The world of business financing is fast-moving
The world of business financing is fast-moving. It can be bewildering for entrepreneurs who have enough on their plates. Developing their core business to steer between all the different choices available can be tough. What are the main choices you face if you do not want to hand over any business equity?
Types of Loans and Lenders: A Business Financing Break Down Click To Tweet
The most common type of loan, and one of the easiest to administer, is an installment (or term) loan. A lump sum is provided by the bank and a payment schedule is provided.
This is usually a fixed amount each month for the whole period of the loan. Both the principal and the interest are paid off during the term. Some flexible installment loans allow for missed or additional payments. These loans work best for one-off costs.
A balloon loan is similar. But you only pay the interest during the term of the loan, repaying the principal as a lump sum at the end. This suits some business situations. The risk is greater to the lender and so the interest is likely to be higher.
Lines of Credit
A line of credit works like a credit card. A maximum amount is made available and can be drawn on and repaid at any time that suits the borrower, for the lifetime of the agreement. You pay interest only on what you take out and, when you make a repayment, that money is available for you to borrow again later. There are many versions available and there are specialist advisers who can assist in your application.
Secured vs Unsecured
All of the above types of business loans can be secured or unsecured. A secured loan puts up some of your assets as collateral. If the loan is not repaid for any reason, the lender can seize the assets and sell them in order to retrieve their money. An unsecured loan does not give the lender any such rights. The larger the loan and the less established the business, the more likely it is that a lender will want security.
With a Small Business Administration loan, the lender is a bank, but the government is the guarantor for the loan, which means that the bank does not require collateral and has to abide by government-imposed conditions.
There are many lenders available on the internet who can offer special arrangements. These can often be agreed very quickly and do not always require evidence about the track record of the business. Rates can be high and you should approach them with caution, but they can be appropriate sources of credit, especially for new businesses.
Finding a loan can feel like a distraction from the main work of your business, but it is important to get it right as, in most cases, a loan is a long-term commitment that is going to have an impact on the cost of running your business. Take good advice and avoid rushing into a decision.