Types
of Business Loans
Standard
business loans can take on several different forms in specific
situations:
Term loans are the most common general purpose loan. They're used
for working capital, expansion, refinancing, and acquisitions. You'll
repay them monthly over a term based on the expected lifespan of
the assets you're purchasing. This straightforward loan is most
common for larger amounts.
Short term loans are almost always set up for terms
of one year or less, and are repaid in a lump sum at the end of
the term, instead of monthly. They're usually for smaller amounts
- less than $100,000 - and are best for seasonal inventory buildup
or small investments with quick returns.
Equipment financing is generally easier to obtain
then general lines of credit, simply because the equipment you buy
serves as direct collateral for the loan. It's also less risky,
in that if you are unable to make your payments, you don't have
a lien against your entire business or your personal real estate:
all you lose is the equipment you bought. Depending on the size
of your business, equipment financing can cover huge expenses into
the millions of dollars.
Lines of credit are more general business loans
that are often set up to insure against cash flow problems. Instead
of getting a check for the full amount of the loan, the financial
institution will allow you to borrow up to a certain amount per
year - you take out the money in increments as you need it. The
flexibility comes at a cost, though: if you don't repay the loan
balances fairly quickly, they can quickly become more expensive
than other types of loans. Avoid using a line of credit for significant
business improvements: they're designed for temporary cash shortfalls.
Credit card advances - in lending, this phrase
does not mean taking out cash through your business credit card,
although many businesses do that. Instead, it's a loan based on
your track record and your expected future business. It's a good
choice if your business has at least a three-year history of accepting
credit cards. Because the credit card sales are such a good estimation
of your future earnings, you'll be able to get a fairly good rate
on a loan against your expected income.
While there are stringent federal guidelines about how banks and
other lenders conduct business, there are no definitive standards
as to how the various types of business loans are structured: terms
and conditions may vary from one lender to the next, and minimum
and maximum amounts can differ. Be sure you know exactly what conditions
apply to each loan you're considering.
Factoring
Another option for many small businesses is factoring, also known
as receivables financing. Factoring is basically selling your invoices
to a third party: instead of waiting for your customers to pay,
you can get the funds immediately - minus a small fee (3% to 5%)
due to the factoring company. Typically you'll receive 80% of the
invoice value upfront and the remaining value once the client pays.
Your business might be a good candidate for factoring if you have:
• Fewer than three years in business
• Good growth prospects but less than stellar cash flow
• Active accounts but slow paying customers
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