(article continued below ...)
One option is through debt financing, where you receive a loan repayable over
an agreed period of time. You then pay interest over the loan amount, the rate
of which depends on the source of the loan, length of time for which you borrow
the money, and the general economic conditions at the time you borrow the money.
It is however important to remember that not all business financing is the
same. The kind of loan you will get will depend on your business needs and the
loan terms (loan amounts, interest rates and repayment terms). Before you go to
the bank or even the Small Business Administration (SBA), you need to be clear
why you want the loan so you can match them with the appropriate credit request
and ensure that you will get the most cost-effective loan. Loans to support your
working capital needs are different from financing a real estate investment.
There are three primary types of loans based on repayment terms offered by
most financial institutions such as banks are:
- Short-term
loans, are for
short-term uses such as meeting working capital needs. These kinds of loans
are usually highly adaptable to your financial needs, and are typically paid
back within 6-to-18 months. You can use these loans to take advantage of
purchasing discounts or some seasonal requirements. Business revolving
credit lines are another example of this kind of loan.
- Medium-term
loans, are
usually paid back within one to five years. These loans are often used to
expand your business line, redesign your work environment or purchase major
equipment like a new computer system.
- Long-term
loans, are
usually paid from the cash flow of the business and can have maturity dates
from five to ten years. Some of the uses of these kinds of loans include the
purchase or refinancing of commercial property.
There are other types of credits. If you are in the business of
international trade, you will utilize Letters of Credit, which is a mechanism
that allows importers to offer secure terms to exporters. Trade credit, on the
other hand, allows you to get goods from your suppliers on credit for 30, 60
or 90 days. Business credit cards can provide short-term financing while
keeping your business and personal expense records separate.
If you are based in the United States and have been turned down for
traditional bank loans, you may try applying for SBA loans. Note that SBA
itself does not lend out the loans, but only guarantees loans you will get
from their participating institutions. SBA has a number of loan programs,
ranging from short term to long-term loans.
Knowing what your credit needs will show the banker or lender that you
possess a strong understanding of your business, the impact of credit on your
bottom line, as well as your short and long-term goals.
=====
