet. This helps improve liquidity.
Obviously, this isn’t all of it even if it does cover the broad types of business loans. There are many more variations and possibilities, such as cash advances, government backed financing for small businesses, and so on. Sometimes, it’s even possible to get grants.
None of this changes the basic elements of financing terms and requirements. An unsecured, short-term loan will always have a higher interest charge associated with it, as compared to a long-term, secured loan. Also, go over the figures once again to make sure the company won’t be harmed by an increase in the debt level.
Grow your business success with the aid of advice, tools, and resources. Read a small business blog that can help you prepare for challenges facing your business such as small business templates.